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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
Read the rest of this entry
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.
Roy Ngerng of Heart Truths, today published an article to expose the raw deal Singaporeans get from HDB and CPF. He makes many valid points, most of which I have made before on www.sonofadud.com. Unfortunately in his overeagerness to convict the PAP of fraud he makes an elementary error and simply gets it quite wrong. Whilst the error does not invalidate the fundamental point about the raw deal it does allow the PAP IB Brigade to seize on it and draw us away from valid criticisms.
Roy’s fundamental error also distracts from the fact that CPF amounts to a regressive tax on lower-income Singaporeans and that the government uses its control over land to ensure that we overpay for a wasting asset which should belong to us rather than them, once we’ve paid for it. This is the real dirty trick.
What are Roy’s mistakes?
He makes the point that CPF requires us to pay interest on any withdrawals we make from our accounts both when used to purchase housing and also to service the loans. This is in addition to the normal interest we have to pay on any housing loans that we take out. So far so correct.
To digress a little: Having to pay interest on our own money is itself unusual. If this were a private savings scheme or pension fund then of course it would be up to us to decide how much money we wished to save. However this is a mandatory scheme. Despite the fiction fed to foreign think tanks that Singapore has a laisser-faire economy this mandatory scheme is in fact a stealth tax on our citizens.
This interest only becomes payable when we sell the HDB unit. Roy’s error (whether intentional or not) is in saying that this interest is lost to the government. It is in fact interest that is paid to ourselves and it is not true that we lose it. The accumulated interest remains in our account and can subsequently be withdrawn for new property purchases though interest will again be payable on the fresh withdrawal unless we have reached an age and have enough in our accounts to withdraw our money without having to pay it back.
It is true though that the government makes it difficult for us to withdraw what should be “our” money. It should be unnecessary if Temasek and GIC are making the returns they claim.That in itself means we should be asking the government why it is so desperate to hang on to our money if its funds are making so much?
It is also difficult to understand why we have to pay interest to ourselves on money we withdraw. From the government’s point of view making us pay back our borrowed CPF contributions is plugging a loophole that Singaporeans could use to withdraw most of their CPF. One way they could do this is by purchasing a property and then immediately selling it. But the government does not have to pay interest on those borrowed contributions so why should we have to pay ourselves back for borrowing our own money?
Another error that Roy makes is to say that it was WP’s Mr Giam who suddenly discovered the hidden scandal of HDB’s 99-year leases. In fact giving HDB leaseholders the freehold of their units was part of the Reform Party manifesto in GE 2011. Before that I believe my late father advocated a similar policy in Parliament. “The Problem with HDB Part 2” on my blog was concerned with the fact that HDB flats would be worthless when the lease expired. To quote:
“However there has been a fundamental mispricing in the HDB market in which decreasing time to expiry of the lease has not been taken into account. HDB properties can be taken back by a future government at the expiry of the lease for no compensation. Yet properties with sixty years or less to expiry trade at very similar prices to new flats with ninety-nine year leases in the resale market. This is completely different from how leaseholds on private property are valued in Singapore. This is also completely different to how leaseholds are valued in any other country in my experience.
The buyers have been sold the fiction that an asset that has to be handed back to the government in at most ninety-nine years, and in many cases much less, will somehow ignore the laws of economics and keep on appreciating forever. Let me repeat that there has been a fundamental mispricing in the HDB market.
Singaporeans have been told by PAP ministers and in particular LKY over and over again never to sell their HDB properties, as they can only go up in value. No government that I am aware of has made such an explicit promise and it can only be characterized as highly irresponsible. If a financial investment had been promoted in this way by a broker or corporation without any mention of the risks and investors had subsequently lost money, the buyers would be entitled to compensation.”
So here are the hard truths (or hard questions) about CPF and HDB which I first wrote about some three years ago. Some of these hard truths Roy has covered but all of them have been written extensively about before by me (see links below):
- Why do we still need a compulsory savings scheme if Temasek and GIC are doing as well as they claim? The PAP claim that Temasek is self-funded yet the government continues to inject assets (like Changi Airport Group) for free into Temasek. Even this capital injection is vastly undervalued allowing Temasek to use the valuation surplus to conceal that the majority of its investments like its panic rescue of Olam do not meet its internal rate of return hurdles.
- Why has the PAP repeatedly broken its promises to allow Singaporeans to withdraw their CPF in full? First we were supposed to be able to withdraw it in full at 55 then this was postponed. Now we have to buy an annuity through CPF Life, which is a bad deal for Singaporeans as the government can alter the payout every year if it has done badly, or if life expectancy changes. In effect Singaporeans have written a free put to GIC. We do not directly share in its returns if it does well but have to bear the losses if the value of its assets falls below that necessary to repay CPF holders.
- CPF is a tax since it pays holders well below what they could earn in the market for investments that were locked in for similar durations and only could be withdrawn under limited circumstances. This tax was significantly higher in the past when global interest rates were higher but still provides a big “endowment effect” which boosts GIC’s returns.
- Furthermore CPF is a regressive tax since it is capped at an income level of $85,000 per annum The top earners in Singapore pay vastly less of their income in CPF than do those on low incomes. Even though they also get less Employer contributions it is likely that much of the Employer contributions are borne by the employees themselves in the form of lower wages.
- CPF is not paid by expat workers and the hypothetical market value of a $ of CPF contributions is significantly less than a $ of disposable income. This gives foreign workers an unfair advantage over Singaporeans and allows them to undercut Singaporeans in the labour market.
- Why is it necessary for there to be a PAP monopoly over the supply of housing? This, combined with mass immigration inflows, results in Singaporeans massively overpaying for 99-year leasehold housing of inferior quality.
- I discussed above the mania that seemed to afflict Singaporeans because of irresponsible promises by LKY and the PAP that HDB was an asset that would constantly go up in value. I pointed out that the SERS scheme, in which Singaporean swap their old flats for new smaller ones with a fresh lease in much higher-density estates had encouraged this illusion. To quote again from my previous article, “The problem is that there is a fundamental conflict of interest between the government’s roles as provider of supposedly low-cost housing for the masses and as monopoly owner of at least 80% of the land in Singapore. This is why the PAP government has had a vested interest in pumping air into the housing bubble. Until now they have been happy to maintain the fiction that the length of the leasehold does not affect HDB valuations. This is because with the deliberate creation of huge excess demand for housing the HDB finds it profitable to acquire existing HDB blocks from their owners and pay them compensation which is close to the price of new BTO flats. That is because they can vastly increase the density of housing on that area by doubling or tripling the size of blocks and building them closer together.”
- However, as I explained above and Khaw Boon Wan admitted in his Parliamentary answer to Mr Giam’s question, the viability of the SERS scheme depends upon the redevelopment potential of the site. In other words, as long as redevelopment continues to be profitable for HDB which in turn is dependent upon other factors like continued population inflows and high economic growth rates.
- KBW stated for the record that if SERS does not make economic sense then the government will allow the leases to expire meaning that HDB owners will get nothing. At some point (certainly when the majority of estates have less than fifty years to run but probably much earlier) the factors that have inflated the HDB bubble will go into reverse. Singaporeans can expect a big fall in HDB prices particularly for older estates where the lease has fewer years to run. This is a ticking time bomb which could have serious adverse consequences for all Singaporeans leaving the majority who are financially naïve or too trusting of the PAP government with negative equity.
- We do not need to make unsubstantiated accusations of fraud , as Roy does, to demonstrate that Singaporeans are getting a bad deal from allowing the PAP to have control over housing and our savings. Owning the freehold of our properties and the freedom to decide how to save are essential elements in creating a property-owning democracy. A property owning class is the basis for a strong middle class and the government ownership of land and housing is the single biggest obstacle to the creation of a strong middle in Singapore. That is why you see such a disparity between the 10% of plutocrats at the top and the 87% of the rest who have the pleasure of the government as their landlord. With a strong middle HDB housing could return to its original function as social housing for the truly needy and provide a valauble safety net.
Sadly every article I write seems to end the same way. So here I go again! Until we start standing up for our rights we will continue to get the kind of raw deal that citizens of any democratic country would see through and not tolerate.
18A Smith Street
25 March 2014
J Y M Pillay
Securities Industry Council
25th Storey, MAS Building
10 Shenton Way
I am writing to you in your capacity as the Chairman of the body responsible for seeing that market participants adhere to the provisions of the Singapore Code on Take-overs and Mergers (“the Take-over Code”).
There has been overwhelming public interest in seeking an explanation for the unusual price movements and trading volumes in Olam International Limited (“Olam”) from 4 February 2014 to 13 March 2014 when the stock was suspended immediately prior to the takeover announcement the next day. During this period Olam’s stock rose just under 40% without any announcement. By comparison its peers in the same sector, Wilmar and Noble Group, rose 11.2% and 12.6% over the same period. The STI index only rose by some 2.3% over the same period. Average daily trading volumes in Olam more than tripled in the month prior to the announcement. While volumes also rose in the other two stocks the increase was much smaller. Moreover the rise in the share prices of Noble and Wilmar and increase in volume is likely to have been driven by index rebalancing and quantitative trading as a direct result of the rise in Olam’s share price.
The Stock Exchange (SGX) put out an announcement on 17 March 2014. This drew attention to the obligations of the Offeror and Offeree companies under the Take-over Code to monitor trading activity in their stocks and make an announcement “if there appears to be a leak of information on the possible offer which is material.”
The announcement went on to say:
“Under SGX’s listing rules, listed companies may temporarily withhold material information relating to a matter under negotiation. However, companies should make an immediate announcement of the yet-to-be disclosed material information or call an immediate trading halt if market activities suggest that the requirement of strictest confidentiality is no longer satisfied.
From 3 March 2014, listed companies are also required to notify SGX on a confidential basis if they are in discussions which are likely to lead to a takeover. We do not discuss our dealings with regards to individual companies including notifications as required under the listing rules. If there are possible breaches of rules or requirements, we will investigate and take appropriate action.”
SGX refused to disclose whether Olam or Temasek had notified them of take-over discussions on 3 March when the new rules came into force. The rest of their announcement was devoted to an extraordinary explanation of why Olam’s share price movement had not been unusual and boilerplate language about SGX’s commitment to maintain the highest standards.
This failed to convince most market participants and independent observers that there was still not a case to answer of breach of the Take-over Code and SGX rules as demonstrated by this Wall Street Journal article on the same day:
“Even after all those upgrades, the consensus target was only 1.68 Singapore dollars (US$1.33), according to FactSet, just a single Singapore cent higher than at the start of the year and far below the S$2 the stock hit just before the deal was announced. Back in November 2012, before Mr. [Carson] Block’s accusations, analysts had a consensus of S$2.33. The stock then plunged to S$1.40, not reaching that consensus price, ever. Temasek’s buyout bid is priced at S$2.23. Nobody said explaining markets is easy, but this begs another look.”
Similarly, in a March 16th article, Bloomberg Business Week quoted Mr. Sachin Shah, a special situations and merger arbitrage strategist at New York based Albert Fried and Co, on his concerns that “there’s been leakage in the deal process”.
It may be your Council’s view that only foreign short sellers have suffered actual loss as a result of the movement in Olam’s share price prior to the bid announcement. However many Singaporean small shareholders lost out as well either because they were short the stock or because they sold out too early.
Reform Party therefore believes that in order to maintain the integrity of our public markets you are obliged to conduct an independent investigation as to whether there have been breaches of Articles 2 and 3 of the Take-over Code, dealing with Secrecy before Announcements and Timing and Contents of Announcements respectively.
SGX cannot be said to be independent of the Offeror in this case, as Temasek indirectly owns at least 23% of SGX through SEL (even though they may be precluded from voting their stake).
Similarly the SIC also contains at least nine members who have potential conflicts of interest arising from their employment with government-linked companies or with companies where a former Minister is Chairmen of the Advisory Board. In addition one of the members is a currently serving MP from the ruling party. I am also concerned that the other members of the SIC drawn from the legal profession may be partners of firms where a substantial portion of the revenue comes from government, statutory boards or government-related companies.
In view of the potential conflicts of interest it is Reform Party’s view that any investigation should be conducted by an entity with no ties to the government. The investigation should take evidence from those affected and its conclusions should be made public as soon as possible. If there is evidence that suggests insider trading then this should be passed to the AG as soon as possible with a view to potential prosecution of those suspected to be responsible. Any breach of the Take-over Code should be subject to sanctions.
Reform Party believes that swift and decisive action on your part will prove that we have a robust regulatory regime and that we do more than pay lip service to the rules. This will boost confidence in our stock exchange and Singapore globally as a transparent and investor-friendly trading centre.
In my blog yesterday I wrote about the inexplicably high offer that Temasek had made to buy out Olam, a Singaporean commodities firm hemorrhaging cash and burdened by debt repayments falling due. As this offer was inexplicably generous and the timing irrational I feared that at least US$2.1 billion that belongs to the citizens of Singapore was being squandered recklessly and that Temasek was trying to mask its real performance by increasing the proportion of private companies in its portfolio.
I also said that in the period before the deal was announced, it appeared that Olam and Temasek had breached the Singapore Takeover Code which is regulated by the Singapore Securities Industry Council.
Yesterday I said “ (the code) 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.”
I believed there had been a breach of the Code because I saw “unusual movement” in Olam’s market price that to me looked like absolute evidence of failure to protect the secrecy of the deal process. That is not to say there was a deliberate leak or intention to commit the offence of insider trading but more that, with so many players involved, leaks do happen and that is why SGX and Temasek need to be vigilant. Temasek must have seen the increase in volume and upward movement and should have made an immediate announcement. Trading in the stock should have been suspended earlier by SGX so as not to penalise the minority shareholders and to give everyone a fair chance. Not to make that announcement was a breach of the Takeover Code and has allowed those with prior knowledge of the Olam deal to profit unlawfully.
Temasek eventually made the official announcement of an offer to buy all the remaining shares in highly leveraged and cashflow negative Olam, on March 14th. However in the month preceding that offer being made, Olam’s shares rose by 35%, with no good news announcement to explain that rise and no similar rise being seen in its peers or the market itself. The Straits Times Index only rose by 2.3 % in that period, for example. Once the official offer announcement was made the preceding 35% rise in Olam’s price looked like evidence that the cat had got out of the bag early.
I am not the only person who noted this. In a March 16th article Bloomberg Business Week quoted Mr. Sachin Shah, a special situations and merger arbitrage strategist at New York based Albert Fried and Co, on his concerns that “there’s been leakage in the deal process”.
there’s been leakage in the deal process
In fact you wouldn’t need to be an expert in M&A activity as I am or an analyst specializing in this area like Mr. Shah, to have serious concerns over “deal leakage”. Any reasonable observer would reach the same conclusion and apparently many of the minor shareholders who sold early in the process are already crying foul.
I seem to have hit a nerve with my article because today SGX has published an astoundingly defensive statement that not only fails to rebut my concern that a breach had occurred but even seems to give evidence to support it.
Naturally, I stand by yesterday’s blog when I stated that the movement in Olam’s share price was “unusual” by the definition of the takeover code and the failure to make an earlier announcement had been a breach.
Here is what SGX said in reply:
“Market commentaries noted that in the six weeks from 3 Feb 2014, Olam’s share price increased 34.8%, higher than those of its peers such as Wilmar International which rose 11.2% and Noble Group which rose 12.6% over the same period. During the period, the Straits Times Index rose 2.3%. Such comparisons should be conducted with care as the financials and outlook of individual companies may differ even if they are within the same industry. While we do not prescribe a view of value or pricing of stocks, we note that of the 13 analysts who issued reports on Olam in February 2014, seven raised their target price by an average of 10.4% with the highest increase being 21.4%. The 13 analysts had target prices of $1.50 to $2.00 for Olam. In the case of Wilmar, eight analysts raised their target price by an average of 2.6% with the highest increase being 4.8%. For Noble, one analyst raised the target price in February. Trading in these three stocks were within the price ranges set out in the research reports, suggesting they were trading within the general market view of these stocks with Olam shares reflecting a more positive market view.”
The so called clarification by SGX fails to answer the question as to why Olam rose so much more than its peers pre-announcement. A 34.8% rise was three times more than the average of 10.4% by which analysts raised their price target for the stock.
SGX quotes the rise for peers Noble and Wilmar but the statistics for Noble and Wimar only back up my assertion that Olam’s rise was unusual. The rises for those two companies were much smaller and completely in line with the general movement in the MSCI agricultural commodities index over the same period. In any case the large movement in Olam would have the effect of pulling up its peers due to technical activity driven by index rebalancing and quantitative trading.
Nothing that SGX has said above allays my suspicions that there had been “leakage” and that failure by Temasek to respond with an immediate announcement broke the Takeover Code with consequences that regulation is supposed to prevent. A defensive and unclear statement by SGX is not sufficient in the light of the failings being exposed. There are a large number of investors who sold the shares in ignorance of an impending deal who will need to be compensated and there may be other investors who bought the same shares, in the same month, in full knowledge of the imminent takeover.
So, not only has the Code had been breached but the Stock Exchange also needs to conduct a convincing investigation into possible insider trading. If evidence is found that anyone with prior knowledge of the deal profited from that knowledge, then prosecutions MUST follow. Unless SGX and other authorities responsible for regulating the market act and act swiftly, investor confidence could be fatally damaged. Singapore’s reputation as a financial centre will be indelibly tarnished.
However who is going to conduct such an inquiry? SGX is itself not sufficiently independent since SEL, a Temasek holding company, controls 23% of SGX (and a further percentage could be held by nominees). The chairman of SGX, Chew Choon Seng, is also the chairman of the Tourist Promotion Board and the former CEO of SIA. It thus has a clear conflict of interest making its statement of little value and SGX clearly cannot investigate itself on suspicions of insider trading or violations of the Code by either or both parties.
How about the Securities Industry Council responsible for the Takeover Code? Similarly the composition of the Securities Industry Council needs to be proven to be independent. What we do know is that Lee Kuan Yew’s son and our Prime Minister’s brother sits on the Board of SGX and Lee Kuan Yew’s daughter–in–law and the Prime Minister’s wife, heads Temasek. At least 7 members of the Securities Industry Council are connected with the Government or Government Linked Companies.
I therefore urge SGX, SIC and the government to appoint an independent body to investigate this The investigation will need to come from outside Singapore as an investigation of accusations of possible misconduct by a Government-owned company is likely to face difficulties in finding individuals who do not have a conflict of interest given Temasek and the PAP government’s pervasive control over the economy and given that members of the same family are in key positions at Temasek, in the government and at SGX.
Meanwhile I repeat my offer to assist naturally extends to any aggrieved investors.
Minister Khaw Boon Wan has called Budget 2014 “very generous …by any measure” so naturally, I want to see how it holds up by my measure but because the budget contains information black holes and inexplicable discrepancies measuring it is almost impossible. This leads me to believe that Minister Khaw Boon Wan is singing a tune without the benefit of the sheet music. No wonder his song strikes a discord with the ordinary citizen.
First let’s remind ourselves of Budget 2013 which I analysed in an article entitled “How To Make A Surplus Disappear without Anyone Noticing”. This is what I said:
“There is an accepted format for the layout of budgets prescribed by the IMF. Last year I asked why the Budget could not be set out in the format prescribed by the IMF. In July 2012 I wrote an open letter to Christine Lagarde (see here) asking this question in more detail and that latter was published by the Huffington Post. I said there that :
The foreword to the IMF manual sets out an analytical framework for budgets and states that one of the aims of the framework is to provide an early warning system as to when things start to go wrong.”
“Specifically lacking in Budget 2013 are the figures for net interest earned and investment gains or losses on financial assets and liabilities. It also does not include a value for the state’s land holdings or for receipts from land sales.
The only information available to us is the Statement of Assets and Liabilities [of Singapore which the Finance Minister is required to publish every year]that is more than a year out of date. This barely helps us gain some picture of the true state of the government’s financial position and the size of our net assets particularly as it comes without any explanatory footnotes or an explanation as to what accounting policy is followed.
As the stocks of financial assets and liabilities are more than twelve times the flows represented by revenues and expenditures any losses in the former can easily dwarf any surpluses in the latter. We see no reason not to have full transparency, as secrecy can only be conducive to lack of accountability, even to mismanagement and potential corruption.”
I have read through this year’s Budget Speech and my first thought was, Yipee! I don’t have to do any work I can republish the piece I wrote last year. Seriously, nothing has changed and that is not a good thing. The Budget presentation continues to be a joke, using a format that does not follow the guidelines prescribed by the IMF described in the Government Financial Statistics Manual 2001.
I wonder why our Finance Minister was appointed head of a key committee of the IMF when he does not even follow IMF procedure. Presumably this has got something to do with the speed and willingness with which the PAP committed to giving away $5 billion of our money (more than 60% of the money promised to our Pioneer Generation!) without bothering with democratic niceties like Presidential or Parliamentary approval.
Christine Lagarde, the head of the IMF, must be pleased with the way our courts have moved so swiftly and efficiently to prevent us from challenging the legality of the government’s actions by saying we do not have locus standi.
I have been pointing out the lack of transparency and the use of smoke and mirrors in the government’s accounts since the Reform Party’s critique of Budget 2012, which was repeated with Budget 2013. I also wrote open letters to the Finance Minister asking him why the Budget was not presented in the format prescribed by the IMF. I have also written an open letter to Christine Lagarde about the discrepancies in the government’s accounts and their failure to provide a full picture of the government’s finances. In particular I highlighted the failure to provide figures for net investment income, capital receipts and revenue from land sales. This was republished in Huffington Post.
In “Where have all our reserves gone?”, “Sherlock Holmes and the Case of the Missing Reserves” and “An Unappetizing Picture”, published in September 2012, I highlighted the fact that the then Statement of Assets and Liabilities (SAL) rang further alarm bells as forensic analysis suggested that the returns achieved by GIC would have had to have been much lower than the quoted returns in order to reconcile the stated figure for total net assets with Temasek’s assets and estimated revenues from land sales:
“It is only by reducing the rate of return on assets to 5.2% that one gets to a theoretical total assets level of roughly $720 billion which is close to the figure for total assets shown in the government’s SAL…
However, when one adds in Temasek’s assets and the likely revenue from land sales, returns appear to have been much worse. I calculated what would be the theoretical rate of return on assets to equal the total assets shown in the government’s balance sheet at 31 March 2011 minus Temasek assets of $180 billion and estimated revenues from land sales of $100 billion. It is only when the return on assets is reduced to a shocking 2.5% in S$ terms while keeping the rate the government pays on its debt to CPF holders at 3.5% that we are able to reconcile our theoretical calculations with what is shown in the government’s balance sheet.”
This was of course a theoretical exercise and, in the absence of any light from the Finance Minister on this black hole, the real picture could be better than laid out above or conceivably much worse. We have no way of knowing. I have not had a chance to bring my analysis up to date with this year’s SAL but I am confident my conclusions there would be unaltered.
Even if the government is barred from spending past reserves without Presidential approval, which in any case can be overridden by a two-thirds vote of Parliament, surely Parliament and the people are entitled to know the true reserve position and how well the government has performed that year in managing them. Nations like Norway, which also have substantial Sovereign Wealth funds, have adopted full transparency and present the results to their Parliament each year. We should be doing this.
This year the Finance Minister has become even braver in his determination to mislead Singaporeans as to the true state of the government’s finances. Perhaps he is emboldened by his victory in court allowing the PAP to proceed unchecked. Particularly as the Opposition in Parliament are unlikely to ask any tough questions and will certainly vote for the Budget.
So let’s look at how he misleads us this time over the disturbing question of our abnormally large surplus. The difference between the estimated surplus for 2013 of $2.4 billion, according to the PAP’s format, and the revised surplus for 2013 of nearly $4 billion announced in Budget 2014 is already embarrassingly large. That figure pales into insignificance when compared with a likely government surplus of nearly $30 billion (extrapolated from the six months’ figures shown in the Monthly Digest of Statistics for January 2014. ) And the government surplus is likely to be considerably narrower than the general government surplus, which includes the results of Temasek and other GLCs and statutory boards not under the GIC and MAS umbrella.
However I cannot say for certain what the figures are as the government has started to make it more difficult to find out what the true surplus is. This may be because many other commentators are now starting to follow my lead, albeit somewhat timidly, and point out that the surplus is vastly larger than the Finance Minister would have us believe.
The problem is that the Yearbook of Statistics used to contain details of the general government surplus in addition to the government surplus but now the format has been changed so it merely presents the surplus in the format the Finance Minister uses, which as we know not only contains no useful information but is deliberately misleading. The Statistics Department has even started restricting online access to anything but the current issue of the Monthly Digest of Statistics (MDS), which only has six months worth of data on last year’s government surplus. Back issues have disappeared. Fortunately the Finance Minister is still obliged under the Constitution to publish the annual Statement of Assets and Liabilities, though this is completely opaque as it is unaccompanied by any explanatory footnotes and is in any case a year out of date. What first world country swims against the global tide towards more openness and transparency by going backwards and trying to restrict its citizens’ access to information?
In Budget 2013 the Finance Minister used his usual trick of transferring the entire Net Investment Returns Contribution (which is meant to provide resources for current spending) straight back to the reserves by allocating most of it to Top-ups to Endowments and Trust Funds (which do not represent current spending). I wrote about this accounting trick previously in Smoke and Mirrors in the Government’s Accounts. This is what I said then:
- The setting up of funds appears to be a way of bringing the Overall Budget Balance close to zero and mirroring almost exactly the Net Investment Returns Contribution. $7 billion set aside for new funds in 2012 and $7 billion in net investment returns contributions. This is despite the fact that monies appropriated to these funds may not be spent for many years, if at all. Again this deviates from the IMF framework, which would require that these appropriations show up as part of net acquisition of financial assets. ( see http://thereformparty.net/about/press-releases/budget-2012-part-one/ and http://sonofadud.com/2012/06/14/chesapeake-energy-and-temasek-a-tale-of-two-ceos-and-shareholder-democracy/ for details of how our accounts fail to follow IMF accepted procedure)
- The $41 billion in the funds’ assets is a sum of money conveniently removed from the direct control of Parliament. In other words the Finance Minister has unfettered control over their budgets and disbursements.
- The legislation requires that these funds produce annual reports and accounts that the Finance Minister is supposed to submit to Parliament. However a preliminary inspection of Hansard uncovered no evidence that this had ever happened. [I later discovered that while some of the funds have been audited by the Auditor-General others, such as the National Productivity Fund and the Bus Services Enhancement Fund, do not even appear in the SAL. More on this soon]
- These funds appear to be a way of injecting capital into the statutory corporations (mainly Temasek, GIC and MAS) almost exactly mirroring the outflow from the Net Investment Returns Contributions (NIRCs). However I have not been able to discover any information as to how these funds are invested. In the Statement of Assets and Liabilities their assets are pooled with the rest of the government’s assets. If it is indeed the case that these monies have ended up being invested in Temasek or GIC then this would seem to violate Article 7(A) of the Financial Procedures Act.
- Finally and most seriously, if these funds are invested in Temasek or GIC, then they may be being used as a way of alleviating the stress these funds are under as a result of poor performance. In particular they ensure that cash outflow is minimal which might otherwise put pressure on the funds to sell some of their investments. If these are illiquid then there could be a considerable drop in their price. While I would hesitate before saying that there is any mismarking or overvaluation of assets we do know from the government’s own balance sheet that the performance of the sovereign wealth funds appears to have been extremely poor.
In this year’s Budget the Finance Minister pulls off the same feat by using this years NIRC to fund the whole of the Pioneer Generation Package of $8 billion. In actuality annual spending, on the Finance Minister’s own figures, is likely to only be around $400 million. If history is any guide, the PAP government will, through its customary stinginess as exhibited in the way the surplus invariably turns out to be higher than expected, likely considerably underspend the amount budgeted.
I will return shortly to discuss the other aspects of the Budget, which pale into insignificance beside the signal fact of how badly Singaporeans are being short-changed by this PAP government. I cannot understand the gushing praise that seems to have come in from many pundits and commentators from civil society and elsewhere.
If we look at the Statement of Assets and Liabilities and the MDS, government net assets have grown by some $100 billion over the three years 2010-2013. Why is that level of continued accumulation of assets necessary and why is the Finance Minister making such efforts to hide the true fiscal situation from the people, even by resorting to subterfuges that would not be permitted if Singapore’s accounts had to be audited like a corporation’s? After all the PAP often pride themselves on claiming to manage Singapore like a corporation. Yet if Singapore were Apple, for example, corporate activists would be demanding the return of a sizable portion of its cash pile to shareholders in the absence of compelling reasons from the management for keeping it. Singaporeans should be demanding answers and, if none are forthcoming, voting to change this country’s management.
Singaporeans have lived too long in completely unnecessary austerity. To cite just one example, while your government has quietly accumulated another $100 billion, you have been forced to wait in tents for medical treatment at government hospitals. These are service standards that would shame a third world country and in any advanced democracy would lead to the government being voted out. There is no justification for such penny-pinching when the stock of the government’s financial assets keeps growing. It is time we awakened to our rights as citizen shareholders and force the PAP government to either return part or all of the surplus to us or else make the case as to why they should be allowed to keep it. Are the returns they can achieve from holding on to our money so much better than we can achieve by entrusting it to private managers or investing it ourselves? Does the PAP need the money to invest in some new invention that will miraculously transform our lives? I doubt it.
Finally you may by now be able to guess my answer to Khaw Boon Wan’s contention that this is a very generous Budget. My answer is that this Budget is not only not generous, it is quite breathtaking in the audacity with which it attempts to fool Singaporeans. Singaporeans, it is your money. You may think you are a free people but so long as you work to provide cash for a government which feels no pressure to live up to basic standards of accountability and transparency then you are actually enslaved.