Search Results for temasek

Temasek fails to persuade over connection with rise in CPF minimum sum

Ho Ching

In an extraordinary turn of events the State Times published a letter in its Forum page yesterday from Temasek Holdings. It seems that last Saturday ST published an article (“Ways to improve CPF”) which quoted an unnamed person as saying he suspected the Central Provident Fund Minimum Sum was raised “because Temasek or GIC lost money overseas”. ( See more at: http://www.straitstimes.com/premium/forum-letters/story/temasek-doesnt-invest-or-manage-cpf-savings-20140604#sthash.jRLqDrka.dpuf)

Temasek wrote their letter in response to that comment and presumably to deny that rumour. I say it is extraordinary because not only does it fail to prove that CPF monies do not help to finance, even indirectly, the government’s injections of capital into Temasek,  but a large part of the letter is  simply a setting out of current government CPF policy and an explanation of the PAP’s stated reasons for increasing the minimum sum. You know, the one about increased life expectancy blah blah.

The letter was written for Temasek by

Stephen Forshaw

Managing Director Strategic & Public Affairs

Temasek

If you want to know more about Mr Forshaw here is the blurb from an interview he gave to  mumbrella.asia – a site about Asian media and marketing.

Stephen Forshaw is the managing director of corporate affairs at one of Asia’s most powerful investment firms, Temasek Holdings. He is also managing director of Temasek’s operations in Australia and New Zealand, and president of the Institute of Public Relations of Singapore.

In this interview with Mumbrella Asia’s editor Robin Hicks, Forshaw – who was comms chief for Singapore Airlines and Microsoft before joining Temasek – talks about how corporate communications is changing, how brands should respond to disaster, and why he’s a big admirer of Shell.

 
” A big admirer of Shell?”  You should be panicking by now.

So now we have an Expat explaining our own government’s  CPF policy  to us. Who made him spokesperson for CPF and for the PAP? As he works for Temasek but is being paid to spell out the PAP’s justification for raising the minimum sum in CPF he only adds weight to the argument that the two (CPF and Temasek) are co-mingled. What will we have next? The Head of Standard Chartered ( in which Temask has a 20% stake) writing to ST to explain to us Singaporeans why women will have to start doing National Service? Or the head of Sheng Shiong writing  to tell us why GST is being raised?

So does Forshaw actually dispel the fear that the minimum sum has been raised because Temasek has lost money and the government needs to get the money from somewhere else?  No. This is what he does say.

“As for Temasek’s performance, we have more than doubled our portfolio value since 2002, excluding any net new capital.

As of our last reporting date of March 31 last year, returns to Temasek for newer investments made since 2002, when we started investing directly in a growing Asia, have exceeded returns since 2002 for older investments made prior to 2002.”

So, that’s as clear as mud. It seems Temasek are saying that positions put on since 2002 have done better in the 11 or so years up to 31 March 2013 than those before 2002 but again doesn’t say whether this is from 1974 up to 2002 or  for example, 1992- 2002.

Is the  date 2002 significant?  Well it could be that 2002 has been chosen for this division of performance into pre and post 2002  because it is the  year Mrs PM took over as head of Temasek. (I’ve said before that it is hugely embarrassing and a conflict of interest to have the PM’s wife head up our sovereign wealth fund.)

But I believe 2002 was chosen because that date was during the post-9/11 recession and at the lowest point for the markets before the  Great Recession of 2008) so of course anything after that is likely to look good, by comparison

Temasek doesn’t provide a link to the balance sheets or any other data. Critically for me or anyone wanting to study their performance, Forshaw doesn’t provide information on the valuation criteria that Temasek uses. I am particularly interested  in their unlisted positions. Again it comes down to transparency and public listing would achieve that.

Still this divide into older badly performing stock and the better performance post 2002 is worrying. If I ran a fund in which all the longer term positions were performing worse than the newer ones, I would expect my investors to be concerned. Consistency is everything.

Of course it begs the question of why aren’t the poorer, older performers culled? Or is there another explanation for recent out performance such as recession recovery or another more sinister explanation or even a bubble waiting to burst.

Actually I have already provided an answer for part of this previously when I highlighted the Olam takeover scandal. That kind of manoeuver allowed Temasek to put the complete purchase on the books as a profit because they had owned shares before what is widely believed to have been a leak in the takeover process, that pushed the share price up enormously. Other Assets such as Changi Airport were transferred to Temasek for a 10th of their true market value. Instant profit.

Go back to the quote again and see that Forshaw tells us “As for Temasek’s performance, we have more than doubled our portfolio value since 2002, excluding any net new capital. -

Let’s look at that “new capital“. That is money that the government injects into Temasek from time to time.  The government is able to inject money or assets into Temasek because of the  constant stream of new investment it receives from CPF. So Temasek is getting CPF money indirectly. Temasek’s answer to the public via the ST forum is economical with the truth to say the least.  CPF may be invested elsewhere and not directly into Temasek or vice -versa but it all comes from the same pot which is government capital or surpluses.  As the CPF monies are available for the government to invest elsewhere, it frees up capital to inject into Temasek.

Let’s look at that doubling of the portfolio value since 2002. The S&P 500, the Hang Seng and most global stick indices have doubled over the same period since the low of 2002. So in other words if you had been investing in an index Fund and gone on holiday since 2002 you would have done as well as Temasek. Had Temasek done nothing in that time, the simple fact of the market rising would have created the same doubling over that period. Bravo!

Temasek Holdings writes that it is not investing or managing CPF money. This is simply sophistry. It is half a lie and wholly economical with the truth.   Money that the government receives from CPF savings goes to GIC and the profits that GIC earns investing  those funds  swells government surpluses enabling the government to  inject more capital into Temasek. Furthermore Temasek’s own internal rates of return that it is supposed to earn on new  investment will no doubt be related to CPF interest rates. Like everything else we have no disclosure on this but trust me, this is how it is done.

The question is unanswered. Why is the Central Provident Fund Minimum Sum being raised ?

http://www.straitstimes.com/premium/forum-letters/story/temasek-doesnt-invest-or-manage-cpf-savings-20140604

Temasek Loses the Plot

LostLast week I pointed out * that it made no sense for Temasek to pay a huge premium for Olam’s equity when Olam’s short-term debt refinancing was likely to be problematical, to say the least.  Lenders would likely have become increasingly nervous about extending more credit and rolling over existing facilities without a convincing strategy to achieve positive free cash flow and worries over the transparency of Olam’s accounts,

If Temasek saw long-term value in Olam,  the moment at which lenders would no longer extend credit  would have been the ideal moment to step in. They could then have offered to buy the debt at a substantial discount to face value, taking control of the company in that way.  Instead of waiting for Olam’s credit problems to become unmanageable and swooping in to get our citizens a bargain,  Temasek has in effect bailed out the foreign lenders. By doing so they are providing them with the reassurance of state ownership, even if not a direct guarantee.

For those of you who are sentimental about our sovereign wealth fund stepping in to save a Singaporean company from going under and believe it is worth the cost, I should point out that all of Olam’s production and most of its employment is overseas in places like Nigeria. Originally headquartered in London, it only moved to Singapore in 1995 and the CEO himself is a relatively new citizen.

On Monday Moodys, the US credit-rating agency called Temasek’s inexplicably generous offer for Olam “credit negative” **

This is what Moodys had to say about the Olam acquisition:

“Bringing a new company under the Singapore umbrella negatively pressures portfolio liquidity. Furthermore, Olam’s dividend yield in 2013 of 2% is well below Temasek’s overall dividend income yield of about 3% in the year to March 2013.

 In terms of currency, 65% of Temasek’s investments are in Singapore dollars. The high concentration of investment in Singapore-listed companies and the large size of each shareholding reduce portfolio liquidity. This feature is markedly different from the typical, more broadly spread sovereign wealth funds that can adjust their holdings rapidly without moving markets or requiring placements or trade buyers to effect disposals.

 It is highly unusual for investment companies to seek full control of a business.

If you want to know how a Sovereign Wealth Fund should be run for the benefit of its citizens,then look at Norway.  The Norwegian Sovereign Wealth Fund takes stakes of 1% or less in the equity of most of the companies it invests in and has a maximum stake size of 5%.  Some might object that a significantly concentrated portfolio leads to significantly higher returns. However the concomitant of higher concentration is significantly higher risk.

The Moodys report also highlighted the relatively weak state of Olam’s finances:

“Olam’s credit profile is relatively weak with gross debt of SGD9.1 billion and a reported last-12-months EBITDA of SGD1.2 billion as of 31 December 2013. Now with Temasek firmly in the picture, Olam will benefit from the financing halo effect, although Temasek does not guarantee the debts of its operating subsidiaries.”

Singaporeans should be very worried by this acquisition. It casts doubt on the  investment competence of  Temasek’s management.  However if this acquisition is worrying,  an investment company that acts in complete contradiction to its stated strategy is even more worrying. In a recent Reuters article about Temasek and Ho Ching’s new strategy,  “Temasek’s pivot to private investment heralds billion-dollar listed asset sales,  Temasek was described as cutting back on big stakes in publicly listed firms and putting more emphasis on private equity.

To quote from the article:

Under the guiding hand of chief executive Ho Ching, the wife of Singapore’s prime minister, the $170 billion state investor is morphing into a leaner form. The firm’s returns have often lagged its own internal metric in recent years due to its focus on big stocks.

Which goes on to say:

“Now they’re allocating capital in smaller chunks to these publicly listed firms, so that they are no longer a significant stakeholder in the company,” said Melvyn Teo, a professor of finance at Singapore Management University who has observed Temasek’s strategy closely over the years.

So lets just recap here.

  • Temasek invests the citizens’ money for the citizens’ benefit
  • Temasek is morphing  into a leaner form
  • Temasek is no longer going to take significant stakeholder positions
  • Temasek aims to raise its returns relative to an internal metric
  • Temasek is shifting its focus towards stakes in smaller companies and private equity investments

I fail to understand how Temasek’s takeover of Olam fulfills any of these aims.

So is Temasek fit for purpose and is our money safe? I am not convinced.This complete contradiction provides yet more evidence that the management of Temasek do not know what they are doing. Far from investing for the long-term (which again is almost certainly being used as a way of justifying ex-post any number of poor short-term investment decisions), in making the offer for Olam in such haste and overpaying they appear to be reacting to short-term pressures (possible bankruptcy?)

It has been suggested that Olam was on the verge of collapse and Temasek were trying to shore up the banking system. But that hardly makes sense as Olam’s debts of $9 billion are not that significant in relation to  total deposits in our  banking system.

It may be that Temasek are deliberately paying far too much for Olam because they want to mark their existing shareholding to the offer price and book the  resultant goodwill on their balance sheet as profit. It is ironic that this is exactly the tactic that Carson Block accused Olam of using to artificially boost their profit. By keeping Olam listed with negligible free float they may be able to  claim further mark to market profits by pushing up the share price. That is why we had Nomura coming out with a recommendation yesterday ( that investors hold on to their shares because they are likely to rise further.)

It is no coincidence that the Lead Nonexecutive Director of Olam  happens to be the Chairman of Nomura Singapore. The Securities Industry Council (SIC) need to look at whether parties allied to Temasek but outside the “Concert Parties” (as defined in the offer document) were involved in pushing up the share price. Given the conflicts of interest that the members of the SIC have, an independent investigation is unlikely to happen.

Another worrying sign is the fact that both Josephine Teo and Inderjit Singh spoke  in Parliament (“Govt spending needs won’t drive GIC, Temasek investments”) in an obviously choreographed performance to deliver the message that Temasek and GIC must not be put under pressure to deliver short-term returns to meet spending demands.  Josephine Teo said that “GIC and Temasek “must continue to invest with the aim of achieving good, risk-adjusted returns over the long term”.  As Keynes said about returns over the long-term, “In the long run we are all dead”.

If the returns are as the managers of Temasek and GIC claim they are, then why does the PAP give the impression that its idea of the long term will be well past the lifespan of any Singaporean alive today or even their grandchildren? Why are Singaporeans willing to put up with this nonsense. We need proper accountability and transparency now and this can only be achieved by listing Temasek and GIC and distributing shares to Singaporeans?

Temasek claims a track record of 17% p.a. annualised. I hope I have shown my readers over the last three years that the track record quoted  was only achieved because when Temasek was set up the government transferred its shareholdings to Temasek for close to zero consideration. When these companies (SIA and SingTel are two prominent examples) were later floated, Temasek claimed the revaluation gain as part of its returns. This blatant padding of Temasek’s real track record would not have passed muster with an independent regulator if Temasek were a private sector investment company marketing funds to the public.

This practice still continues. A case in point is the  injection of Changi Airport Group into Temasek in 2009 at a book value of around $3 billion or less when the real value of the airport is probably upwards of $16 billion or so (see my article “Has Temasek Found A Cure for Balding?”).

As I first said in an interview*** in 2010 (which was quoted all over the world), if Temasek were a private company, heads would have rolled by now. That was in 2010 but the situation has not improved.  The irrational investment decisions, the contradictions of policies announced just days before and inability to stick to an investment strategy, coupled with the lack of transparency and use of dubious accounting to artificially boost returns would all raise red flags with investors. I can tell you that if I were a private investor I would not be putting my own money into this company.

Ho Ching

*Questions for the Prime Minister’s Wife on Temasek’s Olam Acquisition

**Temasek Unit’s Offer for Olam Is Credit Negative, Moody’s Says

***http://in.reuters.com/article/2010/03/12/idINIndia-46873320100312

Questions for the Prime Minister’s Wife on Temasek’s Olam Acquisition

Olam Share Price

Olam Share Price

My suspicions were raised yesterday by the news that Temasek has put up $2.1 billion dollars to buy out any remaining shares they do not already own in Singaporean commodities trading firm Olam International Limited (“Olam”).  The offer was inexplicably generous. Though Temasek is only offering 12% above the stock’s last traded price, the offer is in fact  a staggering 55% above where the shares had been trading on February 4th  2014.

Why would Temasek be willing to pay such a high price for Olam no matter what the cost to its stakeholders, the citizens of Singapore? Naturally, at that 55% premium it can expect to get the vast majority of the shares except for those held by the founding shareholder and the company’s management, who have agreed not to tender their shares beyond a set percentage.  It would also seem that upon acquisition Temasek intends to take Olam private which means it would become unlisted. Unlisted holdings within an already secretive Temasek are bad news for Singaporean citizens.  Being unlisted allows a firm to hide a weak balance sheet or even catastrophic losses without the pressure of Singaporean public scrutiny and without the need to publicly report quarterly and annual earnings.

As you all know I am at the forefront of demanding greater transparency from Temasek. One of the reasons I have campaigned for Temasek to be listed publicly is so that we CAN apply public scrutiny and have complete transparency over its reported earnings. At the very least Temasek should produce the level of detail and transparency in its annual reports that Norway’s sovereign wealth fund does, allowing the figures to be scrutinized by Parliament.

My concern is that Olam is part of a movement by the government led by the Prime Minister and Temasek led by the Prime Minister’s wife, towards further secrecy. In the past few years I have been highlighting discrepancies and black holes in our government’s accounting procedures and simultaneously raised serious doubts over Temasek’s published rates of return. In the two years since Chip Goodyear suddenly left, Temasek has increased the percentage of private firms in its portfolio by 22%. As of March 2013 a very significant 27% of Temasek’s portfolio was in privately listed companies whose accounts are invisible to us. That percentage of private companies
may be even greater by the time the next reports come out around July.

The move towards private companies and accompanying secrecy may not matter if those companies are profitable but what better way for Temasek to hide its losses in a company they have made a bad bet on than by acquiring more than 90%, taking it private and burying it?  Is this in fact what they’ve done with Olam?  Did Temasek in fact, put up billions of our dollars in what amounts to a face saving exercise or to inflict financial pain on anyone who dares criticise them?

On the face of it Olam does not present as a good bet at a 55% or even a 12% premium. Olam’ has had a turbulent stretch recently after its weak balance sheet and its accounting practices came under the scrutiny of Carson Block and his research firm and short-seller Muddy Waters (“MW”) in November 2012.

carson blockFor those of you who don’t know MW they were behind the exposure of the Canadian-listed Sino-Forest Corp for misrepresenting its timber assets. Sino-Forest subsequently filed for bankruptcy in 2012.

In November 2012, Carson Block labelled Olam another “Enron”, described its equity as worthless and its accounting as highly questionable and announced that he was shorting it.  MW pointed out that Olam was burning up cash. Even on the company’s own figures it would not have been able to generate sufficient cash to meet the large debt repayments falling due over the next couple of years.

Enron, I’m sure you all remember, was a US energy-trading company with creative accounting whose apparent profitability relied on revaluing assets using dubious financial models. At the same time its cash flow was consistently negative and it was only managed to survive as a going concern on the generosity and gullibility (or venality) of its bankers. When it collapsed in 2001, as a result of the recession, there was a huge scandal and most of the top management ended up with long prison terms.

I have told you before that Temasek have an unerring ability to find the only banana skin in the room and promptly slip up on it (see “Chesapeake Energy and Temasek: A Tale of Two CEOs and Shareholder Democracy”) So my readers will not be surprised to learn that Temasek were the biggest shareholder in Olam, apart from the founders of the company, at the time that MW came forward with its negative assessment.

Olam’s stock dropped 20% on MW’s announcement and hit a three-year low in December 2012. In fact the company may have collapsed if Temasek had not come to Olam’s rescue within days of the MW announcement by agreeing to buy a US$750 million debt issue with warrants. This move may also have relieved the company’s debt refinancing issues temporarily and been a precondition for the banks to roll over short-term maturing debt. However the rapidity with which Olam turned to Temasek for assistance and the high cost of the new debt indicates that the MW hypothesis that Olam had been in danger of collapse was probably correct.

In addition Mr Verghese, the CEO of Olam and a true son of Singapore even though he is a new citizen, threatened to sue Carson Block and MW for defamation. There are some things we do so well in Singapore and using defamations suits to silence criticism is certainly one of them. Mr Verghese, reported to be politically well connected in Singapore, actually started proceedings, with Olam as the plaintiff, in the Singapore courts. However he decided to drop the suit after realizing that Olam would be unlikely to be able to enforce any judgement obtained in a Singapore court against a US company with no assets in Singapore. Furthermore the suit was not helping the stock price or Olam’s credibility.

Returning to the subject of why Temasek chose to make an offer to the shareholders at this time, I would quote Carson Block’s comments: “The Singapore sovereign wealth fund’s timing is interesting given that Olam has $1.2 billion of debt maturing this year and is still burning cash, and that the stock has inexplicably outperformed in the past month.”

As I described above Olam has continued to hemorrhage money. As of June last year, Olam already had long-term debt of S$5.9 billion compared with S$4.3 billion at the end of June 2012.  Temasek’s bail out via Olam’s Convertible Bond and Warrant issue was only a stopgap replacing cheap debt with expensive debt. Olam continued to be over-leveraged.

More importantly by February of this year Olam still faced an enormous re-financing problem with billions of dollars of debt falling due in the short-term without any positive free cash flow to draw on.
Even with the lifeline provided by Temasek through new lending, Olam would likely have been unable to continue as a going concern just as Carson Block of MW had predicted.

Given the circumstances, the timing of Temasek’s offer is peculiar and I am afraid inexplicable.  So is the offer’s huge premium to where the stock was trading in early February. Even if Temasek genuinely sees future value in Olam as a global commodities trader and producer they have a fiduciary obligation to their shareholders the citizens of Singapore not to overpay.  The rational strategy would have been to buy the debt of Olam at a big discount to face value and then take control of the company by forcing a restructuring, wiping out the equity holders in the process. To make an irrationally generous offer for a failing company with public money is rewarding foreign shareholders at the cost of the Singaporean taxpayer and CPF holder. Temasek has a case to answer here and questions need to be asked.

Some analysts have argued that the massive premium was justified because of a turnaround in fundamentals for the company. They point to rising agricultural commodity prices as well as better capital spending discipline by Olam. However it is hard to see that this is the case. Olam last month posted a 12.5 percent drop in second-quarter profit on weaker sales and commodity prices. While Earnings Before Interest, Tax, Depreciation and Amortization (EBITDA) rose slightly over the previous half-year, cashflow from operations continued to be strongly negative and debt continued to rise.

Undoubtedly the company had addressed some of the concerns raised by Block’s report but I don’t see this as anything approaching a turnaround. It certainly does not explain a 55% rise in the share price in one month. The MSCI agricultural commodities index only rose by 13% over the same period.

In fact I would go so far as to say that Olam and Temasek might have breached the Singapore Takeover Code.  This mirrors the UK Takeover Code and places very clear obligations on both the offeror and offeree companies to keep any offer discussions secret. In the event of an unusual movement in the share price of the offeree company or an increase in turnover they are required to make an immediate announcement as to the possibility of an offer. The movement in Olam’s share price was clearly unusual and should have led to an announcement much earlier. The stock exchange also needs to conduct a convincing investigation of possible insider trading and if evidence is found prosecute those responsible. If any MPs, NCMPs or NMPs wish to raise this issue as well as the broader question as to why Temasek chose to pay so much for Olam, then I am more than happy to assist them.

This episode only seems to demonstrate that the managers of Temasek and in particular the CEO, the PM’s wife, do not seem to feel under any capital discipline or fiduciary obligation to achieve the best returns for their stakeholders, the citizens of Singapore. Singaporeans should rightfully be angry that money can be so gratuitously and unnecessarily squandered in this manner. Foreign shareholders and lenders have not only been let off the hook but rewarded generously.  This seems to be for no other reason than to administer a painful lesson to those who would expose the mistakes made by Temasek’s investment managers. The irony is that the virtually unlimited resources of our sovereign wealth funds that enable their managers to do this have only been built up through our sacrifice.

Value destruction on this scale is only possible because of our willingness to allow the PAP government to get away with not giving us the true picture of our public finances. Instead we meekly submit to conditions of austerity that are totally unnecessary. The next time we are told by the government that taxes will have to rise to finance greater social spending, or that we have to queue in tents at SGH like some Third World war zone, we should remember what our refusal to stand up for our rights is really costing us.

How to Create A True Property Owning Democracy through The Privatization of Temasek and GIC

property owning democracyIn my last blog post (see here) I pointed out that since 2009 I have advocated the privatization of Temasek and GIC and the distribution of shares to Singapore citizens. This was also a plank of the Reform Party manifesto in GE 2011 (see here).  Naturally there has been a lot of interest in this idea, if not controversy, including an attack by some YPAP activists back in 2009.  Most of their criticisms were simplistic and easy to answer.

However there has continued to be a lot of interest in the mechanics of how such a privatization might be achieved and how the shares would be distributed. Recently an anonymous commentator asked posted this question on TRE:

Kenneth, what about future generations of Singaporeans? How does it work? Every Singaporean gets one share? How?

 This article attempts to address these questions.

But before then I would just like to answer the question as to why I am proposing privatization in the first place.

The most fundamental reason is transparency and accountability. Temasek’s charter says it aims to “create and maximize risk-adjusted returns over the long-term”.  There is no definition of what long-term means. GIC merely says that its objective is to deliver  “good long-term returns for the government” which is defined as  “good long-term returns for the Government – a reasonable risk-adjusted rate above global inflation over a 20-year investment horizon. “As any economist knows “investing for the long-term” can be used to cover a multitude of sins. Almost any period of poor performance can be explained away by saying that it is temporary. Without the discipline and transparency of a market listing and need to provide full information to investors there has to be the suspicion that management will seek to enrich themselves and/or tolerate poor performance. I wrote about these issues and the need to privatize Temasek in particular in my blog post, “Chesapeake Energy and Temasek: A Tale of Two CEOs and Shareholder Democracy” where I said:

It is instructive to contrast the power of shareholder democracy in shining a spotlight on management conflicts of interest and excessive compensation with our own powerlessness in finding out what is the real picture at our own sovereign wealth funds. Of course an incorruptible government ensures that there is no egregious wallowing at the corporate trough, like the shenanigans at Chesapeake, even though the PAP elite believes it is not in our interests to be told very much of what is going on. Even our (s)elected President has little power, and seemingly little interest, in keeping an eye on the investment performance of our SWFs, despite his choice of a pair of spectacles as his electoral symbol.

And also:

“…as a first stage to transparency and the privatization of our SWFs we need to separate the stakes in domestic companies from foreign investments. Temasek should be split in two. In fact if it had been a listed company in the US, for instance, management would have taken that route in order to raise shareholder value. With the split, the market is likely to value the two successor companies as a whole more highly than the original. This is because of the improved management focus and transparency resulting from the split. As a rule investors prefer to construct their own bundles of different businesses rather than have to invest in a company where management have made that choice for them.

Another reason for privatizing and listing Temasek and GIC is so that management compensation and incentives can be made transparent. Shareholders can check whether the incentives of management then are in alignment with the objective of increasing shareholder value. If there is excessive compensation for mediocre performance, then shareholders can vote against management at the AGM just as at Chesapeake. In the last resort they can vote with their feet by selling their stock which is why companies with poor corporate governance trade at a lower multiple than similar companies, ceteris paribus.”

As I explained in my last article, “Has Temasek Found A Cure for Balding” the lack of information and the valuations placed on assets that the government has injected and continues to inject into Temasek leave large question marks over the true track record of the managers. There is no reason for this excessive secrecy. After all look at Berkshire Hathaway, Warren Buffet’s investment vehicle, which is around the same size in terms of net assets which publishes quarterly and annual reports as required by the US Securities and Exchange Commission with exhaustive explanations of its accounting policies. Having to release so much information has not affected its ability to generate returns.

Both Temasek and GIC give their shareholder as the Government of Singapore. But the shareholders should be the people of Singapore and the managers should be accountable to the people. This is the rationale for my plan to privatize Temasek and GIC and distribute shares to Singapore citizens. By doing so, together with allowing Singaporeans to own the freehold of their HDBs, we create a true property-owning democracy rather than the fake “porcelain rice bowl” model that the PAP government is so fond of.  The 99-year leasehold coupled with the right to move us with inadequate compensation whenever there is a profitable development opportunity is akin to feudal land tenure for the 90% of us who cannot afford private property. In fact it is even worse since there is no asset to pass on to one’s children.

To distribute shares equally to all Singapore citizens would also be a powerful boost to wealth equality without having to resort to redistributive policies on taxation, which by reducing the incentives to work and invest for the most productive may reduce potential output. A rough guesstimate using the deliberately opaque and inadequate information provided in the government’s annual Statement of Assets and Liabilities suggests that this could be potentially worth more than $100,000 per citizen.  Obviously with a listing the valuation would depend on the market and the greater the transparency and measurable alpha generated by the managers the more likely the shares would be to trade at a premium to book value. On the other hand if Temasek and GIC’s portfolios are very optimistically marked in terms of valuation and the less liquid the portfolio the lower the market valuation is likely to be.

There are of course a multitude of questions that would have to be resolved. These are some of them together with some possible answers:

How should the shares be distributed? In my view it should be equal shares for everyone though consideration could be given to allocating more shares to those who had done NS as compensation for the economic sacrifice.  Of course this might be opposed by women who could justifiably point to the economic sacrifice entailed by child-bearing though most women who have children do so as one-half of a couple. The sacrifice affects both parties.  A fairer way might be for Singapore citizens with less than ten years citizenship to be excluded unless they had done NS.

 Should shares be given to those under 21 at the time? Probably not on the grounds that they have not made the economic sacrifices that the older generation has to build up the stock of assets. New citizens would not get shares though perhaps consideration could be given to keeping back a certain proportion of shares to allocate to those who had done NS.

What happens to CPF contributions in future that have been a big source of cheap funding for GIC? I have advocated privatizing CPF and making contributions voluntary (while keeping their tax deductibility).  Even with the endowment effect of cheap CPF borrowing GIC’s performance has been lamentably low (see link).

What would happen to future government surpluses? There is no reason for the government to run surpluses once an adequate level of reserves has been reached. Of course if and when shares in our SWFs are allocated to citizens there may be a period of adjustment during which the government would have to run a bigger budget surplus to offset additional spending by the private sector as it adjusts its stock of financial assets to the desired level rather than the artificially high one imposed by government. Budget surpluses could be invested in the SWFs and the new shares created held back to reward new citizens who had done NS or children of existing citizens.

Is there not a risk that Singaporeans would just squander their new wealth or be cheated by unscrupulous individuals with inside knowledge? Privatization and the distribution of shares in state-owned enterprises was given a bad name in the former Communist bloc. The selling off of state assets cheaply to the former managers of the companies with the use of loans from state banks helped create the class of Russian oligarchs who became billionaires literally overnight. However in this case the problem would be avoided as there is no requirement for the state to raise money through privatization. Instead shares would be distributed equally. Some Singaporeans might want to see some sort of vesting process imposed to ensure that Singaporeans could not squander their new-found wealth. However such fears are undoubtedly ill-founded as well as being patronizing and elitist It is exactly the same kind of attitude as the current government has towards our citizen’s rights to know how our assets are being managed and even to know the true extent of the reserves. If markets tend towards efficiency then the share price should broadly reflect the mean value of the probability distribution of future returns.  The shareholders would be the best judge of whether the share prices of our privatized SWFs were overvalued or undervalued on this basis.

How would you prevent foreigners gaining control of Singapore’s crown jewels by buying up the shares held by Singaporeans? Firstly most of Temasek’s domestic investments are not in high technology areas but in mature industries.  Temasek has sold several of the companies in its domestic portfolio to foreign buyers in the past.  It is difficult to argue why the management of a privatized Temasek should not be able to recommend a bid by a foreign company for any of its assets or even for Temasek itself and why Singaporeans should not be free to accept.  Adequate safeguards could be put in place by requiring any takeover offer from a foreign company for a Singaporean company above a certain size or in a strategic sector to require approval from a Committee on Foreign Investment (like CFIUS in the US or the FIRB in Australia).  It should also be coupled with a strengthened competition regulator given that Temasek holds many quasi-monopolies in the local market.

These are a few thoughts on the issue.  I advocated privatizing Temasek and GIC primarily to impose transparency and accountability on the management through the discipline of the market. There would be a transparency premium to the valuation. Distributing shares to Singaporeans would also establish a direct nexus between our citizens and the managers of our reserves and give them the power to replace them in a direct manner as opposed to the indirect method of having to replace the government.   At the same time it would give ordinary citizens a significant endowment which would greatly reduce inequalities in the distribution of wealth and thus contribute to much greater equality of opportunity. This would be along the lines suggested by Rawls, the American philosopher, in his later ideas on the creation of a property owning democracy. Given that Singapore’s state should already be wealthy enough to provide everyone with significant property assets, the conflict and loss of economic efficiency resulting from redistributive taxation could be avoided. My ideas may be too radical, even heretical,  for the current orthodoxy that state capitalism works best.  However Singaporeans can increasingly see that the current model has failed to raise living standards significantly for the past decade or more.   My hope is that this will start a debate and I look forward to your comments.

Has Temasek Found A Cure for Balding?

BaldnessThe question of the transparency and proper accounting of our reserves has been a primary concern of mine for some time, in fact ever since 2009.  A major theme has been that currently we have inadequate safeguards to prevent them being frittered away by an irresponsible government instead of being used for the benefit of the people whose hard work and sacrifice have built them up.  In the RP responses to Budget 2012 and 2013 (see here and here) I complained that our Budget presentation was a masterpiece of obfuscation and misdirection and that there were several glaring discrepancies in the accounts. I followed this up with two letters to the Finance Minister (here and here) complaining about discrepancies and a further letter to Christine Lagarde, the head of the IMF (here).

I have also written extensively at www.sonofadud.com on the question of the transparency of our reserves and why the numbers do not add up(see here for just one example). A further list of links is given at the bottom of this post.

Thus  as the person who raised this issue first I am well qualified to adjudicate on the issues raised in the recent argument between Christopher Balding and the person calling himself “Kok Ah Snook” .

After I had been writing about these issues for some time, I found that Chris had in April 2012 been writing in a rather alarmist and sensationalist style and making unsupported allegations of fraud about what he believed to be large shortfalls in our reserves. However his analysis was merely speculation until I spoke to him and pointed  where on the MOF website he could find a sub-standard balance sheet, without any explanatory notes, which the Finance Minister is required to publish annually under the Constitution. The balance sheet is supposed to represent Singapore’s assets and liabilities.

After some discussion I then flew out to meet him in Hong Kong where we agreed to work together towards a joint presentation of what we had found.  While looking at his work I noticed certain errors or implicit and unjustified assumptions that he appeared to have made in his calculations of what should the theoretical total of Singapore’s gross and net assets and pointed these out to him.

However despite what I thought was an agreement he started publishing fresh articles independently using some of the information that I had sent to him.  Since it seemed to be difficult to work with him I went ahead and published my conclusions in the article above where I cited some of the errors he had made in his analysis. However despite this I broadly agreed with his conclusion that the theoretical level of gross and net assets should have been much larger differing only in the order of magnitude.  Whereas Chris calculated that there was potentially over a trillion $ in missing assets my more rigorous assumptions reduced the theoretical shortfall on conservative assumptions to the level of  $300 billion or so.

In later articles (see here and here) I argued that GIC would have had to have earned less than 2.5% p.a. in S$ terms, even  allowing for a cost of government borrowing from the CPF of 3.5%. to generate such a low level of net assets . This was after subtracting Temasek’s publicly stated level of net assets and a conservative estimate of revenue from land sales from the total of gross assets shown in the Statement of   Assets and Liabilities. This was actually much more damning because it established that even the most careful analysis suggested cause for concern that the managers of our reserves appeared to be achieving very poor returns.

So let us get back to the current controversy. I read what  Mr. “Kok” wrote (and also met up with him). He is technically correct that there is no theoretical difference between owning assets worth $100 directly and owning shares in a company with net assets of $100. However I do agree with Chris that it is a cause for concern if the assets are injected into the company for free or not for fair value and that the managers of the company subsequently revalue the assets and claim the gain as their own investment performance.

The view that Temasek’s presentation is unorthodox and misleading is supported by current accounting practice (as exemplified by US Financial Accounting Standards Board (FASB) Statement No. 141 which can be found here). This requires that:

20. The acquirer shall measure the identifiable assets acquired, the liabilitiesassumed, and any noncontrolling interest in the acquiree at their acquisition-date fair values.

 In the case of a “bargain purchase”, one where the fair value of the assets acquired is above that of the consideration paid, the “the acquirer shall recognize the resulting gain in earnings on the acquisition date. The gain shall be attributed to the acquirer.”

 Accounting Standards Classification (ASC) 805 has superseded FASB Statement 141 but the instructions remain the same. The International Financial Reporting Standards (IFRS) has very similar, if not identical guidelines on how to treat acquisitions of undervalued assets.

Of course Temasek as an exempt private company is not required to publish its audited statutory consolidated accounts though presumably these should be in accordance with US Generally Accepted Accounting Principles (GAAP) or  IFRS.

At the time of Temasek’s acquisition of these group companies from the government, even if there was no fair value determination for the companies transferred, Temasek should have recorded them at the book value they were showing in the acquiree company’s accounts. Temasek paid $354 million for the 35 companies by issuing shares to the government. It is hard to believe that this was book value even then. It is likely that Singapore Airlines alone even in 1974 had a book value of close to that figure.

If Temasek had chosen either to use fair values or book values for the assets acquired then the resultant gains should have been taken to income on the date of inception and added to the reserves.  The starting base for calculation of returns would then have been much higher and subsequent returns correspondingly lower, probably by a significant amount. Even if the acquiree companies’ book value was used it is highly likely that there would have been a higher starting value for Temasek’s initial assets and a significantly lower rate of return since then.

This does matter if you are a publicly listed company because investors will look at the track record of the managers. If you were a hedge fund manager and your returns were inflated because they include returns that belong to prior periods then that would be highly misleading and probably fraudulent. Regulators would definitely be concerned.  If the fund’s returns were padded by the injection of undervalued assets from other funds then this would also be misrepresentation of the true performance of the fund.  Before regulators tightened their rules on marking of assets and liabilities to fair value, which should be market values as far as possible, it is probably true to say that it was fairly common for investment bank proprietary trading desks to build up hidden reserves by undervaluing some of their assets.  These could then be released when necessary to cover losses or when bonus payments were calculated.

It has been argued by “Kok” among others that the glaring undervaluation of Temasek’s initial portfolio does not matter in the case of Temasek because it is a government-owned company and it is not marketing shares or investment funds based on its performance.  It was just a choice of accounting treatment and after all no money was siphoned off.

However, this is far too naïve a view. Singaporeans are the investors in Temasek and ultimately the owners of the assets. If the government is able to convince them that they are better managers of these assets then they really are then the voters may be swayed to vote for them when they otherwise would not. Also the CEO of Temasek has talked in the past of co-investment funds to be sold to Singaporeans and others to allow them to invest alongside Temasek. Should these come to fruition then investors need to know what the true performance of the current managers is. The remuneration plans of Temasek’s managers are also linked to long-term investment returns. If these appear better than they really are then payouts to managers may have been larger than they should have been.

Finally a future group of managers may decide at some stage to partner with a private equity firm or firms to make a buyout bid for Temasek’s assets that a future government might accept. If some of the assets in the portfolio are still significantly undervalued, and only the future managers know about it, then Singaporeans may be seriously shortchanged. This is unlikely but not inconceivable. After all Nomura’s private equity division bought the Ministry of Defence housing stock in the UK for a fraction of its true worth generating reported profits for Nomura of US$1.9 billion and setting Guy Hands, the then head of Nomura’s Principal Finance Group, on thr road to a reported personal fortune of £100 million by 2011.

Despite Balding being on the right lines his analysis is unfortunately vitiated by some elementary mistakes as usual. These unfortunately undermine the credibility of his case though they do not affect the main argument.  He mentions Changi Airport Group  (CAG) and says that the government invested $5.68 billion since the late 1970s and is then selling it at a loss to Temasek for $3.2 billion in 2009. However he omits to take account of any dividends paid by CAG to the government since its inception. Given that their profit after tax in the first year after corporatization (2009/10) was S227 million the positive cash flow since Changi’s inception may have been several billion dollars. This would have reduced the headline investment figure of $5.68 billion probably significantly. Against this must be set the unexplained entry in the consolidated cash flow statement showing $580 million received from CAAS. Perhaps this represents revenues collected by CAAS prior to corporatization and subsequently paid to CAG.  In this case the purchase price of $3.2 billion should be reduced by this amount. In addition CAG’s balance sheet showed cash of another $500 million as well as the $580 million and both amounts should be deducted from the purchase consideration to determine the enterprise value.

The purchase price was purely notional anyway because the purchase was financed with a simultaneous capital injection by MOF of the same amount. While the capital injection will add to Temasek’s asset base but not increase its returns, the purchase price of $3.2 billion is well below what such an asset with predictable and growing cash flows should fetch in an open auction.  Recent airport sales  (Edinburgh, Stansted) have achieved  Enterprise Value/Earnings Before Interest Tax Depreciation and Amortization (EV/EBITDA) multiples of 15 to 17 times. Putting CAG on a EV/EBITDA multiple of 17 times implies that in 2009 it should have been worth at least $7.3 billion and on the basis of the latest results that would have risen to nearly $16 billion.

 So exactly the same thing is happening as in 1974 despite recent accounting standards updates that mandate that acquired assets should be recorded at fair value in the acquiror’s books with gains recorded on acquisition. All the previous reasons why this is wrong apply here. Yet again, the Singapore citizen and taxpayer gets a raw deal because the value of the assets concerned is not being maximized as they would be if CAG was put up for auction. It would be interesting to see how the value of CAG is treated in Temasek’s statutory consolidated accounts.  Of course undervaluing the asset creates a very useful reserve for a future rainy day for whoever happens to be the managers of Temasek then!

Unfortunately Chris Balding also harms the useful points he makes by the wild accusations of fraud and Bernie Madoff he flings around for which he has no evidence (though it cannot be disproved either). This risks the very valid questions about the management of our reserves being ignored or not taken seriously. Given the recent rising trend of threats of defamation suits to try and silence critidism, culminating in a government body threatening to sue an ordinary individual for the first time, there is a real risk that someone in Singapore could repeat Chris’s accusations and end up getting sued.  It is notable that no one has threatened to sue me yet despite the very serious questions I have raised (though Kumaran Pillai at TOC lied and told me he had received a phone call from Temasek ordering him to take down one of my posts but could not produce any evidence when asked). This is because I make sure that what I write is accurate.

Ultimately the only way we are going to answer these questions is through transparency. That is why I have called since 2009 for the privatization of Temasek and GIC and the distribution of shares to Singapore citizens. That is the only way we will get to know what our reserves are really worth and whether the managers have been turning dross into gold or, as I suspect, the reverse.

Roach Motel Or Investing for the Long-Term: You Decide What Best Describes Temasek’s Investment Strategy.

A “Roach Motel”, originally a term used to describe a cockroach trap, has become a metaphor used by hedge fund managers to describe an investment that is too large in relation to the size of the company’s equity capital or the liquidity of the stock to allow the manager to exit without taking an unacceptable loss. For better or worse, the manager is locked into the stake and the only exit is normally either through a sale of the company, which is fine as long as a price higher than the entry price is achieved, or else through bankruptcy and the loss of the entire investment.

Roach motels sprang to mind when I read this morning that Temasek Holdings is selling a 2.5% stake, or 400 million shares in SingTel with the option to sell another 100 million shares
Read the rest of this entry

Chesapeake Energy and Temasek: A Tale of Two CEOs and Shareholder Democracy

Recently Chesapeake Energy, the second biggest US gas producer, has been much in the news. The company has been having cash flow problems since the CEO, Aubrey McClendon, took a wrong bet on the direction of gas prices and bought back its hedges. This has left it exposed to a big decline in natural gas prices in the US and a market glut.

Why this is a cause for concern is that the company has large spending commitments which leave it facing a liquidity crisis. It has said it must sell assets worth between US$11.5 billion and US$14 billion this year to pay down debt and finance its capital requirements. Shareholder unhappiness with the performance of the CEO and some of the sweetheart deals and excessive compensation he has received from the company boiled over at the AGM on 8 June. The two directors on the company’s slate standing for re-election were overwhelmingly rejected by shareholders. A majority of votes were also cast in favour of a nonbinding proposal to allow major shareholders to nominate board candidates. In another manifestation of shareholder anger, 80% of shareholders voted to deliver a stern reprimand to the company over its pay to and supervision of the CEO, Aubrey McClendon.

McClendon recently also had to settle shareholder lawsuits over the company’s preferential treatment of him in 2008 when he faced margin calls on the stock he had borrowed to buy. This included having to pay the company back the US$12 million it paid him to buy his collection of antique maps which now adorn Chesapeake’s boardrooms. And very fine maps they are too, or so it appears.  Perhaps Temasek’s management have been lucky enough to see the maps when they visited the company! However I am confident that the excitement of seeing these fine examples of early cartography did not cloud the excellent judgement of those entrusted with managing our citizens’ forced savings.

The upshot of Chesapeake’s liquidity crisis is that unless the company achieves its asset sales targets it may have to declare bankruptcy in order to get out of its capital commitments. The problem is that when a company faces cash flow problems buyers tend to hang back in the hope that they may be able to get the assets cheaper if those problems get worse. Of course they face the risk that a competitor might step in to buy them but by waiting they might also learn of new potential contingent liabilities that might affect the value of the assets. Another possibility is that a suitor steps in to buy Chesapeake and makes what is known as a “takeunder” offer where the price is less than where the stock price is currently trading. The well-known activist investor, Carl Icahn (who is almost as venerable as our dear former Minister Mentor), clearly is hoping for a much higher takeover offer or a bidding war because he has accumulated about 8% of the company.  However there is still the risk that a bidder might wait for the company to enter bankruptcy and then make an offer at an enterprise value that leaves nothing for equity holders.

This brings us to Temasek and its holding in Chesapeake. It must sometimes seem to Singaporeans that the management of Temasek and GIC have an unerring ability to find every banana skin in the room and promptly slip up on it. That would be amusing if it was a slapstick movie but not so entertaining when you know that these investments are financed through your taxes and lack of free education and healthcare while citizens in countries that you are helping to bail out receive theirs free.  They have also been financed by the relentless rise in government debt. In his Economics Society speech PM Lee hinted this debt will have to be paid off through tax increases down the road because our overseas investments have not done as well as expected.

Actually Chesapeake does not look quite as bad as some of the other notoriously poor investments by Temasek and GIC that have been the cause of so much scorn from Singaporeans for the management of these companies. Temasek’s investment is at least in the cumulative convertible preferred stock which ranks above the common equity but carries no voting rights. The preferred stock pays a fixed dividend of 4.5% which might seem attractive in comparison to a common equity dividend yield of around 2%. However, unlike straight debt where a failure to pay the coupon would be an event of default entitling the holders to put the company into bankruptcy, the company can pass on the dividend if it does not have the cash to pay it. Missed dividends on the preferred stock accumulate and the backlog must be paid off before the company can resume paying dividends on the common shares.

So there is relatively weak protection for the preferred holders. It does have the benefit of being convertible into common stock. However the strike price for the conversion is around US$43 so at the last traded price of US$17 the equity option is quite far out of the money. Thus movements in the stock price will not have a big effect on the convertible price. This will be mainly determined by the likelihood that the company can continue paying dividends.

Temasek’s 2011 annual report says that they purchased S$700 million of the cumulative convertible preferred during the course of 2010. It traded between US$80 and US$100 over that period. Assuming they bought it around US$90, then at the last traded price of US$78.76 Temasek has ONLY lost around 12.5% of its investment (and that is before taking account of the dividends it has received since 2010).

However, even if Temasek is able to get out with only a small loss or, miracle of miracles, to break even on its investment, there are still several lessons that we should learn. It is instructive to contrast the power of shareholder democracy in shining a spotlight on management conflicts of interest and excessive compensation with our own powerlessness in finding out what is the real picture at our own sovereign wealth funds. Of course an incorruptible government ensures that there is no egregious wallowing at the corporate trough, like the shenanigans at Chesapeake, even though the PAP elite believes it is not in our interests to be told very much of what is going on. Even our (s)elected President has little power, and seemingly little interest, in keeping an eye on the investment performance of our SWFs, despite his choice of a pair of spectacles as his electoral symbol. He has still not replied to my straightforward question as to whether presidential approval was sought or given for our republic’s loan commitment to the IMF. Presumably this is because it is not in the public interest for anyone outside the ruling elite to know the answer to this question, just as Tharman said it did not serve the public interest to tell us why Chip Goodyear would not be taking up his post as CEO of Temasek.

Recently I wrote an open letter to the Finance Minister asking him to explain some apparent discrepancies between the governments’s annual Statement of Assets and Liabilities (ALS) and the reported general government surpluses. Using the IMF’s own figures as well as those kindly provided (after much prodding, to be explained in a separate post) by the Department of Statistics, I pointed out in my letter that the total reported surpluses are of the order of S$429 billion since 1980. This contrasts with my calculations from the ALS which show that real net assets (excluding land) are only some S$280 billion as of 31st March 2011.

Yet much of the valuation of the net assets is underpinned by an enormous rise in the value of unquoted investments which have gone from S$53 billion as at 31st March 2004 to S$172 billion as of 31st March 2011.  Since 2008 the price of KKR stock, which is a private equity fund manager and thus a good proxy for the value of the funds it manages and has equity in, has halved from over US$20 to around US$12 today. At the same time government debt has increased to over 110% of GDP.

It might be argued that the increase in debt is merely the result of the government’s sterilization operations to mop up the liquidity stemming from our current account surplus of over 20% of GDP. However in that case why does Norway, which runs a large current account surplus of about 15% of GDP and whose sovereign wealth fund has over US$600 billion in assets, have a debt to GDP ratio of only some 50%. Saudi Arabia, which also had a current account surplus of around 24% of GDP in 2011, has a debt to GDP ratio of around 7%.

So far the Finance Minister has not deigned Singaporeans important enough to need to know the answers to these questions.  An American political economist in Hong Kong, Chris Balding, has been asking the same questions, though in a much blunter manner (Americans are not used to what we feel is a need to continually abase ourselves before our servant leaders due to our fear of defamation suits, even as we agree to pay these servant leaders millions of dollars). So far there has been only a deafening silence.

The productivity of civil servants at the Ministry of Finance is clearly much poorer than those who work at MICA. There the Minister was able to use state resources to fire off a malicious and defamatory rebuttal of my letter to the WSJ within days. Past precedents, where trade restrictions were invoked by LKY against foreign newspapers and their countries took no action to protect their legitimate trade interests seem to have been enough to cow the WSJ into not printing my response.

Since I entered politics I have been consistent in calling for transparency and accountability in the management of Singapore’s reserves and in particular at our SWFs. In fact since 2009 I called for their privatization and listing on the stock market with equity to be distributed to Singapore citizens. However my proposal has not been reported in the State media which has had a permanent media blackout on me since before the GE.

Interestingly, when TJS called for the dismantling of our SWFs, which I think would be a disaster and rife with conflict of interest problems if done too quickly, his proposal was immediately picked up by the State media. Clearly the PAP elite are continuing their long-standing policy of favouring an approved Opposition, while denying the oxygen of publicity to anyone they think might pose a threat to their hegemony.

This deliberate favouritism was also seen when the former civil servants and government scholars, who moved from WP to RP and then found a more congenial home, at least for now, at NSP, asked some questions about the high levels of Temasek’s administrative expenses. In stark contrast with the lack of response to my questions, there was a swift response from Temasek that this also included the equity accounting of the expenses of group companies like SIA, PSA and others.

However the answer to this question (which should have been obvious by looking at the accounts) makes it plain that as a first stage to transparency and the privatization of our SWFs we need to separate the stakes in domestic companies from foreign investments. Temasek should be split in two. In fact if it had been a listed company in the US, for instance, management would have taken that route in order to raise shareholder value. With the split, the market is likely to value the two successor companies as a whole more highly than the original. This is because of the improved management focus and transparency resulting from the split. As a rule investors prefer to construct their own bundles of different businesses rather than have to invest in a company where management have made that choice for them.

Another reason for privatizing and listing Temasek and GIC is so that management compensation and incentives can be made transparent. Shareholders can check whether the incentives of management then are in alignment with the objective of increasing shareholder value. If there is excessive compensation for mediocre performance, then shareholders can vote against management at the AGM just as at Chesapeake. In the last resort they can vote with their feet by selling their stock which is why companies with poor corporate governance trade at a lower multiple than similar companies, ceteris paribus.

While Temasek makes much of high-sounding phrases in its discussion of its Compensation Framework in its Annual Report, it does not actually provide any details. Though it says prior year bonuses are clawed back in bad years, there does seem to be a gaping disparity between Temasek’s glowing self-description of its performance (22% p.a. annualized over two years and 17% p.a. annualized since inception) and the bigger picture as shown by the ALS. With a listing and independence from the government, we would be able to see the full compensation of all the management, including the CEO, and also demand their removal in the event of poor performance.

The shareholder revolt at Chesapeake shows us very clearly the accountability we as shareholders in Singapore Inc. have a right to expect and should be demanding from our government and the management of our SWFs. Without privatization of our SWFs and a change of government we are unlikely to get it. PM Lee has already promised us higher taxes. If we do not take action now who knows how bad the situation will be with a further five or ten years of poor investment performance. I am prepared to accept that I may be completely wrong and our investment managers are the best since Warren Buffet. However if that is the case why will the Finance Minister not answer my perfectly reasonable questions? Since he clearly will not respond to me my suggestion is that as many of you as possible write to him to urge him to answer my questions.

Ageing Populations, Japan’s Recession and Our CPF Savings.

Someone made a comment a couple of days ago on my  public Facebook profile Kenneth Jeyaretnam TeamRP:

Kenneth, just checking your opinion on this. Japan’s economy is doing badly, and this is partly due to their aging population and low birth rate. 

do u think that if the Sg government did not do anything do bring foreigners here, that we would end up like japan?
Falling birth rates with an economy in recession?
And also, in your opinion, how can Japan get out of this mess that they are in?
Thanks!

 I decided replying on Facebook would be too long so decided to make it the subject of a blog.

Are Japan’s problems due to their ageing population and low birth rate?

saupload_The-Deflationary-Spiral

 No not really. Japan’s immediate problem is deflation where prices are falling and the real value of debt increases.

Interest rates cannot fall below zero so as prices decline, the real interest rate rises and the cost of servicing that debt rises.

This leads people to consume less and firms to invest less while trying to save more to meet the higher cost of servicing the debt. Lower consumption and investment leads firms to cut prices and try to cut wages.

This quickly becomes a vicious spiral.

Japan may have a future problem with an aging population and low birth rate but technological advances in robotics and software will lead to accelerating productivity growth that will offset this. Advances in medicine will lead to an increase in lifespans and the quality of life. This will increase the number of years people can work and be economically productive, probably quite substantially.

How did Japan get into this situation in the first place?

Japan got to this point because it relied too much on net exports and investment, rather than domestic demand, to drive growth. Its corporations hugely over-invested in a narrow range of industries, induced by subsidies and non-tariff barriers.  Demand for the country’s products stagnated and as China and the rest of Asia opened up to foreign investment Japanese corporations either transferred production to Asia or were forced out of business. The persistent current account surpluses pushed the yen up despite attempts by successive governments to manipulate the exchange rate.  Japan fell into a deflationary spiral as faced with the loss of competitiveness and a lack of demand at home, domestic manufacturers cut prices and wages.

While there were endless stimulus packages during the 1990s and 2000s, with a vast number of infamous pork-barrel infrastructure projects, none of the stimulus packages was sufficiently large to reverse falling prices once deflation had set in. Moreover they were often accompanied by taxation increases which largely negated the effects of the additional spending. Saddled with overcapacity, the corporate sector failed to invest and the Government failed to mop up the excess savings. Ultimately it only succeeded in increasing the debt to GDP ratio.

What is the solution to Japan’s problems?

 Japan needs to break the deflationary spiral and push the inflation rate up to erode the real value of debt. This has to be done through a combination of monetary and fiscal policy.

In what has come to be known as Abenomics, the Japanese PM, Shinzo Abe, has leaned on the Bank of Japan to undertake a massive easing of monetary policy and expansion of the money supply. This is several times larger as a proportion of GDP than the monetary easing in the US by the Federal Reserve after the financial crisis of 2008.

However, monetary policy easing has not been accompanied by any easing of fiscal policy. This has in fact been tightened with a rise in the sales tax in April and another rise due by October 2015 (though this may be postponed in light of the poor GDP figures).

Without fiscal policy easing Japan’s monetary easing just looks like another in a long line of Japanese attempts to gain a competitive advantage through currency depreciation. The yen has fallen some 45% since its high point in 2012 of around 80 yen to the dollar. While it may bring temporary gains to Japanese exporters other big exporters like China, South Korean and Germany are unlikely to tolerate it for long. In fact all these countries have moved to depreciate their currencies (in Germany’s case the European Central Bank has eased policy to push down the euro) in an attempt to divert some of the US’s demand growth to their own products. This is unlikely to be successful for long and indeed there are already signs that US growth is stalling.

The conventional view is that Japan cannot afford to embark on a fiscal easing because its Government debt to GDP ratio is one of the highest in the world. Gross debt is over 230% of GDP though this comes down considerably, to about 134% of GDP, when debt instruments such as securities and loans held by the Japanese Government are included. However, all Japanese Government debt is denominated in yen and Japanese residents hold 90%, so it is difficult to see why the Japanese Government would be unable to repay the debt. Ultimately they could just monetize the debt by printing money or borrowing from the banks. Critics might complain that this would be inflationary but Japan’s economic woes stem from deflation in the first place. A rise in inflation to erode the real value of debt is just what is needed in the first place.

How is Singapore like Japan?

 Singapore is likely to have the same problem as Japan in the future but not because of a falling birth rate. The PAP Government has aggressively moved to boost the economically active segment of the population and counteract the falling birth rate (which they are responsible for) by allowing in so many foreign workers at all levels. At least for the time being we do not face the problem of a large number of retirees supported by a shrinking working population. However this has merely shifted the problem to the future since Singapore’s population cannot continue to grow to infinity. But I have argued above that this is likely to be a non-problem anyway as productivity, lifespans and working lives expand, probably quite dramatically.

Singapore’s problem is that like Japan, it relies largely on adding more inputs to create output rather increasing the productivity of these inputs. This was pointed out, by Krugman and others, in the 1990s when comparing the performance of the Asian “tiger” economies, including Singapore. I have often drawn attention in the past to Singapore’s poor productivity growth and that the PAP government has taken the easy route to impress foreigners and grow the economy merely by adding more low-cost workers.

Our economic growth is also extremely unbalanced, like Japan’s in the past and China or Germany now. Singapore runs a huge current account surplus of close to 20% of GDP that is much bigger than either Germany’s or China’s, which are often cited as examples of countries adopting selfish economic policies. Consumption is only about 40% of GDP so investment and net exports comprise about 60% of the economy. This cannot continue indefinitely without the rate of return on new investment falling so low as to be unattractive. The PAP Government have tried to stop this happening by opening the floodgates to cheap and easily exploitable foreign labour but we must be reaching the end of the road here despite the Government’s plans for a 7 million population and their barely concealed desire to increase that target to 10 million or more as soon as they think they can get away with it.

A major part of the problem with our unbalanced and unsustainable economic growth is that the PAP Government runs a surplus of about 10% of GDP and together with our forced savings in CPF this is recycled into the purchase of foreign financial assets that earn low or negative returns in S$ rather than being spent on consumption .

What could send Singapore into a deflationary spiral?

 Already demand for Singapore’s exports is slowing amid the global economic slowdown and the economy is on the brink of recession. Unemployment is rising particularly among graduates who are forced to take lower-paying jobs. A property slump abroad could quickly translate into falling property prices here. Since inflation is domestically generated and is mainly caused by the rising cost of land and rents a property price slump could quickly lead to a scenario where prices are falling. This could lead to the same kind of deflationary spiral we have seen in Japan and that Europe is on the brink of falling into.

You might think that this cannot happen because the PAP Government has a lot of room to cut taxes and spend more because of the huge Government and current account surpluses. However much of the Government surplus is income from foreign financial assets. A slump in asset prices and in foreign currencies could cut the value of this income and leave a shortfall in the amounts necessary to repay CPF account holders. We already suspect that something like this has happened and that the value of our reserves has been eroded due to mismanagement. The Government does nothing to dispel these rumours by its desperate desire to hang on to our CPF savings and prevent withdrawals. The PAP is also so desperate that they have revived the defamation weapon and use of illegal assembly laws just in order to try to silence a group of young people who never looked very threatening to start with.

A “Tails They Win, Heads You Lose” Scenario

Heads

Ultimately though, even if the kind of scenario outlined above unfolds, the PAP Government can allow the S$ to depreciate and print money to pay off CPF holders. This should prevent us falling into the kind of deflationary spiral that afflicts Japan. However any such action, even if viewed as a lesser evil, would be expropriation from Singaporeans who have not been given any choice in whether they wish to lend money to the PAP Government for overseas speculation.

We have been left holding the risk with no share in the rewards. To the PAP leaders and the heads of Temasek and GIC Singapore is just a gigantic hedge fund that owns a valuable asset which unfortunately comes with a liability of three million native inhabitants. By electing them to office with no checks on their power, Singaporeans have granted the PAP a free option. This is why I call it a “Heads They Win, Tails You Lose Scenario”.

Singapore and LKY- Darlings of Western Think Tanks. (at a price)

While Singaporeans may long ago have lost their admiration and affection for Lee Kuan Yew and the Lee family, though not their fear, there is one constituency where LKY’s reputation seems undiminished. This is of course with foreigners and particularly Western think tanks and academics. The Western media may have been cowed by fear of defamation suits or the loss of advertising revenues but it has always been a mystery why Western think tanks and NGOs are always ready to sing the praises of the PAP government or LKY’s wise foresight.

Among the myths that are endlessly repeated are that Singapore was a mangrove swamp before the genius of LKY transformed it or that Singapore is a barren rock devoid of natural resources. Like citizens of a communist country Singaporeans find this endless repetition of lies and propaganda offensive. In response to LKY being called the “founding father” of Singapore in the book “Hard Truths”, one netizen’s response was to say that LKY was not his father and how dare he call himself founding father.

One reason for this naivety on the part of foreigners may just be the very skilful marketing and hype done by the PAP Government and ignorance on the part of Western pundits. Nevertheless, I have always wondered how the PAP Government ensures that they are rarely criticised by Western media and think tanks.

Sometimes the people peddling the myths have never even visited Singapore or looked for a counter factual. It is sheer ignorance that allows  a Nobel Prize-winning economist like Stiglitz to write a shockingly ill-informed pieces like this and then ignore my rebuttal. Then it turned out that he had written his piece based on conversations and impressions of his Singaporean students in the US. No doubt they were government-funded scholars.

Or John Kampfner, a clever and good man  whom I have met and  author of “Freedom for Sale” an important book, who did at least visit Singapore. He  always stayed with elite Singaporean friends in condos and landed houses.  He wrote a chapter praising the  miracle of  Singapore’s public housing while never having visited an HDB block.

But how does Singapore, with its state control over most sectors of the economy, manage to come top of indices of economic freedom compiled by right-wing think tanks like the Heritage Foundation? Thanks to a New York Times (NYT) article the mystery is solved. Ignorance is not the answer here. Money, it seems, buys an awful lot of influence.

 This is evident from the way Lee Kuan Yew, who recently celebrated his 91st birthday, he was showered with the predictable awards from a number of international organisations. The Atlantic Council, which “promotes constructive leadership and engagement in international affairs based on the Atlantic Community’s central role in meeting global challenges.”, on Sunday gave Lee Kuan Yew its Global Citizen Award. Henry Kissinger, the former US Secretary of State, who is the same age as LKY, paid tribute to him while our Foreign Minister, Shanmugam, was on hand with a gushing tribute, “This is an age where words like ‘outstanding’, ‘extraordinary’, ‘great’ are overused to describe leaders. But few will challenge that Mr Lee deserves to be described in those terms and more.”

Brookings

A few months ago the Brookings Institution, a leading American think tank, which is often critical of US economic policy but usually has nothing but praise for Singapore’s Government, established a Lee Kuan Yew Chair in South East Asian studies (see link).

Lee Kuan Yew is not the only member of the Lee family to receive an award this year. In June 2014 his daughter-in-law and the PM’s wife, Ho Ching, received the Asian Business Leaders Award from the trustees of Asia House, a London-based “centre of expertise on Asia”.

To quote from the press statement, “The annual award recognises individuals who embody the ‘Servant Leader’ – economic success and professional excellence accompanied by moral leadership and service to society, Ms Ho Ching was selected to receive this year’s award because of her impressive business credentials and her significant efforts to inspire a commitment in others to improving society.”

The State Media and the PAP Government would like you to believe that these awards were just a recognition of the individuals’ achievements and talents.

However the New York Times recently carried an article exposing the substantial amounts given to several US-based think tanks, including the Atlantic Council and the Brookings Institution, by foreign government donors (see link). I was not surprised to learn in the same article that the PAP Government had given money to at least two US think tanks, the Atlantic Council (which gave LKY the Global Citizen Award) and the Centre for Strategic and International Studies.

To quote the NY Times, “The think tanks do not disclose the terms of the agreements they have reached with foreign governments. And they have not registered with the United States government as representatives of the donor countries, an omission that appears, in some cases, to be a violation of federal law, according to several legal specialists who examined the agreements at the request of The Times.” The law in question is the Foreign Agent Registration Act which was passed in 1938 to combat a propaganda campaign by Nazi Germany.

In many cases, according to the NY Times, these donations come with expectations that the think tanks will promote the interests of their foreign donors, particularly in lobbying the US Government. In at least one instance the head of a think tank set up by the Atlantic Council, the Rafik Hariri Center for the Middle East, was removed because she put forward views to the US Congress which were opposed to those of the donor that had paid for the new centre. As the NY Times says. “Sometimes the foreign donors move aggressively to stifle views contrary to their own” and they quote another scholar in a phrase chillingly reminiscent of Singapore, “It is the self-censorship that really affects us over time”.

 The PAP Government’s donations to the Atlantic Council and the Centre for Strategic and International Studies not only appear to have secured Lee Kuan Yew the Global Citizen Award. They also ensure that these think tanks are unlikely to criticise them.

Likewise, presumably the PAP Government and/or the Lee family get to appoint the holder of the Lee Kuan Yew Chair at Brookings. In addition the money paid to Brookings would make them reluctant to criticise an important actual and potential future donor. The first appointee, Joseph Chinyong Liow, is currently professor of comparative and international politics and associate dean in the Rajaratnam School of International Studies (RSIS) at Singapore’s Nanyang Technological University.

The list of donors who contributed to the setting up of the LKY Chair also makes for interesting reading. Brookings says “generous contributions have been made by Ray and Barbara Dalio, Chevron, Hotel Properties Limited, Keppel Group, Robert Ng and Philip Ng, Sembcorp Industries Ltd., Edwin Soeryadjaya, STEngineering, and The Starr Foundation.” No information was given about the relative amounts contributed.

Ray and Sarah Dalio

Ray and Sarah Dalio

Ray Dalio is the owner and CEO of Bridgewater Associates which claims to be the world’s biggest hedge fund. According to this 2011 article in the New Yorker, a quarter of Bridgewater’s capital comes from sovereign wealth funds like GIC. In 2013 Dalio earned $700 million according to Forbes so our investments contribute to his and his wife’s earnings through the fees Bridgewater charges. There is thus a direct conflict of interest since LHL is the Chairman of GIC as his father was previously. In effect, Singapore’s CPF holders are paying indirectly for the setting up of a chair in LKY’s name without their approval being asked.

Keppel Corp, Sembcorp Industries Ltd and STEngineering are all GLCs and partly or wholly owned by Temasek Holdings which is of course headed by the PM’s wife and LKY’s daughter-in-law.

Hotel Properties Limited (HPL) was the company that was infamous in 1995 when it was discovered to have given discounts on properties in developments like Nassim Jade to LKY, LHL and many other members of the Lee family without seeking shareholder approval. Though PM Goh declined to refer this to CPIB, wrongly in my view, the fact that the individuals paid back the discounts was an admission that they should not have received them, particularly given the Government’s control over land sales.

As the Government owns 80% of the land in Singapore, it would be fair to say that all property developers are dependent on the Government. In fact the Economist in its survey of crony capitalism in March 2014 ranked Singapore as fifth, largely due to the concentration of its billionaires in areas like property where government support or subsidies are essential.

Robert and Philip Ng top the Forbes list of the 50 richest Singaporeans. Their wealth stems from property like Ong Beng Seng at HPL. Thus exactly the same conflicts of interest apply as with HPL. In fact Robert Ng sits on the board of Temasek.

Ho Ching’s award from Asia House is also just as dubious as her father-in-law’s award from the Atlantic Council. Since she is a civil servant (albeit one with multi-million dollar remuneration) she would naturally be expected to embody the ideals of “Servant Leader”. How also can she be said to have impressive business credentials. Unlike some of the other recipients she has not built a business from scratch. In fact she has never worked in the private sector. She was appointed head of Temasek by the PAP Government of which her husband is the head. Her father-in-law, LKY, is on the International Advisory Council of Asia House. The Council also includes several representatives from the founding stakeholders of Asia House, HSBC, Prudential and Standard Chartered. They all have significant business interests in Singapore while Temasek owns nearly 20% of Standard Chartered.

The revelations from the NY Times are an eye-opener. They shed light on the extraordinary thoroughness of the PAP’s influence-buying strategy and the lengths the PAP will go to, using taxpayers’ money, to get a favourable rating, even if it means sowing misinformation and rewriting history. It is particularly hypocritical that the PAP should give our money to US think tanks with a view to influencing government policy when they are always warning foreigners not to interfere in Singapore politics and ban Singaporean NGOs designated “political” from receiving foreign funding.

Next time when you read that a  prestigious and independent institution has placed Singapore at the top of some global ranking or given its leaders an award you will be asking yourself, “How much of our tax payers money did they receive?”

Leaked: The letter that Ho Ching received from a Nigerian lawyer.

A copy of a letter sent to Temasek Holdings urging them to invest in Nigerian energy company Six Energy has fallen into my hands.  I share it with you. (Warning! I have no way of confirming that this letter was really sent or received. It may even be a parody. Judge for yourself.)

Agabi and Associates.
Solicitors and Advocates for Six Energy.
5th floor, Kelong House.
Lagos.

To the Honorable Madam Ho

Temasek Holdings

Re: Strictly Confidential and Urgent  Business Opportunity.

Dear Madam Ho (wife of glorious Prime Minster of the fully Democratic Republic of Singapore, the Honorable Mr PM LEE)

I am the representative of the Nigerian energy company ‘Six Energy’.  In Nigeria we have long admired you  as a market guru seemingly able to seize every and any opportunity to make money. We are mesmeric by the incredible track record of the company, Temasek Holdings, which effortlessly has made annualized returns of 16% since inception.

Even when your countrymen discovered that you had made elementary mistakes during the financial crisis of 2008 this did not end of your career as in a lesser fund manager. Truly your esteem is such that the Government of your country, headed by your illustrious husband, had sufficient faith in your  abilities,  to confirm his appointment of you as CEO.

Please permit me to make your acquaintance in so informal a manner.  This is necessitated by my urgent need to reach a dependable and trust wordy foreign partner. I am in a position to uplift your esteem even higher and present Temasek Holdings with an unbeatable business offer.

You must have heard over the media reports and the Internet of various huge sums of money invested in our company by such elite organisations as the International Finance Corporation, part of the World Bank Group of companies (see link).

We know you are not a charity despite the fact that Singaporeans sometimes may be forgiven for thinking you are, even if most of your charity work benefits foreigners. We know that Temasek’s principal aim is to make money for its shareholder, the Government of Singapore. We agree with you that this money would be wasted on Singaporeans who are a weak and whining lot, unappreciative of all that you, your husband and your father-in-law, may he live forever, have done for them. We know that without his guiding genius your esteemed country would just be another disgusting mangrove swamp, like much of our coastline after the Western oil companies started pumping oil.

We therefore humbly beseech you for a small investment, nothing too big for an esteemed and magnificent company of your stature cannot handle. S$200 million should be suffice for now though we may kindly call upon your esteemedness for  further and larger amounts in the future. This money will be part of a total fundraising of over S$300 million in new equity capital (alas we do not know where the money we raised before has gone!) and will be invested with most care and utmost diligence in development of our growing portfolio of energy assets in Nigeria.

You may be concerned that all the other participants in our fundraising are there with charitable objectives, to reduce poverty and create prosperity in Africa. You may be worried that the International Finance Corporation, which will be a junior partner in the investment, is principally concerned with ending extreme poverty and creating shared prosperity rather than making money for its shareholder. This may suggest to you that investing in Six Energy would not meet the investment criteria of Temasek Holdings .   Don’t worry this just means that there will be more money for you.

Madam Ho, you may ask yourself why your exaltedness should be investing your country’s citizens’ precious money in a Nigerian energy company when the only other investor is a multilateral institution who is not there to make money. After all your countrymen and women may ask what you know about Nigeria or about investment in Africa.  They may be concerned at the risk that those evil rascals and thorough bad fellows, Boko Haram, are getting stronger on a daily basis and that our army appears powerless to stop them.

Tell these ungrateful wretches to be no concerned. Kidnapping a few schoolgirls and bombing our capital is much different from attacking a well protected  first class company like ours. In case you have trouble with your investment committee, we have prepared many sets of cashflow statements to show you the huge IRRs that your investment will be sure to earn.  Just do not ask us to pay you any dividends. Or if we do pay you a dividend please be advised that instantaneously you must invest that back into new shares. We know that this will not shock you as Temasek and your sister company GIC have used a similar scam to avoid paying any money to their shareholder for years.

We know your immense appetite for foolhardiness and high risk  which has been demonstrated by your decision to double down on your investment in another company, Olam, which has extensive interests in Nigeria. In such case we truly can appreciate the immense generosity and kindness of your benevolent leadership towards the management and shareholders of that company which rescued them  from bankruptcy without them having to lose any of the huge wealth and large properties they had accumulated. We also truly thank the good people of Singapore for going without basic health care or even free education so that others in our countries can be helped. In particular the recent generosity of their Government which put another $5 billion in surpluses extracted from your people into your esteemed organisation is to be highly commended. Even some of our Illustrious former Presidents, like Mr Abacha, clearly have a lot to learn.

Though we have neither seen nor met each other, the information we gathered from an associate who has worked in your country has encouraged and convinced us that with your sincere assistance, this transaction will be properly handled with modesty and honesty to a huge success within two weeks.

Please note that we have strong and reliable connections at the Central Bank Of Nigeria and other Government Parastatals and we hear that you have also banking secrecy in Singapore and do not engage in public disclosure of Temasek deal details,  hence assistance in this regards, would not be a problem.   Indeed Madam, you will be absolutely right when you say that this project is risk free and viable for you (although possibly not so good for your citizens). If you are capable and willing to assist, contact me at once via email with following details:

1.Your Full Name, Company’s Name, Address, Telephone and Fax Numbers. 2.Your Bank Name, Address. Telephone and Fax Number. 3.Your Bank Account Number and Beneficiary Name – You must be the signatory.

Rest assured that the modalities I have resolved to finalize the entire project guarantees our safety and the successful transfer of the funds.

Kindly contact me as soon as possible, whether or not you are interested in this deal, so that whereby you are not interested, it would give us more room to scout for another partner.  But if you are interested, kindly contact me via above email, telephone or fax, so that we can swing into action, as time is not on our part.

I wait in anticipation of your fullest co-operation.

Yours Faithfully,
Dan Agabe

P.S. Also this transaction demands absolute confidentiality which our associate in your country tells us is Temaask Holding’s strong point.  We also understand that your husband’s government is also not strong on transparency. Nevertheless,  on no condition must you disclose it to anybody irrespective of your relation with the person.  In particular do not discuss this with that horrible fellow Vikram Nair who has spread bad words about Nigerian financial schemes in your country.
Thank you and God Bless.

Best Regards, MR DAN AGABE.

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