Category Archives: The market

A Fresh Round of Wayang about Competition?

 

 

StarhubSingapore Monopoly Then and NowSetWidth360-Singtel-logoToday the Infocomm Development Authority  (IDA) announced that they were looking to increase competition in the mobile sector by expanding the role of Mobile Virtual Network Operators (MVNO).

To those who are not familiar with the jargon of the mobile industry, MVNOs, as the name suggests, do not operate their own networks but instead lease spectrum from other operators and piggy-back on their networks. They then attract customers by offering slightly cheaper price plans than the main operators. They are wholly dependent on the main operators for maintenance of the network.  Service standards are thus usually considerably worse. The main operators will prioritize their own customers in the event of any breakdown.  It can sometimes take weeks to get services restored as I discovered to my cost when using a MVNO for my broadband service in the UK many years ago.

At present there are up to six small MVNOs in Singapore mainly serving foreign workers with a collective market share of less than 1%. Virgin, the UK company controlled by Richard Branson, tried to enter the market as a MVNO in 2001 but quickly gave up, presumably because it was unable to get attractive terms for its leased spectrum.

This may have had something to do with the fact that all the mobile companies, like all the telecoms companies and indeed most of the large corporations serving the domestic market, are controlled by the government through the octopus-like tentacles of Temasek.

As I have long argued, extensive domestic monopolies and cartels, the majority of which lead back to the government, mean that Singaporeans pay more for many goods and services than citizens of other countries and often suffer from a lack of innovation. This is particularly true in mobiles. Mobile plans in Singapore require you to buy a mobile separately. Mobile operators in other countries often offer handsets and include the cost of this in the price plans.  Surprisingly Singaporeans often pay more for their plans without a handset than residents of the UK and the US do for mobile plans that include a new handset.

We also lag behind in innovation. While Singapore may not look bad in a comparison of international broadband speeds we have to consider that we are just a city and a fair comparison would be with speeds in the major cities. The actual broadband speeds, in my experience of Starhub’s network, were nothing like the advertised ones, because it was shared with many users. While SingTel is now rolling out  plans with advertised speeds of up to 500 Mbps, this compares with speeds in major US  cities offered by Google and others of up to 1,000Mbps. And the major US mobile operators rolled 4G networks a long time before Singapore. I also read today that the regulator had to intervene to stop the state-owned mobile companies from charging their customers for what should be a free upgrade to the 4G network. 4G was rolled out in the UK last year so we are lagging behind.

This is what I wrote back in December 2011,  in ” Another Round of Monopoly Anyone” when there was the last round of wayang over competition:

In Parliament on Monday the Government announced changes to the Telecommunications Act designed to give them powers to require a telecoms company, or Telco, to divest its assets and business to a separate entity should it be found to be engaging in anti-competitive behaviour. Also the government now has the power to take over any network or services if it is in the National or public interest to do so.

 According to the Minister for Information, Communications and the Arts, Dr. Yaacob Ibrahim, the Government is committed to ensuring fair competition ‘because ultimately we believe that this will drive prices to an affordable level for all Singaporeans’. This sounds suspiciously similar to what I have always said. Namely, that competition is as vital in business as it is in politics. In particular I was sceptical not so far back, of the Worker’s Party plans for  nationalising the transport industry when I felt that competition (with a strong neutral regulator ) would always be in the best interests of the consumer. My caveat was that I always point out that what we think of as privatised here in Singapore is not really that privatised.

Are these proposed changes to the Telecommunications Act anything other than a public relations charade designed to give the appearance of opening up the domestic economy to more competition?  In fact they do nothing to reduce the power of government-owned or controlled cartels which dominate many of the key consumer sectors of the economy?

 Who, after all, is the ultimate owner of the three Telcos operating in Singapore? SingTel, though listed, is majority-owned by Temasek. As is Starhub, in which Temasek has an interest, either directly or indirectly, of about 57%. Even the third player, M1, has Keppel Telecoms (an 80% owned subsidiary of Keppel Corporation in which Temasek holds 22%) and SPH Multimedia (part of Mediacorp) as holders of a third of its shares. The Malaysian state Telco, Axiata, owns a further 20%. In any case, a large number of the directors and senior managers at all three Telcos are either MPs, or have a Civil Service or GLC background. Since the Government clearly controls the telecoms industry already, the need for extra powers to nationalize it in the public interest would appear to be unnecessary.

 Without the sale of Temasek’s stakes in at least one of the dominant mobile operators (SingTel or Starhub) here to the private sector, it is difficult to see how we are going to get a more competitive environment, and thus lower costs and greater innovation. Monopolists’ desire to protect their previous investments is going to be a big factor inhibiting their take up of new technologies. Fiddling at the edges with weak players, like MVNOs, who will remain dependent on the regulator to ensure they get treated fairly, is not going to change that.

We are moving globally to a world where quantum leaps in technology and productivity are reducing marginal costs to zero in many industries.  While this might seem a natural recipe for monopoly,  technology is changing so rapidly in many industries that the state capitalist model that Singapore espouses risks being left trailing in the dust. Our state-owned companies may try to hold back innovation and restrict consumer choice at the PAP’s behest to make sure they control the free flow of information and continue to reap monopoly profits. However technology will invariably find a work-around.

One example is the fight unfolding at the moment in the US where a tiny start-up, Aereo, whose business model allows consumers to by-pass the established networks and cable companies and watch TV over the internet, is being challenged in the Supreme Court by the same companies.

I have long advocated a radical dismantling of the state capitalist model and a strengthening of competition regulation if we are to encourage innovation. Mobile telecoms is just one area where government monopoly does not serve consumers’ interests nor our ability to compete globally in new technology industries.

An Familiar Tale of An Ordinary Singaporean and His Problems with An Unsympathetic HDB Bureaucracy

Screen Shot 2014-04-21 at 22.11.27Recently someone posted to my timeline on Facebook an account of another person who claimed to have received unsympathetic treatment from HDB. I have inserted a screenshot of the Facebook post above. The post received nearly 5,000 likes very quickly. After reading about it I invited Mr S to come and see me at the Reform Party office. He came down to see me yesterday afternoon accompanied by a neighbour, Mina, who has been assisting him in his  brush with the HDB and CPF bureaucracy.

I will summarise his case briefly. Mr S was forced to sell his HDB flat in May 2012 because of debt problems.  He is married with three children, two girls aged 19 and 16 and a young boy. Since he sold his HDB flat he has been living with his sister and her husband in their four-room flat. However his sister’s family now need the space back. Very sadly Mr S has recently been diagnosed with late-stage cancer and is no longer able to work. Previously he had his own business but I understand it was closed down due to insolvency. He is currently receiving $1,000 a month from ComCare, which is insufficient to cover his and his family’s needs.

However, despite his lack of liquid assets or income, Mr S has over $200,000 tied up in his CPF Ordinary and Special Accounts.  He applied for a BTO three-room flat last year and was successful in getting one. He put down a $1,000 deposit, which did not come from his CPF savings. Unfortunately the new flat will not be available till 2017 . He needs to find new accommodation immediately. He returned to HDB in November 2013 and requested to be put on the HDB subsidised rental scheme, as he cannot afford to rent a property on the open market. Mr S claims that the HDB rental officer told him that he could not be placed in the scheme, as he had already been successful in applying to buy a new flat. He then went and cancelled his application and forfeited his $1,000 deposit.  However, after cancelling his application, he was told that he was ineligible as he had sold his former HDB flat less than 30 months before and furthermore his level of CPF savings was too high. HDB are denying that they gave him this advice and that they told him from the outset that he would not qualify for a rental flat.

Mr S had ended up in the Uniquely Singaporean trap of having substantial savings in his CPF but being unable to use any of it. As the PAP government has broken its promises and unilaterally and repeatedly tightened the rules on withdrawal, introducing first the Minimum Sum Scheme and now replacing that with CPF Life, it really looked as though Mr S and his family would end up homeless. The letter from HDB, which I reproduce here (with the names redacted), seemed to suggest that it was an acceptable solution for Mr S to send all his children to India while he and his wife rented a room.

 

IMG_0026Mr S and Mina told me that HDB was advised that Mr S was of the seriousness of his medical condition and that his life expectancy had been reduced. Therefore I find it staggering that none of the staff could advise him that there was a simple solution to his problem. CPF allows those who have a medical condition that significantly shortens their lifespan or who are permanently unable to work to withdraw their CPF savings provided they leave the Medisave Minimum Sum in their account. Mr S obviously qualifies. Since CPF and HDB are so closely connected it seems inconceivable that the staff are so poorly trained as to be unaware of this fact. Perhaps they are incentivized only to sell flats and not trained to give appropriate financial advice. Or they are told not to tell customers of this scheme as it might encourage Singaporeans to contract a terminal illness just so they can withdraw their CPF savings early? That would be exactly  the PAP government’s way of thinking. I recall the PM in his National Day Speech 2013, advising Singaporeans that the best way to keep medical expenses down was just to stay healthy.

Anyway I am pleased that I was able to point out there was a fairly easy solution to Mr S’s problem though sadly there is no miracle cure for the poor man’s illness. Tomorrow I will assist him in filling in the online application for early withdrawal.  I will also go with him to see his MP in Jurong GRC at the next MPS and to HDB in order to try to get his deposit back. Mr S also wrote to PM Lee on his Facebook page and was contacted by an individual who took down the details. That was two days ago and he has yet to receive a response.

 

 

 

An Open Letter to the Chairman of the Securities Industry Council

18A Smith Street

Singapore

058932

 

 25 March 2014

 

J Y M Pillay

Chairman

Securities Industry Council

25th Storey, MAS Building
10 Shenton Way
Singapore 079117

 

Dear Sir,

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.

 

 

Kenneth Jeyaretnam

Secretary General

Temasek Loses the Plot

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

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

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

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

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

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

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

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

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

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

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

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

To quote from the article:

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

Which goes on to say:

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

So lets just recap here.

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

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

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

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

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

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

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

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

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

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

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

Ho Ching

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

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

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

SGX denies wrongdoing and possibility of insider trading in Olam takeover.

sgx

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.

cash

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.

handcuffs-business500

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.

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

Olam Share Price

Olam Share Price

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Madame L from Pioneer Generation Package to Cardboard Collecting Pittance

IMG_0193

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

 

 

Budget 2014: A Very Generous Amount of Wool Pulled over Your Eyes.

woolovereyesMinister 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.”

 And also:

“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 of Finance

Tharman20 February 2014

An Open Letter to the Minister for Finance

Mr. Tharman Shanmuguratnam
Ministry of Finance
100 High Street
#10-01 The Treasury
Singapore 179434

Dear Minister,

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.

Yours faithfully,

Kenneth Jeyaretnam

Secretary General

Indonesia Reopens old Wounds

headlines-macdonald-house-bombing

Recently Indonesia has taken the decision to name a warship after one of the marines who bombed MacDonald House on 10 March 1965 during the period of armed confrontation (known by the Indonesian word konfrontasi) between Malaysia (of which Singapore was then a part) and Indonesia.  For those who were not around and do not know the history the state of Singapore did not actually exist then.

I was born in 1959 and would then still have been a colonial subject of Her Majesty the Queen though at the time of the bombing this would have become Malaysian citizenship. I have a personal connection to that tragedy besides the geographic one. My mother,  Margaret Jeyaretnam who had come over to the Straits Settlement in 1955 to marry my father later became one of the first citizens of the new republic of Singapore.  She also became one of the first lawyers of newly independent Singapore . In fact she was senior to my father who was in the Government Legal Service at the time. She also later set up the Samaritans of Singapore as well as being Registrar of the Anglican Diocese of Singapore and Malaysia. In 1965  she was working for the law firm of Donaldson and Burkinshaw who were  situated at MacDonald House.

MacDonald House

Looking at that building today  it is hard to believe that it was the first modern office building with central air conditioning in Malaysia and our early version of a sky scraper. Presumably the reason why it was targeted.

I was only six at the time of the bomb blast. I remember being pleased at first, because my mother came home early from work that day. She then described how there had been a loud bang, that the whole building shook and that she was evacuated via the fire escape. I still remember how upset she was over the people who were killed and particularly over the death of the lift operator, a young Malay boy, whom she said always smiled and said hello to her every morning. It was a very real tragedy and very close to home.

This is a grossly insensitive act by Indonesia. The most simplistic comparison is with the Japanese PM’s decision to visit the Yasukuni shrine but in fact those were uniformed soldiers who were waging a war, which is not to downplay the war crimes committed by the Japanese against civilians and POWs.

In the case of   Osman Haji Mohamed Ali and Harun Said, the men in question may have been following orders but they committed a terrorist act that led to several civilian deaths and injuries.  In order to carry out the atrocity they had to take off their uniforms and wear civilian clothes . This is what enabled  Malaysia to hang them rather than treat them as  soldiers and POWs entitled to the protections of the Geneva Convention, which Indonesia clearly feels they were.    All of us globally have to take a hard line against terrorism. Sometimes it is hard to tell where war ends and terrorism begins but in that case I think  the line was quite clear because there wasn’t actually a war on at the time.

It is curious that the Indonesian government should choose  right now to bring an unpleasant episode between our two countries to the fore. A conspiracy theorist might think that the Indonesians are giving the PAP a helping hand, for motives unknown, to rally Singaporean support behind the government as the defenders of Singapore’s sovereignty.  LKY always traded very heavily on  external threats, the ‘danger at the gate’  theory keeping his citizens in permanent fear of imminent war.  With his health in such a grave condition and a  recent order for the electoral register to be revised,  the conspiracists who often maintain that LKY has already passed away will say that this is a manufactured fear to bolster PAP’s  standing.

Conspiracist theorists are not known for rational thought.  I am grateful to my readers for suggesting more rational  motivations.  What is more likely is that the old wounds being opened here are the criticisms over the Haze coming from Indonesia.  Indonesia is also about to go into Presidential elections so this kind of sabre rattling plays well for them at home.

What I find both unnecessary and unhelpful is that right on cue some of the Opposition parties  have taken this opportunity to call for the slashing of defence expenditures.  Bizarre! For the record, I believe that Singapore can easily INCREASE its defence spending AND  its spending on Health Care and  other safety nets. We need to increase our spending on defence not because of  Indonesia’s action but because  we will be better off with a professional army. Two years of National service is simply not long enough to train a really professional army. At the same time we should gradually reduce National service.

So far the Indonesian government shows no sign of backing down which is unfortunate for relations between our two countries but hopefully this is a blip and we can achieve a diplomatic solution.

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