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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
Managing Director Strategic & Public Affairs
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.
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 ?
Last 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.
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.
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.
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.
In 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.
“…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.
The 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
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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.
In Budget 2015 the Finance Minister allocated $3 billion towards the construction of the new Terminal 5 at Changi Airport. He stated that he would be setting up a new fund, the Changi Airport Development Fund (CADF). The Transport Minister subsequently explained in a debate in Parliament on 11 March 2015 that this was just a downpayment and that the eventual cost would be many times more.
I have written more about the Finance Minister’s fondness for padding the Budget with allocations to new funds. These keep springing up like weeds. I have argued in “Smoke and Mirrors in the Government’s Accounts” and “How to Make A Surplus Disappear Without Anyone Noticing” that their purpose is to make current spending look higher than it is and prevent Temasek, GIC or MAS having to actually pay out the Net Investment Returns Contributions (NIRC). They are part of a circular closed system that prevents Singaporeans knowing the true state of the reserves. Once money is allocated to a fund Parliamentary accountability disappears since only the Finance Minister scrutinises the Fund’s spending. The Finance Minister is supposed to lay the fund’s accounts before Parliament but there is no evidence that any time is allocated in Parliament to discuss the performance of the funds.
My concern with the Changi Airport Development Fund is more specific. In 2009 the Government corporatized Changi Airport Group (CAG) through an Act of Parliament transferring it from the Civil Aviation Authority of Singapore in return for a capital injection valuing the CAG at $3.2 billion.
Looking at Changi Airport Group’s latest accounts for the year ending 31 March 2014 (see below) Earnings Before Interest Tax Depreciation and Amortization (EBITDA) was $1.34 billion. Putting that on an Enterprise Value to EBITDA multiple of 20 times (not unreasonable in the current low interest environment) would value CAG at $27 billion. Not a bad return considering that when MOF transferred CAG it also included $1.09 billion cash on the balance sheet so the true cost was around $2.1 billion.
The Ministry of Finance (MOF) currently still owns CAG. Such a valuable asset should be included in the Net Investment Returns Framework and also be accounted for in the Statement of Assets and Liabilities (SAL) of Singapore, which the Finance Minister is obliged to publish every year with the Budget. There are no notes to the SAL so it is not clear whether it includes CAG just as it is not clear whether it includes Temasek’s assets. However legally all assets owned by the Government should be included. That should include Temasek, GIC, MAS, CAG, CAAS, land sales receipts as well as the freehold interest in 80% of Singapore’s land owned by the Government. The taxpayer is also losing out because it is not included in the NIRC, which is defined under Article 144 of the Constitution to be the returns from GIC, Temasek and MAS even though the Government is funding the development of CAG out of taxpayer monies.
Lui Tuck Yew said that Terminal 5 would have an initial capacity of 50 million passengers a year and an eventual capacity of more than all the current terminals put together. That means it could easily double CAG’s EBITDA and raise its potential value to greater than $50 billion.
If the taxpayer is paying for the construction of Terminal 5 but the asset is owned by CAG or subsequently transferred to them for a nominal sum then whoever owns CAG will reap a huge gain perhaps even exceeding what it has made on the original transfer of Changi Airport. The Transport Minister failed to disclose the terms under which Changi Airport Development Fund will operate and how the taxpayer will be paid back. Under the Constitution, there must also be an Act of Parliament setting up CADF and its existence must be disclosed in the SAL.
At some point in the future the PAP Government clearly intends to sell or transfer CAG to another company. Article 35 of the Civil Aviation Authority of Singapore Act states that as soon as practicable after the transfer date the successor company (CAG) may be sold in accordance with Article 35 (see below). Presumably the likeliest buyer is Temasek.
If CAG, which also manages foreign airports, is sold, whether to Temasek or to a foreign company or private equity firm, then the Finance Minister must ensure that this is an open auction in which the taxpayer receives full value for money. This would be true in any event and particularly the Government is getting the taxpayer to fund the new terminal. The Government must also disclose any bonuses paid to the management of CAG and to any subsequent role for the former management with a new company because of the potential conflict of interest.
The Chairman of CAG, Liew Mun Leong, a former civil servant, was formerly the head of CapitaLand Group, formerly wholly owned by Temasek and still 39% owned, was paid a $20 million bonus in just one year by his boss, Ho Ching, It was shocking to many Singaporeans at the time that a former civil servant could be paid so much when before joining CapitaLand he had been a loyal apparatchik of the Government. The CEO was formerly with the RSAF and apart from that his principal qualification seems to have been as Principal Private Secretary to Lee Kuan Yew. Many of the board members also have a role with Temasek so the connection with Temasek is pretty close, incestuous even.
Temasek’s management, and in particular Ho Ching, the PM’s wife, are paid bonuses depending on Temasek achieving more than a hurdle rate of return, which is pegged to the cost of 10-year debt according to the Temasek annual report. The report discloses that staff may get co-investment grants in which they share directly in Temasek’s returns. If Temasek succeeded in acquiring CAG this could then result in a massive bonus for Ho Ching and her management team. If she was to get even 1% of the value accretion from floating CAG this could potentially be worth up to $500 million at some point in the future.
This is all pure speculation since Singaporeans are not told how much Ho Ching is paid or how her remuneration is calculated. No one in Parliament has asked about her or her team’s remuneration. When questions were asked in Parliament about Chip Goodyear’s resignation and his leaving package Tharman was evasive and rebuffed questions with “People do want to know. There’s curiosity. But that is not sufficient reason to disclose information.” and “It will not be advisable, nor in the interest of Temasek or Mr. Goodyear, for us to comment further. It serves no strategic purpose.” It is incredible that the PAP Government were able to get away with this reply and with not disclosing Ho Ching’s remuneration given that Singaporeans own the assets and the managers who run them are public servants.
Even if CAG is not sold to Temasek at a knock-down price, we need to be vigilant against any other attempts to transfer value from the taxpayer to the management of CAG or a new purchaser. At some future point the Government may decide to put in place a poison pill triggering its sale on a change of government, rather like the PAP did with AIM. The management could decide to form their own company and acquire the assets themselves, or in partnership with a private equity firm, at a significant undervaluation, particularly if no one in Parliament is aware of or prepared to question their true value. This is not just a theoretical possibility. It actually happened with state assets that were sold off after the collapse of the Soviet regime. Similarly Nomura’s private equity group in the UK were able to purchase the Ministry of Defence’s surplus housing stock at a fraction of its true worth in the 1990s and make reported profits of US$1.9 billion.
We need full disclosure from the PAP Government on how it accounts for enormously valuable but apparently unrecognised assets like CAG and the value it assigns to them. We need to ensure that the taxpayer reaps the full financial vale of these assets particularly if she is asked to add value by paying for investments. Finally safeguards need to be put in place that the civil servants running these businesses do not enrich themselves at the public’s expense in the event of a sale and in particular that any sale, even to Temasek, takes place at full open market value. This is particularly important given the inside information possessed by the management and the PAP’s preference for secrecy. Given the close connection between Temasek and CAG and the dual roles played by many of the directors of CAG, Temasek will have insider information and an edge even if there is an auction. We have to ensure that the management of Temasek, including Ho Ching, do not reap a windfall profit because of this insider knowledge.
The latest figures for non-oil domestic exports were extremely weak and signal that GDP growth is likely to be weaker than the MAS’s projection for this year of 2-4%. They fell by 9.7% in February compared with the same month last year. As non-oil domestic exports comprise about 40% of GDP, it is likely that the economy will enter a recession later this year if the trend is confirmed (though on the past track record one cannot rule out further manipulation of the figures by the Statistics Department). The decline in exports to China can hardly have been a surprise for the Government as most data have indicated that China is already in recession despite the official figures purporting to show that the Chinese economy is still growing at 7%. In addition the Japanese government’s deliberate depreciation of the yen is doing exactly what it is supposed to do-curb imports and stimulate exports.
The PAP Government does not have any strategy to deal with this other than to blame it on industrial restructuring caused by their decision to restrict the inflow of cheap foreign labour in an effort to boost productivity growth. However if this were part of a planned restructuring we would expect to see a booming export sector complaining about lack of access to cheap labour. Instead local manufacturing has been forced to restructure by a combination of weak global growth and uncompetitive or poorly positioned exports. The fact that commentators expect the MAS to respond by depreciating the SGD further, a move that will cut real wages, shows that the Government is panicking and this is not a planned strategy to increase productivity. The fall in exports and manufacturing output, unless accompanied by lay-offs, will actually have the opposite effect of leading to negative productivity growth.
Reform Party have consistently called for a stimulus package to boost domestic demand since April last year in order to restructure the economy away from its dependence on exports. We called for a stimulus package of about 0.5 to 1% of GDP. Needless to say, the Government and the State media ignored our calls.
There is ample fiscal room for a much larger stimulus of about 2-3% of GDP since the Government runs a true surplus of about $30 billion a year. In addition the current account surplus has consistently been around the same size. In Budget 2015, the Finance Minister used the usual sleight of hand to produce a headline deficit for 2015 of $6.7 billion. However, he lumped together transfers to funds, like the Productivity Fund and the newly set-up Changi Airport Fund, with current spending. Once these are properly allocated and the usual conservatism in forecasting spending taken into account, the Government Budget will probably show a surplus. This is despite ignoring returns from Temasek, GIC, MAS and land sales, which need to be taken into account if we follow the correct IMF accounting framework.
In light of the latest figures showing the situation has got considerably worse we repeat our calls for an enhanced stimulus package. As we indicated in our previous calls, this should take the form of cash rebates concentrated on the middle to lower income groups. The depreciation of the SGD, whether engineered by MAS or the result of massive capital outflows, is unlikely on its own to revive the economy. Most exporting countries, like Germany, Japan, Korean, even China, are resorting to deliberate weakening of their currencies to try and boost exports in what will undoubtedly be a self-defeating strategy.
Author’s note: This is an edited version of article I originally wrote for TOC which has not been published on my blog before today. Reading this article I surprised even myself, to see that back in 2009 I had already exposed the link between GIC’s funding and Temasek. You’ll read in the article where I say, “However a significant portion of its funding may come indirectly from the CPF which invests primarily in debt issued by MOF.”
If I wrote this today I wouldn’t put in the word “may“. That is because since 2009 GIC has confirmed what I wrote that in fact GIC’s funding comes from CPF. They say so here, “GIC, along with MAS, manages the proceeds from the Special Singapore Government Securities (SSGS) that are issued and guaranteed by the government which CPF board has invested in with the CPF monies”. I have also updated the level of assets of GIC. These are really the only parts of the article that need updating.
Everything else is as true today, so maybe back in 2009 Singaporeans just weren’t ready for the message. Fast forward to the last two years or so and thanks to the dedicated blogging and brave public rallies of Han Hui Hui and Roy Ngerng who started blogging on this in 2012, my central ideas as to transparency and how our wealth is invested have become popularised and a hot button issue. No doubt CPF will be at the forefront of every Opposition Party’s manifesto next GE.
My view on investments is that an extra 1% or 2 % return is a red herring. Investment in our only natural resource, our people, could potentially have a much higher internal rate of return, in the form of a more highly educated workforce, than that achieved by Temasek or GIC on their overseas investments.
What is a Sovereign Wealth Fund?
Sovereign Wealth Funds (SWFs) are not a new idea. According to Wikipedia, the term Sovereign Wealth Fund was first used by Andrew Rozanov in an article entitled, ‘Who holds the wealth of nations?’ in the Central Banking Journal of May 2005. A SWF may be defined as a state-owned investment fund composed of financial assets such as stocks, bonds, property, precious metals or other financial instruments.
Two types of SWFs.
1. The first, and the oldest form of SWF, is one set up to manage revenues from an exhaustible resource such as oil, or one which derives its assets from government budget surpluses.
One example of this type and possibly the oldest known is the Kuwait Investment Authority, a commodity SWF created in 1953 from oil revenues.
A more recent example of this type is the Norwegian SWF which was set up primarily to ensure that the wealth represented by Norway’s oil reserves was not squandered on current consumption but turned into financial assets which would benefit future generations.
The example we are interested in is Temasek. It was set up in 1974 to hold stakes in the various government-controlled companies, such as DBS, SIA and Singapore Technologies, that had previously been held by the Ministry of Finance. The Temasek Holdings website states that, “Our investments are funded through dividends we receive from our portfolio companies, our divestment proceeds, commercial borrowings, a maiden Yankee bond issue in 2005 and occasional asset injections from our shareholder, the Minister for Finance (Incorporated).”
2. The second type of SWF is one set up to manage a country’s excess foreign exchange reserves. GIC is probably an example of this type of SWF since it was set up in 1981 with the explicit objective of managing our foreign exchange reserves for long-term capital appreciation. I say probably, as there is very little transparency, so it is not clear whether it is also funded by capital injections from the Ministry of Finance in the same manner as Temasek. However a significant portion of its funding may come indirectly from the CPF which invests primarily in debt issued by MOF. ( see my note that this information is now updated) No information is available on the current level of assets. The website states only that the investment portfolio is in excess of US$100 billion. However various estimates have put the level of assets at between US$250 and US$330 billion. (Author’s note: I know now from the Statement of Assets and Liabilities that the Finance Minister has to include with the Budget (though I have not been able to access it this year) that the global total of financial assets owned by the Government is about $800 billion. Subtracting Temasek’s assets ($223 billion in 2014) and the Government’s deposits with MAS ($113 billion in 2014) from this leaves a figure for GIC’s assets of about $460 billion. However in the absence of even minimum levels of transparency this is still guesswork and could be completely wrong.)
Does Singapore even need a Sovereign Wealth Fund?
Singaporeans need to ask, particularly in the light of the recent investment losses, why Singapore even has a SWF let alone two.
Look at my definition for the first type and you will see that Singapore does not meet the criteria since we do not need to manage a windfall from any natural resources. If Singapore had expanded its domestic investment and consumption over the last 30 years it would have had smaller current account surpluses and thus smaller foreign exchange reserves needing management. MAS already has sufficient foreign exchange reserves necessary to manage the Singapore dollar. No second SWF was needed to fulfil this function.
Again without transparency we have no breakdown of how much government saving in the form of surpluses has contributed to both Temasek and GIC’s growth over the years. But we do know that the cumulative budget surplus over the last thirty years has been considerable.
Where have these budget surpluses come from in the first place. Well we all know how to save money. We cut back on expenditures. When a country cuts back on the absolute basics such as free education for its children then it creates a budget surplus. Let’s make no mistake here. No other First World Nation only has compulsory education up to the end of Primary school and even that only for a very short day. Even our very minimal compulsory education is not even free (although heavily subsidised). I am not advocating a full welfare state but to put it bluntly, Singaporeans have helped to pay for our enormous overseas investments by going without the brights and benefits that citizens in a democracy demand. So Singaporeans go without free universal education to secondary level, a national health insurance system and other elements of a social safety net which are characteristic of most countries at Singapore’s level of development. By making you go without the PAP builds up a huge surplus for investment overseas.
How the budget surplus should be invested: In Singaporeans
SO, the budget surplus, has been taken from the pockets of Singaporeans and represents money that you not only could have but should have. It could and should, be returned to the citizens of Singapore in the form of lower taxes, fees and charges. It could have also been used to finance much higher domestic investment in education or in health and welfare.
Their website states that Temasek has achieved an annualized return of 18% since inception though that is based on the March 2008 asset figure of S$185 billion rather than on the current valuation of S$145 billion announced by CEO Ho Ching yesterday. Investment in our only natural resource, our people, could potentially have had a much higher internal rate of return, in the form of a more highly educated workforce, than that achieved by Temasek or GIC on their overseas investments.
Instead of the Government investing our money to pick winners through an industrial strategy there could have been greater incentives for investment and R&D in the private sector which might have led to faster productivity growth and higher levels of real incomes. And even if GIC has not been funded directly by the MOF, the growth of our foreign exchange reserves has come about through chronic external surpluses which represent domestic under-consumption and under-investment.
As a final insult, CEO Ho Ching announced on July 29th 2009 at the Institute of Policy Studies that Temasek was thinking of allowing Singaporeans to co-invest alongside Temasek sometime in the next ten years. How kind of her. I thought we had already invested as outlined above. The only positive side of this news is that it would presumably force Temasek to be much more transparent about its investment process and corporate governance. In any case any personal financial adviser would not advise an investment in a company without sufficient transparency that required due diligence.
The next step: issue shares to Singaporeans
As we all know, calls on the government for accountability and transparency in its sovereign wealth funds is not new. However; I would go one step further! Many of you know that I gave a speech at the Foreign Correspondents Association lunch on the 2 July 2009. In answer to a question put to me after the lunch I went on record as saying that Singaporeans should be given a direct stake in our SWFs. One way to do this is through the privatization and listing of Temasek and the issuance of shares to Singapore citizens. Another way is through the explicit linkage of part of the value of these assets to the welfare of Singaporeans, as is done in Norway through the Pension Fund.
To counter one possible objection that our national “crown jewels” could end up being bought by foreigners the government could retain a golden share which would prevent this happening to Temasek’s portfolio of domestic GLCs. Longer term there is no reason for Singapore to continue to run large budget surpluses over the course of an economic cycle.
In conclusion whilst I will not stop any time soon on calling on our government for greater transparency and accountability into how it manages our money, I would urge us to look at credible new proposals such as mine.