Wednesday, March 21, 2007

Commerce is More than Ease of Doing Business: SG Lags in Key Entrepreneurial Factors

Following up on my recent post on the deficiencies of GDP as a metric for Quality of Living, here's a post on the deficiencies of "Ease of Doing Business" as a metric for the business environment. Here's a recent extract from an article in today's business times:

S'pore scores low on several counts in big-city lineup
But survey finds it pips 10 other global cities as best place for business
BT March 21, 2007

"What sets the study apart, however, is not the choice of cities but the indicators used. The nine indicators and 32 variables go beyond the traditional cost factors to 'provide a more broad-based picture of what drives business location decisions in the 21st century'.

Singapore ranked last in 'technology IQ and innovation' - perhaps the one indicator which, more than any other, defines, in the popular mind, the 21st century city of opportunity, the study says. The variables assessed here included percentage of self-employed and number of registered patents.

Singapore ranked near-last, unsurprisingly, in 'intellectual capital' - an indicator that looked at, among other things, the number of Top 500 universities in a city and number of Nobel Prize winners in the past eight years.

Similarly, Singapore ranked above only Shanghai for 'financial clout', which took into consideration things like the number of Fortune Global 500 headquarters and domestic market capitalisation. The other indicator where Singapore did poorly was 'lifestyle assets', covering entertainment, recreational space and number of hotel beds - though its ranking is expected to improve with the completion of the integrated resorts in 2010."

I shouldn't extract the whole article, for then I'd be at risk of violating copyright. But the message from this article is clear: Focusing single-mindedly on the ease of doing business provides a skewed picture of the "business-friendly" environment here in Singapore.

Particularly in a 21st century developed economy like Singapore, where a country cannot simply rely on low-cost manufacturing to create jobs, there is a premium on entrepreneurship and business startups to renew and drive economic growth. This necessarily makes factors like "Intellectual Capital, Financial Clout & Innovation" particularly important, since these are the factors that help create a strong environment that breeds entrepreneurship.
  • Intellectual Capital is important because entrepreneurs often draw upon the knowledge banks which a city has built in order to create new products and services. It is often an important source of competitive advantage since intellectual capital is difficult to replicate and patents can be filed to protect companies'/individuals' intellectual capital.
  • Financial Clout is important because startups need more than just entrepreneurs and good ideas, they also need strong financial backing to get their projects off the ground.
  • Innovation and Technological IQ is important because without an innovative spirit, we will find few ideas with which to start companies and create new products and services. A low technological IQ means a country runs the risk of falling behind other more innovative cities, and hence losing businesses and jobs to the competition.
However, Singapore is ranked rather poorly in all these metrics, far behind its peers whom it seeks to compete against.

Yet, the government likes to brandish the "no.1 in ease of doing business" metric about, as if trying to say Singapore has the best business environment in the world. Yet they fail to acknowledge that the city lags far behind in other crucial metrics that the determine business & entrepreneurial success of a nation.

So, the lesson is, just as you should take GDP with a pinch of salt, so should you take "ease of doing business" with an equally big dose of salt. Just because it's easy to start your business, doesn't mean your business has a high chance of succeeding. The business environment should be measured by many more metrics than the lack of administrative hurdles to get your business started.

Monday, March 19, 2007

Quality of Life is more than Material Wellbeing: GDP as an Incomplete Measure of Singapore's Development

The Government likes to tout how Singapore's GDP (Gross Domestic Product) has rapidly grown, it frequently brandishes this metric in order to sell Singapore's economic success to the masses and to convince the public that the country is doing well - and thus buy votes.

But is GDP necessarily a foolproof metric for the country's progress?

Common criticisms of GDP as a measure are that it only measures change in material well-being, and ignores a variety of other, possibly more important factors that affect living standards. You can find these in any Macroeconomics textbook:
  • It takes no account of the distribution of income (i.e. whether the rich or the poor are the ones benefiting) (#1)
  • It takes no account of the composition of output (doesn't tell us the breakdown of goods and services produced, for all u know GDP grew because we produced more tanks)
  • Ignores negative externalities (e.g. doesn't tell us if there has been more pollution as a result of increased production)
  • Ignores the allocation of time between working hours and leisure hours (i.e. ignores work-life balance) (#2)
  • Ignores "quality of life" issues, which may result with excessive concern with material well-being at the expense of social, moral and religious values. (#2)
  • Excessive concern with material well-being can lead to increased crime, increased divorce, marital breakdown, increased suicide rates. (#3)

Don't these criticisms sound familiar?

(#1)We've heard much about the widening income gap in Singapore - focusing purely on GDP fails to acknowledge how the benefits from economic growth are concentrated in the upper income group, while the lower income group sees a fall in its income and the middle income group experiences wage stagnation.

(#2)Focusing on GDP also ignores the fact that Singaporeans spend many hours in the office, working their butts off in the evenings and on weekend, to achieve this economic growth. And time spent at the office must necessarily come at the expense of family, friends, hobbies, and other activities that make life fun.

(#3)And, of course, we need not be reminded of how divorce rates in Singapore are on the rise and how suicides are hitting the headlines. The Government's focus on GDP ignores all these ills of society.

Because of these deficiencies related to GDP, other measures have been developed to gauge a nation's welfare, and perhaps the best known of these alternatives is the United Nations' Human Development Index (HDI)

The HDI brings together three different aspects of living standards. It's not perfect, but it provides a better picture than does GDP alone. The HDI includes

  • Real GDP growth as a measure of material well-being
  • Average life expectancy as a reflection of quality of health care.
  • Adult literacy rates as a reflection of educational standards and attainment. This measure relates to the political situation of the nation - democratic values and freedom are more likely to be achieved in an educated society, as is social tolerance and harmony.

If we look at Singapore's position on the UN global HDI list, we see it is ranked quite highly, at number 25.

However, on deeper scrutiny, we see that this high ranking on the HDI is highly skewed towards Singapore's GDP (#21) and life expectancy (#17), whereas Singapore is comparatively far behind in Adult literacy rates (#46), even behind countries like Thailand and the Philippines, and its also behind in combined primary, secondary, and tertiary enrolment ratio (#35), behind the Russian Federation and Hungary.

As long as the literacy rates remain at such a level, Singapore will face challenges moving up the HDI ladder. It's difficult to see it going much further up in GDP and in life expectancy - hence the chief factor that Singapore needs to work on to improve the standard of living relates to non-material measures - things like higher adult literacy rates, which, as mentioned, is associated with democratic values and freedom.

Despite the more balanced perspective it provides, the HDI also ignores issues related to work-life balance. I shudder to think where Singapore ranks on a global scale with regards to this measure. If this measure was factored into the equation, I hazard that Singapore would rank much lower globally than #25. And then there's the rest of the unaccounted measures like the income distribution, and the rate of suicides... I wonder how these would impact Singapore's global ranking.

So, the next time you see a news article in the press that trumpets how GDP has grown at a rapid pace (read:economy is doing well), pause to think about the deficiencies in the measure! Just because the economy is doing well, doesn't mean the quality of your life is improving. Life is about more than material wealth, and Singapore's progress should be measured by more than GDP!

Wednesday, March 14, 2007

A Forum Post on Temasek's Tangle with Shin Corp

[I found this on forum written by a guy named Bluefix. This is for my reference and for your information.]

As reported by AFP: "Temasek said it will continue to monitor developments in Thailand before making future decisions regarding its controlling stake in telecom giant Shin Corp, formerly owned by ousted Thai premier Thaksin Shinawatra. In a letter to the Straits Times, managing director for corporate affairs Myrna Thomas said Temasek makes investments like any other company based on commercial considerations and after factoring in potential risks (#1). “Our investment in Shin Corp in Thailand was no different. We had a positive assessment of the outlook for Thailand and completed the investment in accordance with market norms and best practices in international mergers and acquisitions,” Thomas said. “We continue to monitor the political situation and business environment in Thailand and will take the appropriate decisions as an investment firm.” She noted that Temasek has maintained its “triple A” credit ratings from agencies Standard and Poor's and Moody's. The letter was in response to a reader who had written to the newspaper that Temasek's Thai investment was a national concern as Shin Corp has now lost 45% of its value since the deal was concluded last year. Singapore's ties with Thailand were strained after the Thaksin family sold a 49% stake in Shin Corp to Temasek in a tax-free deal which angered the Thai public ... Relations further deteriorated when Thaksin had a private meeting in the city-state with Singapore Deputy Prime Minister S. Jayakumar in January (#2). "

When you are wrong, just admit it and move on. Not good to keep grasping at straws and kicking sand when you are down. Temasek has done very well in most of its investments, but its silly to defend a pretty gaping investment thought process which went awry. Not by chance, but more due to arrogance and not doing sufficient homework on the Thai deal.

On point #1, This time that Temasek managers have made mistakes that in-depth due diligence and a modicum of investment-banking knowledge seemingly could have avoided. Temasek's decision to buy a majority stake in Thailand's Shin Corp from members of Prime Minister Thaksin Shinawatra's family unleashed a political firestorm that eventually contributed to Thaksin's decision to step down from power temporarily before being ousted later. The US$1.9 billion deal was widely criticized in Bangkok not only for the tax-free nature of the transaction but, more significant to Temasek, for the sale of strategic telecommunications concerns to a Singaporean government-linked entity. Political protesters cast Temasek's purchase as "economic imperialism", and a consumer boycott of Shin's mobile-telephone arm has dented revenues and profits in recent months. Temasek officials at the time explained that it is not a government-directed policy agency, and that Temasek makes investment decisions on strictly commercial grounds. Until then Singapore Inc had been able to skirt nationalistic criticism in Thailand, despite making substantial positions in many formerly Thai-owned banks in the aftermath of the 1997-98 Asian financial crisis.

More significant were the apparent legal blind spots in the Shin Corp deal, which some analysts now contend would have been less controversial if it had been broken up in two or three phases. Temasek was forced hurriedly to divest Shin's stake in budget airline Thai AirAsia because of Thai laws restricting foreign ownership that they apparently overlooked. What kind of due diligence and investment deal structuring or thought process that goes on when you can miss out on these glaring landmines?! There are still lingering legal questions about the waivers Temasek received to avoid making a mandatory tender offer for two Shin subsidiaries, and whether foreign concerns are allowed to own a majority stake in telecommunications concerns that operate under government concession.

Temasek's lack of transparency and its general aversion to press interviews have only added fuel to the fire of the nationalistic backlash its aggressive investment strategies are starting to cause across the region. Citing the above examples, some investment analysts contend that during Temasek's drive to acquire big stakes in regional strategic industries, particularly in banks and telecommunications, the investment company is not effectively gauging through its due-diligence procedures the possible political and even social ramifications of its investments. And that in turn raises important new questions about the quality of Temasek's management team.

On point #2, a failure to appreciate neighbourly sensitivities. Thaksin has been ousted, and the Thai government is suing him from every angle. Yet you have a high ranking Singapore politician meeting him in Singapore. Foreign Minsiter Nitya Pibulsonggram had already said before the meeting took place that he had personally warned his Singporean counterpart that there would be "reactions" from Thailand if ousted prime minister was received by Singapore Deputy Prime Minister S Jayakumar. Nitya said after having been informed of deposed prime minister Thaksin Shinawatra's pending visit to Singapore, the Thai Foreign Ministry notified Singapore "at least three times" that the treatment to be accorded Thaksin was "unacceptable" to the Thai Government.

A lack of awareness of regional cultural and political sensitivities is a big shortcoming in Temasek. The trouble is they are too proud to probably admit it. When egos, pride, nationalism, excessive feelings of superiority and lotsa cash gets mixed up, its hard to be humble man!!! Mark my words, they will end up selling Shin Corp back at a huge loss.

Monday, March 12, 2007

The Shin Saga: It takes two hands to clap

Singaporeans might accuse the Thais of being fickle and having a poor legal and regulatory framework when it comes to managing foreign acquisitions of their national assets. Indeed, prevention is much better than cure, and moving in using the Thai military to seize assets is not an action that instills confidence in foreign investors.

The U.S., for example has strong regulatory bodies which are required to give their approval when major acquisitions are made. Cases in point are that regulatory bodies intervened and oversaw both the proposed CNOOC acquisition of Unocal and the Lenovo acquisition of IBM's PC arm. Thailand would do well in learning from other countries in developing a strong mergers & acquisitions regulatory framework to oversee politically-sensitive business assets, and to raise confidence to promote foreign investments. Jil in Pattaya has a smartly written post on this issue.

Yet pointing the blame at the Thais without doing some introspection with its own investment process does no favours for Temasek. It doesn't matter that the Thais ****ed up, you still lose your money! Billions of dollars of it!

As a nationally owned corporation, Temasek has to factor in the unique political risks it faces when making transnational acquisitions. Insisting on running Temasek as a private sector investment company systematically ignores the political risks it faces, and exposes Temasek to the risk of another similar incident reoccurring. Temasek needs to revise and reconsider its approach as "just another commercial investment firm," and build a unique investment framework for the unique investment firm that it is.

Indeed, it takes both hands to clap. The Thais need to get their regulatory framework in order, and the Singaporeans need to recognise the unique nature of their politically-linked investment company.

Incidents similar to the Shin issue can be avoided if either party properly takes these points into consideration.

Friday, March 09, 2007

Deal with Shin Corp Issue Openly and Transparently

[This letter was published in ST. The original unedited letter which I wrote follows below. Laurence Lien is from the Ministry of Finance while Myrna Thomas is from Temasek Holdings.]

I refer to the replies of Laurence Lien and Myrna Thomas (‘Temasek accountable to Govt on portfolio basis’ and ‘Temasek operates like any investment firm’; ST, March 8) to Patrick Tan (Billions at stake, so Shin saga a national concern, ST, March 3).

Mr. Lien rightly explains that we should evaluate Temasek’s performance on the basis of its portfolio returns as a whole. However, he fails to acknowledge that well-constructed investment portfolios are made up of prudently made individual investment decisions. While an investment manager is ultimately concerned with his entire portfolio’s performance, that in no way exonerates him from performing due diligence on each individual investment, nor does it excuse him from making each individual investment with reasonable care.

While I am not claiming that Temasek has been negligent, the Shin Corp Saga nevertheless has valuable lessons to teach investors. Mr. Lien should not divert attention from the issue of the individual investment by referring to Temasek’s portfolio. Instead, due effort should be made into reviewing what may have gone wrong in order to prevent such incidents from happening in the future.

Myrna Thomas, on the other hand, claims that Temasek acts like any other commercial investment firm. I, however, beg to disagree.

As Mr. Lien points out, Temasek is accountable to the Government of Singapore, which is, in turn, accountable to Singapore as a nation. This introduces political overtones into every investment that Temasek makes, whether such overtones are rightly or wrongly perceived. Whether Temasek likes it or not, it has to deal with the potential for its national ownership to spark political reactions in other countries.

Because Temasek is owned by the Government of Singapore, the political risks that Temasek faces when making investments are real, tangible and heightened in comparison to privately owned investment firms. Indeed, these risks should be magnified when one considers that even privately owned companies sometimes run into political reactions when making transnational acquisitions. Temasek hence cannot be said to “operate like any investment firm.”

When one is managing a portfolio of several billion dollars, small percentage points make a difference. This is even more so when these small percentage points involve a couple of billion dollars which can make a difference to a nation’s budget.

Let us not sidestep the issue but deal with it openly and transparently so that such incidents can be avoided in the future.

Temasek accountable to Govt on portfolio basis

MR PATRICK Tan Siong Kuan ('Billions at stake, so Shin saga a national concern'; ST, March 3) was understandably concerned that if Temasek Holdings' investment in Shin Corp made losses, Singapore would lose national reserves. But this is not the right way to measure Temasek's performance.

Temasek invests in a broad range of assets to diversify risk and achieve good returns on the portfolio as a whole. It accepts that some investments will do well while others may fail. What is important is that the portfolio as a whole delivers creditable and sustained returns. This is the approach taken by many other reputable, long-term investors.

The Government holds Temasek accountable for achieving good long-term performance on an overall portfolio basis, rather than on individual investments each year. If Temasek were to be assessed on each individual investment, it would adopt an overly conservative investment strategy and ultimately achieve much lower overall returns.

This approach has yielded good results. As of March 2006, Temasek has delivered a compounded annual return of 18 per cent in terms of total shareholder returns by market value since inception, or 28 per cent per annum in the last three years.

For the financial year 2006 ending March 2007, despite the Shin investment Temasek is again expected to do well.

Laurence Lien
Governance and Investment
Ministry of Finance

Temasek operates like any investment firm

WE APPRECIATE Mr Patrick Tan Siong Kuan's concern over Temasek Holdings' investment in Shin Corp ('Billions at stake, so Shin saga a national concern'; ST, March 3).

Temasek operates with commercial discretion and flexibility as a commercial investment company. Like other investment firms, our investment decisions are based on commercial considerations within the appropriate risk-adjusted return framework for the different industries and markets.

Our investment in Shin Corp in Thailand was no different. We had a positive assessment of the outlook for Thailand, and completed the investment in accordance with market norms and best practices in international mergers and acquisitions. We continue to monitor the political situation and business environment in Thailand and will take the appropriate decisions as an investment firm.

Temasek is accountable to our shareholder in terms of our overall returns. We have maintained our Triple A credit rating by Standard & Poors and Moody's. This means we are financially sound and have sufficient assets and liquidity to support our obligations and investments.

It remains our objective to continue to deliver sustainable long-term returns.

Myrna Thomas (Ms)
Managing Director
Corporate Affairs
Temasek Holdings