Author Archives: kjeyaretnam
Many readers will have seen PM Lee’s recent “Lunch with the Financial Times” interview. That interview was no doubt aimed at a UK or global audience but actually it is vitally important for us Singaporeans, giving us a rare opportunity to see our PM perform without the protection of PAP control. Here in Singapore we are unable to see or hear anything about or by the PM that hasn’t been scripted beforehand or edited afterwards. The PAP has total control over our media corporations through the management shares and the rights this gives them to appoint directors or in fact over the hiring and dismissal of any member of staff of a media company. These rights are enshrined in the Newspapers Printing and Presses Act and not some speculation on my part. Check the Act out here.
So how does our PM perform away from the cosy protections of a media controlled by his own government? The answer, for all to see in black and white, is not very well. His interview is best summed up by a comment left on the, “In Memory of JBJ” Facebook page. “what a lame duck interview” .
I hadn’t been expecting any great insights but even so I was surprised by what seemed to be random thoughts or coffee shop musings more bluntly referred to as mind fa**ts. He was overwhelmingly unimpressive and I was surprised that there is no sign of him being a pundit like his dad. Maybe he was trying to be “his own man” in which case I recommend that he immediately start trying to be someone else instead.
This pathetic interview is the perfect illustration of why having no competition in government has been bad for Singapore.
There were multiple gaffes but it was the one where the PM seemed to admit the possibility of a change of government in Singapore and even the PAP going into coalition that caused them to rush around in panic later. This is the passage in question:
So can he envisage a day when the PAP is not running Singapore? “It could well happen,” he replies mildly. “I don’t know how it will work but it could happen.” A little later, he hints that the PAP is beginning to consider the possibility of one day forming a coalition government. “It may not be one team in, one team out, it may be more complicated – you’re getting used to more complicated than that in Britain now.”
It seems abundantly clear to any ordinary reader that when the PM talks about things becoming “more complicated” in Singapore and then says “you’re getting used to more complicated than that in Britain now” that he must be referring to the fact that the UK has a coalition government.
However this interpretation resulted in some hurried backtracking on Facebook, presumably when he realised he might have given the impression that Singapore might progress one day to something more resembling a democracy. To quote his loyal States Times:
“PM Lee sought to clarify that what he meant was that he could imagine a situation in the future where the PAP is not dominant, but that he had no idea how that would work, “or whether it could be made to work at all”.
“To think that instead of PAP dominance we will have a stable two party system is naïve,” he wrote.
“Just look at the UK today – even there the two party system is no longer what it was. A coalition govt for Singapore was not on my mind.”
It is always a bad sign when your PM needs to clarify in his own newspaper and then again on his Facebook page. Despite his attempts to correct the situation and warn that Singapore would descend into chaos if we ever had a functioning democracy, the PM unwittingly provided the best argument in democracy’ s favour. It is because of the lack of competition in the political arena that we have a situation where the PM is clearly not able to think fast enough to avoid being caught out by even the mildest of questioning by an independent journalist.
This is particularly true when he has to face the novel experience of not being able to subsequently re-edit what he says. Typically even with all his clarifications, the PM was not able to produce a single argument why political competition would be bad for Singapore, just alarmist hints for consumption by a domestic audience fed misleading facts about gridlock in Western democracies. I note here that the new term of denigration for his voters is ‘naive’. Previously we were “lesser mortals” and then “daft” . Our people quite rightly angry got angry with being called names by their leaders and turned daft back on them so it seems that naive is the term du jour.
As I said in a Reuters interview in 2010,
“Firstly, do not be afraid. You have a right to exercise, to have a say, in how your country is run,” Jeyaretnam told Reuters in an interview at his apartment…
“Singapore is not going to collapse. Competition in politics is as necessary as it is in economics to ensure efficiency.”
Instead 50 years of repressive measures to prevent the development of an alternative government have left us with is a clear demonstration that where the Darwinian laws of competition are not allowed to operate survival of the weakest triumphs. Lame duck is a good enough term but Dodos are what the PAP are actually turning themselves into. The PM is as environmentally ill-adapted to the bracing world of competition outside Singapore as the Dodo was when new predators invaded its sheltered Mauritian environment in the seventeenth century. The longer the PAP continues to resist the development of political competition, the further Singapore will fall behind the advanced democracies in terms of creativity and innovation.
Meanwhile our people are trapped in this authoritarian state. If our people are naive then they are naive only because the PAP controls all sources of information, blocks transparency, provide no accountability and keeps them in a childlike state of dependency.
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.
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.
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.
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 a Facebook post on Wednesday night, the PM made another statement of breathtaking economic illiteracy. He said, “Singapore must never fall into the same hole as some countries which spend more than they can earn,” Perhaps it is the fact that he studied Mathematics rather than Economics that has led him to make such a fallacious statement. As every first-year student of Economics learns, while one country may be able to increase its savings as long as other countries are willing to go into deficit, if all countries simultaneously tried to increase their savings and run current account surpluses, the result would be a catastrophic slump. This is what caused the Great Depression and fiscal austerity has unnecessarily prolonged the Great Recession since 2009.
However I suspect his motivation is political rather than economic. As the head of Singapore’s elite he has a vested interest in stopping spending on the bottom 80% of the population if it might conceivably lead to a rise in taxes for him and his cronies down the road.
But such fears are unfounded. Singapore is in no danger of spending more than it earns for the forseeable future. We run a current account surplus (which represents our external saving or forgone consumption) of around 20% of GDP year after year. This is already attracting attention internationally from the US and the IMF because of the drag it exerts on world growth.
Singapore has no external debt and while the PAP rip off CPF holders by forcing them to lend money to the government at below-market rates of return, all CPF debt is owned by Singaporeans. So if we were to spend more than we earn we would be borrowing from ourselves. However we are very far away from this ever happening. In fact the rate at which government reserves are accumulating, at least on paper, is accelerating.
As I wrote about in Budget 2014: A Very Generous Amount of Wool Pulled over Your Eyes, the PAP government is hiding a surplus of around $30 billion a year from its citizens. Over the last six years to 2012 the cumulative surplus amounted to $187 billion, even with the poor returns the government has been able to achieve with our captive CPF money. Even the Pioneer Generation Package, which the PM said MPs from both sides of the House had paid tribute to for its generosity, only represents $260 million of current spending and not the $8 billion headline number, which is unlikely ever to be spent. Why then, for goodness’ sake, is the PM talking about taxes having to rise? To quote the PM, “We are alright for the next few years. Beyond that, we must think about raising more revenues.”
One might suspect he has taken leave of his senses. On present trends, using the figures the government reports to IMF, the cumulative surplus to 2020 is likely to be in the region of $250 billion. So either he is mad, mendacious or we should be afraid, very afraid, that our vaunted reserves are not all they are cracked up to be. Government secrecy can be used to hide a multitude of sins.
I wrote about this in “Where have our reserves gone”, “Sherlock Holmes and the Case of the Missing (or Merely Hidden) Reserves“, and “An Unappetizing Picture.” It is one of the classic signs of an autocracy that the government treats the people as children, who cannot be trusted to make decisions for themselves. The Finance Minister’s Budget presentation is certainly like a nursery story for children. It serves to cover their political motives in not wanting Singaporeans to realise how badly they are being short-changed.
However I will reserve further discussion of the contradictions in the PM’s statement to another time. Here I just wanted to make one simple point. If the PM and the PAP were serious about not burdening future generations then why not give HDB owners the freehold of their apartments once they have paid off their thirty-five year loans? As everyone knows, HDB leases are only for ninety-nine years, which means that future generations will have to start the process of paying for a home all over again because the property will revert to the government at the end of the lease.
In his National Day Rally Speech in 2011, the PM said “The way we have done it which I think has been successful has been to give people assets, especially an HDB flat;”. As usual the PM is being economical with the truth, as in an actuality the HDB purchase price should be amortized over the life of the lease. At the end of the lease the asset will be worth zero and our descendants will inherit nothing.
If Singaporeans collectively own the freehold of our HDB properties then we can manage the estates ourselves and make our own decisions about upgrading and redevelopment. The full rise in the value of the land will accrete to us rather than a large part being siphoned off by the government. If the majority of us can never aspire to owning (a share of) freehold property, then we can never become a true democracy, because we will always be dependent on the government. Just as at Cheng San in 1997, the PAP government will continue to try and use Singaporeans’ insecurity over property ownership to ensure that they stay in power. This cannot be to the long-term good of our country
With Budget 2014 fresh in our minds I thought that now would be a good time to update my readers on the case of Madam L. You can read the previous blog entries from September last year, if you are not familiar with the case or need to refresh your memory. (“Homeless in Singapore’s Island Paradise” and “Homeless with a Handcart against Singapore’s Grand Prix”).
Mdm L has been homeless for 2 years, sleeping on the streets and turned away by everyone until she came to me for help. So, I was not her first choice! But she had always been a supporter of JBJ so she came to me. She has been living in the street on around $8:00 she earns a day, on days when she is well enough to push her trolley around collecting cardboard.
Despite repeated calls to the Social Service Office in the months following our first meetings, dealing with her case we seemed to have hit a brick wall. Despite Madam L being homeless and destitute it seemed impossible to unlock the aid to which according to the ComCare website she was entitled. ComCare promises $450 a month Public Assistance to those unable to work and without any other means of support. Madam L does have children but is estranged. In any case I went to visit her son and they have several children of their own to support and are in the low-income bracket.
The refusal of the authorities concerned to give her the support that she was promised is typical of the way our government operates. At Budget time our Finance Minister always waxes eloquent about the support given to the poor and needy in Singapore and the myriad schemes that are available but the situation on the ground doesn’t bear the fruit being promised.
Who can forget our PM’s comment at Davos”If you’re poor in Singapore, it’s no fun, but I think you’re less badly off than in any other country in the world, including in the US”. This breathtaking falsehood, fed to foreign journalists, politicians and academics, has unfortunately been swallowed without any independent corroboration by Nobel Prize winners like Stiglitz. This is Stiglitz’s original article and my rebuttal, which the NY Times declined to carry.
Anyway there is some good(ish) news to report. Mdm L has now been granted an allowance of $300 a month from Comcare for a period of six months. I feel this is a measure of some small success. It wasn’t really hard to take her around to the various agencies and to keep phoning and pushing the various parties who should be assisting her. All she needed was some guidance, hand holding and someone to unravel the bureaucracy for her.
She was adamant at all times that she didn’t want charity despite the many offers we received from readers because she lives in fear of being “put away “. She was also offered a shared room soon after I took up the case on her behalf but the proposed room-mate was unsuitable. However, I believe that once she does have a room of her own she will be in need of your generosity to furnish that room and provide her with a buffer to pay the rent so that she can ease back into a home situation with less stress.
The aim is still to see Mdm L suitably housed. She also needs medical care. I will make sure to review with ComCare before the end of the six-month period and to pursue her other needs. Mdm L and I are due to visit HDB together next week. I hope that the evidence of offers of support and donations and the Comcare allowance will persuade HDB to find her a room, this time. I am still questioning HDB over the action they took in evicting her in the first place.
Before I finish just wanted to say a word about the much hyped Pioneer Generation Package. How does that help Madam L and the thousands like her who were never formally employed and thus do not have any CPF funds? So many like her are from the Pioneer Generation and yet are reduced to collecting cardboard and hawking tissues.
In any case the Pioneer Generation Package and its hyped $9 billion cost is a fraud. As I pointed out in Budget 2014: A Very Generous Amount of Wool Pulled over Your Eyes, the actual projected cost is more like $400 million a year of actual spending. And the actual overall cash cost is likely to be considerably less. The Finance Minister provides no breakdown of the estimated cost of the different elements. However 40% to 60% off Medishield Life premiums is not a cash cost when the Medishield fund is still massively in surplus. The government may recoup the cost by raising premiums for the rest of Singaporeans. In any case Madam L and many like her are not enrolled in Medishield and could not afford the premiums anyway. The same is true with the Medisave top-ups, where only a tiny fraction of the fund is withdrawn each year. Madam L has no Medisave anyway. Finally the Disability Assistance Scheme will doubtless be as difficult to access as Public Assistance has been for Madam L.
We will be having a meeting at the Reform Party office at 18A Smith Street in Chinatown this Monday evening from 7pm to coordinate donations and help for Madam L. All are welcome.
Mdm L was born in 1948. She is truly one of our Pioneering Generation. She wants what is her due, just a room of her own and she surely deserves that. Is that so much to ask?
Please watch the short video interview with Madam L above
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.
An Open Letter to the Minister for Finance
Mr. Tharman Shanmuguratnam
Ministry of Finance
100 High Street
#10-01 The Treasury
You recently called in the Auditor-General to audit the accounts of Aljunied- Hougang – Punggol East Town Council (AHPETC) because the auditor’s reports raised serious questions about the reliability and accuracy of the town council’s financial and accounting systems. The report raised equally serious concerns over alleged discrepancies in the accounts of the former PAP-run Aljunied Town Council. At issue is the sum of 1.12 million dollars, which the former Aljunied Town Council had recorded as a receivable due from the Citizens Consultative Committees for improvement projects and whose validity has now been denied by both the Ministry for National Development (MND) and HDB.
I would remind you that the Reform Party, in its budget analysis for 2012 and 2013 and my open letters to you and to Christine Lagarde, has repeatedly raised serious questions about discrepancies and missing information in the way you present the Budget and the picture therein of the government’s finances. In particular the Statement of Assets and Liabilities does not match with the total returns that Temasek and GRC claim to have earned since inception and the revenues earned from the sale of land.
We have repeatedly asked you for an explanation for these discrepancies and to supply the missing information. I therefore have great sympathy with my colleagues in the Workers Party who say that they have been unable to get data from government bodies for an item in the accounts run by the former PAP town council.
My experience has also been that lack of transparency and freedom of information makes obtaining critical data an impossibility.
May I remind you that the Auditor-General’s report for the financial year 2011/2012 given to the President and publicly available since July 2012 contained an item under the heading Ministry of Finance, “Presidents concurrence not obtained for promissory note issued.”
In short your Ministry had been found to have breached the Constitution and unlawfully granted a loan using taxpayers’ money to the International Development Association, the soft lending arm of the World Bank without obtaining the President’s approval as required under Article 144. The promissory note had to be returned and reissued in order for your Ministry to comply with the law. We were not informed what had happened to the monies the IDA had already drawn down. A junior civil servant was blamed and your ministry promised to put new procedures in place. I would ask you to let our taxpayers know what those new procedures and checks and balances are so that we can have confidence that the controls in your Ministry are sufficiently robust, reliable and accurate.
I believe your recent address to Parliament on 21 January 2014 when introducing a motion for increasing Singapore’s capital contribution to the IBRD (International Bank for Reconstruction and Development) raises further cause for concern over the reliability of your Ministry’s accounting treatments.
In Parliament you describe an accounting treatment for the above IBRD capital contribution which if correct renders the treatment that you argued in court last year, applied to Singapore’s loan commitment to the IMF false. (in Civil Appeal No. 154 of 2012 (Jeyaretnam Kenneth Andrew.)
In court I argued that the IMF loan commitment was a liability and therefore caught by Article 144(1) of the Constitution and you argued at that time, that it was an asset and therefore not caught by 144(1). The judges accepted your version that it was an asset and therefore 144(1) did not apply and I lost my case.
I am writing to you to ask you to explain how you could now give a description in Parliament for a similar scenario, where Singapore is agreeing to provide callable capital to the IBRD on demand, explaining that this represents a liability not an asset.
The two bilateral pledge agreements are in fact very similar structures and therefore you cannot at the same time argue that one is accounted for as an asset and the other as a liability.
If I may refresh your memory the Hansard record for the IBRD motion records you as stating:
“The remaining 94% (of Singapore’s subscription), known as callable capital, will not be drawn by the IBRD except in extreme circumstances, when it cannot meet its obligations on borrowings or guarantees. To date, the IBRD has never had to call on the callable capital. It is an AAA-rated institution with a sound balance sheet for over 50 years. Nevertheless, the full increase in Singapore’s subscription to IBRD’s capital will be charged to the Consolidated Fund, as the callable capital represents an increase in the Government’s financial liabilities. “
I thank you for pointing out to our people that no matter what impeccable history a AAA rated institution has, there can be no categorical case for stating that the callable capital will NOT be in fact called upon. In fact as you will be aware supranational financial institutions, such as the IBRD and the IMF, are awarded their AAA rating and quasi-sovereign status precisely because their member countries, including Singapore, guarantee to bail them out.
I refer you instead to the sentence in italics in which you agree with my previous arguments that a callable capital subscription of this nature represents an increase in the financial liabilities of the Government. In lay terms callable capital is callable- however unlikely- and therefore must be written down in our balance sheets in the Liabilities column not the Assets column.
At the time when it is finally called upon it then swops sides and becomes an asset though you have chosen to write down its value to zero. We are agreed on this – that an actual loan or called upon capital commitment must be listed as an asset. Our subscriptions to the IBRD give Singapore voting rights and allow us to influence policy and thus qualify as assets. I agree that until such time as our commitment is called upon it should be defined as a liability.
This is in fact exactly what I argued in court re the IMF. You argued the opposite.
Your different explanations on two separate occasions now make you vulnerable to accusations of contradicting yourself or even knowingly misleading the court by presenting two opposing descriptions for the same thing. The only way you can avoid such accusations would be to argue that a loan commitment to the IMF is qualitatively different from a callable capital subscription to the IBRD. However nonsensical that argument would be.
Nonsensical maybe but it does not surprise me that Hansard shows that in the very next sentence you do indeed bravely attempt to defend the indefensible, namely to argue a distinction between the callable capital of the IBRD and that of the IMF. You do this by saying the IBRD subscriptions are ‘unlike’ our loan commitments to the IMF. It is deeply significant that this reference to the IMF loan commitment is missing from your Ministry’s Press release. And it can only be found by scrutinizing Hansard. Presumably you would not wish to widely publicize this explanation, not only because it is bunkum but also because it contradicts your previous statements in court and in Parliament.
Let us look at your exact words to Parliament and our people:
“Our subscriptions to the IBRD are hence unlike MAS’ subscriptions to the IMF’s capital, or what is called the “IMF quota subscriptions”, or its loans to the IMF, which are neither expenditures nor liabilities, but assets that remain part of our Official Foreign Reserves.”
In fact Minister you are being economical with the truth and attempting to mislead the people by lumping the commitment to make a loan to the IMF with the loan itself or with an increase in Singapore’s capital subscriptions to the IMF. Here are the three descriptions that you use to describe financial resources provided to the IMF that you run together in the above sentence:
1.”MAS’s subscriptions to the IMF’s capital”
2. “IMF quota subscriptions”
3. “Loans to the IMF.”
No. 1 is a contingent liability until it is called then it becomes an asset.
No. 2 is a different way of describing No. 1
Once they are made, actual loans to the IMF (No. 3) are treated for accounting purposes as assets (though in line with US Budget practice a reserve should be taken against the risk of loss and the fact that they may never be repaid) but so long as the IMF loan commitment remains undrawn it represents a contingent liability for the government, whether when it is drawn it represents a loan or becomes an increase in Singapore’s capital subscription to the IMF.
This can be further demonstrated by examining your answer to a Parliamentary question on 12 May 2012:
“5 These are however temporary resources, provided to the IMF in advance of the expected increase in its permanent capital subscriptions (or quota subscriptions) that will be decided in early 2014. Participating in the current round of bilateral contributions to the IMF will in effect bring forward part or all of Singapore’s likely share of the increase in the IMF’s capital base in 2014. [my italics]
6 Singapore’s US$4 billion contingent line of credit to the IMF means that Singapore is expected to lend the funds when the IMF considers necessary.”
Your argument in court that the IMF loan commitment is an asset is furthermore contradicted by MAS’s own accounts for 2012-13. The accounts show our republic’s obligations to the IMF under Commitments, which includes other contingent liabilities such as capital expenditures, leases and a guarantee to Singapore Deposit Insurance Corporation in the amount of $20 billion.
Even you must be aware that a commitment to lend money to the IMF carries risks, however negligible you want the people of Singapore to think these are.
As the Finance Minister and head of the International Financial and Monetary Committee of the IMF, who regularly meets with the US Treasury Secretary, you will know that the US treats commitments to the IMF as contingent liabilities requiring approval by Congress (see here). Furthermore as required under the US Federal Credit Reform Act of 1990 loans made by the US Government are scored to reflect the degree of subsidy or risk of loss. In 2009 the US Congress appropriated US$5 billion to cover the risk of loss on the US commitment to the IMF.
Would you not agree that the government should establish a similar reserve in respect both of our subscriptions (whether called or not) and our loans (whether made or commitments)?
If the IMF loan commitment increases the financial liabilities of the Government (including within the Government the assets and liabilities of the MAS as defined by Article 142 of the Constitution) then you have clearly breached Article 144(1). This follows from former AG Chan Sek Kheong’s opinion in 1998 that “transactions captured by Article 144(1) are those that, logically, increase the financial liability of the Government.”
There can therefore be no doubt that our loan commitment to the IMF should have received Parliamentary and Presidential approval. It further follows that by representing a liability as an asset to the Appeal Court you led the Court to rule that it was an asset and to dismiss my appeal.
Whilst you may use sophistry and a constitution re-written by the PAP government to be so vague as to be unfit for purpose and hoodwink our people – it will not pass on a global stage. Already our republic’s banking secrecy laws are bringing us under increasing pressure to comply with global money laundering regulations. We have become known as a haven for dirty money. Our love of accepting ultra rich individuals and large institutions that take advantage of our low tax regime and preferential treatment for non-citizens is also under fire.
As the budget is due to be presented tomorrow, I would hope recent events will persuade you to set out Budget 2014 in an internationally accepted and transparent format as prescribed by IMF and not the deceptive and incomplete format that your Ministry presented in 2013 and in previous years.