economics Archives

Skills and degrees

There’s been recurring opinions, stories and new reports about jobs and skills in Singapore over the past couple of months. The Job Skills insights report presented some interesting results that can be interpreted in vastly different ways, and is perhaps worth our society deliberating over.

One of the statistic in the report (page 14) that comes across as strange though not surprising, is that a non-degree holder with high skills proficiency is finding it HARDER (lower chance of getting the job) to get high-skilled jobs while a degree holder with medium to low skills proficiency can access high-skilled jobs more EASILY (higher chance of getting the job).

And on the next page, it claims that those same degree holders who were mid-low in skill proficiency had higher remuneration, and more autonomy in the jobs they got. Overall, the slant of the report seems to be promoting the need to obtain degrees and more qualifications even though it is supposed to highlight the importance of skills.

There are different opinions about what exactly is happening in Singapore. Some believe that if there simply aren’t job opportunities around, the paper chase just ends up being an arms race where jobs are just moving around from one group to another. The winner then becomes the certificate issuing organisations and schools.

Others think that there’s something absurd about hiring process and HR if they are so reliant on the degree or paper qualifications rather than real skills. Perhaps the high density market and having no short of manpower options mean that such patterns emerge where paper ‘evidence’ is used more than trying to screen for real skills. That contributes to some kind of ‘efficiency’ in the process especially when the HR function in Singapore isn’t exactly the most progressive.

There are others who believe the government’s emphasis on skills had just become a matter of incentivising more paper mills because it is easier to have a clear-cut measure of the output of their ‘skills’ policy. This is why instead of having skillsfuture churn out people who have the skills for the future (such as AI-literacy, programming skills, ability to think more strategically, understanding of carbon emissions, understanding of new energy technologies or what sustainability is really about), we simply get more aunties who could bake melon pan, or uncles who could generate good morning messages with GenAI.

I exaggerate.

But the point remains that we have a culture that is steeped in wanting to have tangible proofs of something that is genuinely intangible. And degrees or paper qualification remains a proxy for us to somehow observe skills. The point of it all is really the skills rather than the degree – so to make it about the degree seems rather superficial and short term. If anything, the big companies hiring in Singapore could come to the conclusion that since the degree holders they’re hiring have already hit the mid-low level of skills proficiency, the talent pool is really shallow and this is it, and they forgo hiring the non-degree holders who have high skill proficiencies.

Maybe that is when they start pulling out of the market. Because they are not able to access the real talent pool they need.

In long run, our paper chase actually ends up stopping ourselves.

Policy crowding out

Is job creation the responsibility of the government or businesses/entrepreneurs?

Sure, most governments in capitalistic democracies work hard to reduce red tape, improve ease of doing business and provide all kinds of support to businesses. But can policies to create jobs end up crowding out the private sector activities that create jobs, perhaps even undermining the private sector activities?

For example, when EDB in Singapore attracts MNCs that comes into Singapore and starts hiring, providing good and stable jobs, do they end up disincentivising prospective entrepreneurs from starting their own business? Do they also bid up the cost of strong junior hires for the local companies that need them more? Do the companies that comes into the Singapore market compete out local firms who may have been able to perform the same services in the local economy?

Is there a risk that existing investments in the market hold-hostage our domestic policies? Take, for example, the oil & gas industry in Singapore; do its presence slow down our climate policy? Would the fact that government is busy attracting companies and making things smoother for them cause them to compete more effectively with other local companies who may not have that same support from our own government?

Just bringing up the questions worth pondering over. I’ve no answers but I think it’s worth actually looking into actual data and finding ways to understand some of the answers to these questions I’ve raised.

Understanding carbon intensity versus fuel emissions

One of the reasons I’m writing this article is that Asia Pacific is increasingly recognising the role of renewable and alternative fuels, especially biofuels. And one of the ‘measures’ of sustainability of these fuels, which may be low or zero carbon in emissions, is the carbon intensity (Scope 3). However, it often gets confused with the fuel emissions (Scope 1), and so I thought it was worth explaining clearly.

Fuel decarbonisation is so critical that it covers part of decarbonising electricity generation. Relying on a mix of intermittent renewable generation with short-duration storage in the power system is very challenging. Gas peakers are going to be integral in a system that has a significant share of wind and solar power. Yet there are concerns about carbon emissions associated with gas.

Decarbonising natural gas use and other liquid fuel-use remains a critical lever to achieve net zero by 2050. Renewable fuels, especially biofuels, enable a drop-in solution that bridges our immediate decarbonisation needs with future alternative fuel, or complete electric solutions. There are concerns however, with the sustainability of biofuels, and one of the ‘measures’ of sustainability of these fuels, is the carbon intensity of it.

The carbon intensity of the fuel refers to the lifecycle carbon emitted in the production of the fuel, usually expressed in gCO2e/MJ (reads: grammes of carbon dioxide equivalent per mega-joules). For fuel that is zero emissions, or non-reckonable carbon emissions, there are still carbon emissions associated with its production, processing and transportation before its energy is used. And so if it’s being transported from such a location, or that too much logistics were involved in its feedstock collection, those emissions gets accounted for in this carbon intensity metric. EU use thresholds for carbon intensity to determine if the fuel is ‘sustainable’ or not – on the basis that if the fuel does not achieve a level of emissions reduction, then it cannot be considered renewable.

As should be clear by now, carbon intensity is different from the concept of fuel emissions. The carbon intensity value is not reflective of the emissions of the fuel itself but more of its lifecycle, making it a Scope 3 emission as opposed to Scope 1. Take, for example, a regime where there is a carbon tax associated with fuel emissions, the carbon intensity of the fuel would not actually be considered within the calculation of the carbon tax at all – especially if the tax is designed only to apply to Scope 1 (direct emissions).

However, such a regime where a carbon tax is applied to Scope 1, should be mindful that they do not end up incentivising the use of “low-carbon fuel” that have overly high carbon intensities. Because this would defeat the purpose of trying to price the carbon emission as the direct emissions become displaced by emissions in some other parts of the fuel supply chain.

Carbon intensity is also why the International Maritime Organisation have been pushing for the Net Zero Framework that considers the ‘well-to-wake’ emissions (lifecycle emissions) instead of the ‘tank-to-wake’ (direct Scope 1) emissions. If we are focused only on the ‘tank-to-wake’ emissions, then technically, grey hydrogen or grey ammonia would have zero carbon emissions. We don’t want a case where the emissions are not reduced at the system level but just shifted from one part of the value chain to another – that’s why we care about the carbon intensity of a fuel, not just its direct emissions.

It’s probably worth pointing out I first wrote this article on linkedin and you can find it here.

Energy companies of the future

When I started more than 10 years ago in the infrastructure sector focusing on environmental solutions, I saw a lot of new energy startups. A lot of them were facing difficulty on the capital front because all the wealth of the energy sector is tied up in Oil & Gas or the traditional utilities. The startups needed to access regulated infrastructure, regulated markets as well as capital in order to scale but it was difficult. The incumbents were gate-keeping.

So I came to this conclusion that nurturing startups in the energy space wasn’t so much about forming the next unicorn or tech-giant equivalents. It was about strengthening the incumbents; and that these startups are ultimately finding a match in terms of strategic investors in the incumbents in order to exit or to find their innovations adopted through the value chain.

Even for the commercial & industrial, behind-the-meter type solutions, I had in mind that the traditional incumbents would still win out because of their brands and stability.

Turns out that these became areas where they tend to beat a strategic retreat. Because it was too difficult. The big guys had a couple of things they wanted to sell; and they sure could provide some service in order to sell those electrons or molecules. They would even invest in some hardware on your site such as a metering system, or some tanks and nozzles, etc.

But once things got complex, where they have to manage some operations (even virtual ones), and liability at the customers’ sites, it became too difficult. They also think it’s too small, so they left it to whom they believe would be the small guys.

Now it took a long time but these were still difficult projects for the small guys! The EPC players, system integrators, tech solution providers had to come together, get into the complexities of energy service contracting and setting up new operation protocol to get projects up. Slowly they came up; sometimes with investments from the cashflow of these contracting firms, sometimes from family offices and rich borrowers. Financial innovation sort of quickly caught up to support this.

The resulting model, as it turns out, is more of a fund structure where capital is raised in a vehicle that will deploy capital into those energy-as-a-service projects. There is basically an increasing specialisation in the capital-heavy versus labour/technical-heavy segments of the industry. The market is still struggling to understand whether these C&I type energy assets (be it a new chiller/cooler, some kind of tech-enabled energy management systems, or just a set of solar panels with battery energy storage system) is considered infrastructure. Nevertheless, they see it as riskier than traditional state-granted concession type of infrastructure, but still safer than privatw equity where the money is put into operating companies without committed long-term revenues.

Now, I want to address the segment of the market that is also dealing in utility scale renewable power. The end of market moves and financial innovations seem to also point towards a fund structure. Whether it is Equis Energy (now Vena) or even Brookfield Infrastructure that started off in more traditional infrastructure, a whole lot of large scale renewable projects are eventually funded and operated by funds.

I would have imagined that funds would be taking over the more traditional parts of the sectors but instead, what we are really seeing is that funds have become the vehicle for transiting into a new energy system of the world. Is this just an interim solution or do we expect funds to become the energy companies of the future?

Advancement through dilemmas

As I ponder over the paradoxes of our society and nature, I begin to see more and more how our traditional linear paradigms about advancement and growth jars too much against reality.

There are many things that appears contradictory and yet continue to co-exist peacefully in the world without apparent conflict except in our minds. There are tyrants who are charismatic, loved and admired but also incompetent democratically elected leaders who could set a country back by decades. And there are both decentralised and centralised systems that appear to thrive, and also implode.

We ask ourselves if history proceeds through its course regardless of individual’s actions and it is just collective macro force created by the tiny actions of every individual that matters, or that it progresses through the agency of a few, put in the positions of power and influence? It’s not clear at all.

So when we think that progress in the system involves maturity of technology, of having regulation, standardisation, proper rules of engagement in place, we also recognise that these things stifles innovation and block new, emergent contenders from taking over incumbent structures.

Similarly, having contending standards or technology pathways look as though they are going to create a gridlock that prevents the industry from adopting a single unified approach.

The western, perhaps Anglo-Saxon, thought models make it difficult to hold those juxtaposing, contradictory ideas together because it supposes that there is just this one way that is the right way.

What if that is not reality at all?

Climate startups

Whether it’s climate tech or climate or sustainability startups, I’ve been encountering them recently. Of course, they are just startup companies, looking to find a product-market fit and then scale their business. There is a massive distraction in today’s market where you could grow a business out of making grant applications and putting together plans, where you try to get funding to take off.

This sounds a lot more like research in academia than the economics of a free market. While government is hoping to drive the development of good climate solutions, they are still tapping on the market where it failed, doing so through what they believe are ways to keep things market-driven when they have actually replaced the market and allowed the grant application processes to pick winners.

The challenge is that the winners picked through a grant application process are not going to be the type who wins in the market. These are firms who would have scrutinized the fine print, delivered on arbitrary KPIs and proxies that some bureaucrat came up with in his or her office. And these schemes are just distracting time, money and resources away from the startups towards satisfying governance requirements. After all, ‘it is taxpayers’ money”

The work of growing a new industrial ecosystem isn’t easy and I’ve spent considerable part of my career thinking about ecosystems, value chains, bottlenecks in developing an industry. If the government can give some demand assurance perhaps for a specific project, or product that the customer would be able to use or satisfied with, then it could help. And very often, if politicians want to be able to make claims about having supported one particular development then things becomes more difficult, not easy. When economic support is driven by a desire for narratives rather than allowing the stories to emerge from a system that is created, you can get a poorly specified policy.

Singapore’s 60th

I sat down and listened to the National Day Rally speech with a break in between. In terms of delivery and finding the stories to tell, I’d say Lawrence Wong did well. He also positioned the 4G team well, and to a large extent, it almost feels like political campaigning. The election results this year have shown a good amount of trust in the PAP government and reduced tolerance for weak opposition candidates. So I’d expect that the ruling government would lead confidently and start working on rolling out a vision.

I think the elements of vision involve more of the old playbook, unfortunately: another committee to work on the economy, more new towns and spaces earmarked to be developed, and then programme funding or tweaks to support Singaporeans, in terms of reskilling or upskilling.

There’s this common thread that Lawrence Wong seem to have been emphasizing, but I’m not sure I observe much of it on the ground. He seems to be recognising that general sense that the government had been dominating decision-making, and so there are generally more attempts to involve the people, to gather feedback, or to listen in. If that was his diagnosis about the sentiments, it is correct. It is not something to be ‘fixed’ overnight however. And it will take time to create a culture where people contribute responsibly to policy-making, and to concern themselves with the needs of the wider society.

Over the years in Singapore, there had been more individualistic attitude – because the government’s approach to just about everything involves sticks or carrots, more often than not, there’s this general attitude of ‘what’s in it for me?’ From the NDR speech, I can see Lawrence Wong urging less of that individualistic attitude, more of the ‘we’, but I wonder what are some behaviours that the government or the civil service can lead with, in order to foster and encourage that.

Experience curve development

I wrote about experience curve pricing and how China executed it as their industrial policy and successfully developed dominance in several sectors. It is hard work, and it takes a lot out of the economy, but it pays off subsequently.

The problem with Singapore is that we keep hitting up our scale limits. When we successfully bet on the right industries that have incredible growing demand, we end up expanding to our space and resource limits that we have to cede our dominance to others.

One good example was the manufacturing of actuators for hard disks. Singapore once had almost 70% market share for the production of that. Imagine that the majority of hard disks used in the world’s PCs had actuators that were manufactured in Singapore. But as the demand expanded significantly, companies like Toshiba, Seagate-Maxtor which had plants in Singapore faced a problem – they didn’t have enough space to add additional lines in their manufacturing facilities in Singapore. Of course, cost of manpower was also rising – and so they started to set their sights on other ASEAN markets for these manufacturing activities.

Singapore just had to keep going up the value chain; and it gets harder and harder to be able to bet on the right products that had good growth or stable demand externally. Most of the time, these demand were captured by the international companies first, and then when they set up their supply base in Singapore, they are effectively bringing that demand to Singapore. That was how we expanded our economy and ‘created’ markets for our economy.

There were still Singapore businesses which were successful in finding opportunities overseas and managed to capture demand externally. But how many of them were actually creating manufacturing in Singapore? How many of them actually brought most of their supply chain through our economy? It was probably quite limited because Singapore was either too expensive or simply not efficient to run them through Singapore. Besides, Singapore doesn’t even have much integrated full-scale supply chains within the country – we are merely one of the stops or churning out one particular part, or assembling some of the components for something much bigger eventually.

So, the experience curve strategy may not work well in Singapore. Yet what then could have that same sort of sticky effect that Singapore’s development can run on? What can generate persistent advantages that are self-reinforcing, without relying on a massive scale, and that do not hit up against our scale limits? We used to sell our ability to integrate and coordinate, but in my opinion, we will run up against it due to increasing size and increasingly siloed areas of specialisation. Besides, that advantage is limited to the government departments.

I think we are lacking focus when it comes to finding a particular niche that we can get into, which initially does not have sufficient scale but could be stewarded into success. It could be focusing on being excellent in a small area which has some natural scale limits in the global markets yet able to fit under the natural limits in Singapore. It could be in making something technically sophisticated that forms a small component of something that many other parts of the world will use for producing everything else. And then organising ourselves to make sure we truly dominate in that space – through strong lobbying and advocacy efforts in other countries and marketing ourselves strongly towards whoever is the end or intermediate users who have the ability to influence and bring that end-demand to Singapore.

We only need a basket of those areas of excellence and strong value proposition to fill our economy and survive. But I may be wrong about it.

Blunting policies II

I wrote about the government blunting their policies previously when it comes to SME grants, particularly in Singapore. The same applies to many countries where policy directions are not just unclear but constantly changing. In the energy transition world, so many projects and companies in the US were taking investment decisions on the basis of tax credits for production of renewable energy.

So when the fate of the tax credits was suddenly called into question, it massively derailed the plans of these companies and projects, resulting in a whole sector or industrial sub-segment seizing up. I have always thought it’s incredible that in Europe and US, you could build an entire business or project based on revenues that are only possible because of subsidies or government tax credits. That’s amazing to me because in Asia, companies do not rely on government subsidies to build their business cases. At least not the private companies who have no political influence.

The reason for that is that the private sector is unwilling to take a lot of the regulatory risks from the Asian government, and they are not sure about the longevity of those policies and incentives. They recognise that when leadership changes, these incentives could disappear (as it happened in the US most recently). In other words, those policy measures in Asia are actually pretty blunt because the private sector is not going to respond to it much. US government risk that happening and losing such a precious lever to influence the economy and coordinate the change that is required.

Likewise, in Singapore, one of the biggest advantage that the government have is the ability to coordinate change properly. Technically, they don’t need to use market-based mechanisms to do that, but decades of indoctrination about the need to use free-market capitalism to ensure efficiency have brought us to the approach taken these days. The topic of subsidies is tricky and often at the top level, the thinking is ‘who would not want subsidies and freebies for their business?’ Yet in practice, it is not so easy. But it is not the bureaucracy that companies are unwilling to engage with – it is the uncertainty around the discretion of agencies’ decisions on whether some company or activity merits the funding.

Often, if the government’s grants or subsidies are uncertain and criteria are flexibly applied to accept or reject applications, then companies would rather focus on dealing with the vicissitudes of the market than of the government. I’m writing these because I feel that our agencies could inadvertently undermine something precious that the government have built up in the past. The full implications can only be seen and experience when it’s probably too late.

Experience curve pricing

So it started when I was reading Cedric Chin’s writing about Morris Chang, and then about Texas Instruments dominating semicon industry through the invention of the Learning Curve pricing. Here is a situation where a large company basically finances its product into dominance by sacrificing some early profits as they expect lower prices to generate sufficient demand to increase utilisation of their machine, improving product yield through improvements in the manufacturing process.

This enabled Texas Instruments to dominate the industry as the anticipated increase in manufacturing yield (as a result of the ‘learning curve’), enabled more aggressive pricing, pushing out competitors, increasing market share for Texas Instruments, and thereby creating more scale advantages to drive more yield improvements. This is a remarkable use of financing to use scale economies to dominate the market. Essentially, most of the digital tech companies tries to use this as a means to eventually dominate a market of their niche.

The original idea of the learning curve of course came with manufacturing, and I believe this idea was applied at the scale of the entire industry in China when it comes to solar panels, Li-on battery architecture and now probably electric vehicles. By massively subsidising the products and creating demand not just domestically but also in foreign markets, China successfully increased utilisation of their capital equipment, improved their manufacturing capabilities and cement their advantage further.

While other markets are still focused on ‘costs’ of deploying solar, or using batteries, China took a different perspective, one that was driven by manufacturing capabilities and learning curve. I believe Japan had desired such an approach as well, having been subsidising certain markets and technologies, including development of hydrogen cars as well as residential hydrogen appliances (see ENE-FARM home use fuel cell system).

Sometimes when we wonder if we are too early into the market for something, when it comes to the government that is willing to orchestrate a strategy at that sort of industrial level, one can mobilise the resources to create the future rather than wait for the right time.