The Temasek Problem is Not a Temasek Problem (Why Tharman Shanmugaratnam is Ho Ching's Best Friend)

The major news headline to hit the press in July was the failure of the announced leadership transition by Temasek Holdings to materialise. Back in February, Ho Ching announced her resignation and that she would hand over power of Singapore's Sovereign Wealth Fund to Charles Goodyear. At that time, the Merrill-BoA merger was being finalised and the BoA share price was hitting record lows. Here's a snapshot, if you don't remember.

At the time, the announcement was very surprising indeed, to observers who had been used to criticising the fact that Mdm Ho Ching was the Prime Minister's wife, as well as Lee Kuan Yew's daughter-in-law. That the top corporate job in Singapore was held by yet another member of the Lee family was, in the eyes of many observers, evidence of cronyism and nepotism in the Lee regime.

Many speculated over the reason for the sudden announcement of the stepping down of Ho Ching to give way to Charles Goodyear. Perhaps it was because of the massive losses that Temasek had sustained due to its over-allocation of resources to the financial sector. Perhaps it was because Ho Ching couldn't take the criticisms of having ascended to the CEO position because of her connections. Whatever the case, it seemed that Temasek was taking a significant step towards its image as a genuinely independent entity - by putting a foreigner in charge.

Fast forward five months, and Chip goodyear is leaving Temasek before even spending a single day as CEO. He is leaving amicably, due to 'strategic differences' - so goes the official line.

Of course, every Singaporean is left scratching his/her head trying to figure what is going wrong with the Temasek leadership transition. According to sources,

"A person familiar with the situation said last week that Mr. Goodyear's proposals for the company's new strategic direction were considered too risky by some, without elaborating. He also said Mr. Goodyear planned changes in senior management that weren't well received by Temasek's board."

But what are the real reasons? Singaporeans will never know... because Tharman Shanmugaratnam is Ho Ching's best friend.

Aug 18, 2009
S'pore Parliament
No goodwill for Goodyear
By Robin Chan

FORMER chief executive-to-be Mr Charles Goodyear received no goodwill payment for his four months' work at Temasek Holdings the Finance Minister revealed in Parliament.

But after 25 minutes of grilling, the House emerged none the wiser over what exactly the strategic differences were that led to his sudden departure.

Members of Parliament threw question after question at Mr Tharman Shanmugaratnam asking him to get Temasek to share with the public what went on behind the scenes but he would not budge.

He said that disclosing the information would serve no strategic purpose and that was not unlike the actions of other publicly-listed companies in the private sector.

'People do want to know, there is curiosity, it is a matter of public interest. That is not sufficient reason to disclose information. It is not sufficient that there be curiosity and interest that you want to disclose information,' he said in response to questioning from Mr Low Thia Khiang, opposition MP for Hougang.

He reiterated that the words in Temasek's statement to the public were carefully chosen and the Government would not add to that.

But of course. Did any of us really expect Mr Shanmugaratnam to reveal anything that we do not already know? Did any of us really expect to find out anything truly and genuinely useful about Temasek through the parliamentary proceedings?

Of course not - and that's because the Government bears ultimate responsibility for Temasek's stuff ups. Ultimately, the Government must bear the consequences of any mismanagement of reserves. Likewise, it will take credit for any 'good' news where Temasek is concerned. The Government has a vested interested in keeping information about Temasek cock-ups hidden away from public consumption.

Thus, can Temasek ever be expected to suddenly become transparent and candid about its management stuff ups and its investment errors? No, it will only be transparent to the extent that its shareholder demands it, and to the extent that regulations require. Since Temasek is not a publicly listed company, Singaporeans cannot expect Temasek to be transparent on the basis that its publicly listed subsidiaries are. And since Government ministers repeatedly say that it is not their role to comment on individual investments - Temasek will never come clean on individual investment decisions, nor will the truth ever be told about why Chip Goodyear quit.

No - what Singaporeans expect from Temasek - they first have to demand of the Government. If Singaporeans want transparency and accountability about Temasek's investments and policy decisions, they have to first demand transparency and accountability from the Singapore Government. If Singaporeans want information about Temasek's decision making process, they have to demand the same sort of information from the Singapore Government. They have to demand that Tharman Shanmugaratnam keep a close watch on the major individual decisions that Temasek makes - and in turn - either report this information to the Singapore people, or require that Temasek makes the appropriate disclosures. It is only after we establish a culture of tranparency and accountability at the highest echelons of Singapore's society, that the lieutenants & the troops will then follow in line.

Indeed, the Temasek Problem is Not a Temasek Problem; The Temasek Problem is a Government of Singapore problem. Ultimately, the quality of corporate governance of Temasek Holdings will mirror the quality of political governance of the Government of Singapore.

And until Singaporeans realise this, they will have to continue living with the opacity and secrecy that shrouds Temasek Holdings - protected as it is by its political masters.

TOC, Wayangparty have got it wrong here

2 major alternative commentary websites in Singapore's blogosphere, TOC and Wayangparty.com, have come out with their guns blazing and heavily criticising the government's proposed changes to Parliament.

Andrew Loh calls it a "A mockery of Parliament" because of the huge number of "loser MPs", "nominated MPs", and "walkover MPs." He says,

"Parliament being filled with a majority of un-elected members is a joke. Pure and simple, no matter what rhetoric the prime minister uses in trying to convince one and all to accept these changes."

Much as I have been a govt critic in the past, I think the changes announced by Lee Hsien Loong are actually a positive step forward for Singapore as a whole, and that TOC and Wayangparty have got it wrong this time. And much as I think I am going to receive major flak for my comments here, I feel it is necessary to make my case public.

The Economics and Politics of the CPF

[What follows is the excerpt of an exchange I had with someone regarding the CPF. My opinions are purely my personal comments and should be read in the light that I do not have empirical data and am only able to speculate about how the CPF is managed.]

Q: Whats your opinion about CPF 2.5 % and 4 % per annum? Are the returns fair for the avg singaporeans? I thought CPF as an institution ($60 bn, correct me if i'm wrong), should have economies of scale when engaging with investment banks and hence better returns if it were to engage with Vanguard or Merrill Lynch.

...

I think the real question for CPF should always be about economic/financial viability and nothing to do with politics. Investment is something we can calculate/evaluate that is why i love it, can we evaluate politics?

A:The Ministry of Finance (MoF) manages and controls the CPF. It takes in monies/deposits from Singaporeans on the liabilities side while investing the proceeds on the assets side.

On the assets side, Temasek and GIC, which are owned by the ministry of finance, manage the reserves and investments of the MoF.

Now, the challenge for the ministry of finance is to give Singaporeans a reasonable return on their CPF monies, at the same time guaranteeing that
A. it will be there for their retirement, and also guaranteeing that
B. it will be available for housing and medisave,
as and when it is needed for those purposes.

The crux is, how much return should Singaporeans get on their CPF savings, while still being able to retain benefits (A.) and (B.)

Your contention is that it should be possible for the government to give a higher return than a 4% fixed rate. After all, if you were just managing your own retirement money, you would just put your savings into an index fund and let it sit for 30yrs and you would expect to earn about 9% per annum. So, why can't the government do this, since because of its size it has a large bargaining power and it can rope in world class investment expertise from around the world?

My argument is that, yes, it may be possible for the government to give higher rates, but with several caveats.

a. Size is the enemy of returns. Even the Sage of Omaha, Warren Buffett, has admitted that the mountain of capital he has to deploy eats away at his returns. On an individual's scale, you may be managing your retirement money of $1 million. However, this is a very different problem compared to managing assets of $60b. The MoF/CPF cannot simply stick all its assets into an index fund like you can. We have to note that from the government's point of view it is taking responsibility for the entire country and the problems are quite different on a macro scale rather than the micro scale of the individual.

b. Many Singaporeans intend to use their CPF for housing and Medisave. This adds a liquidity challenge to the investment issue and the government may only be able to deal with this by devoting a significant portion to shorter-term marketable liquid securities which give a much lower return than equities. At the same time, higher returns tend to be made in long term investments such as corporate acquisitions, real estate, and equities which will be much more volatile and illiquid than fixed-income securities. Therefore, in order to provide the liquidity and certainty (benefits A. and B. as discussed above), the Ministry of finance may not be able to devote a large portion of CPF monies into higher yielding investments, therefore the tradeoff is that Singaporeans have to accept lower returns on their CPF monies than if they were managing their retirement themselves.

Since we do not have empirical information about the size of the CPF and the inflows and outflows of CPF monies and the investments of the MoF, we can only speculate whether or not 4% is a reasonable number.

This covers the economics and finance of the CPF issue.

The politics of the CPF, however, is just as important.

Central to the CPF is the idea that Singaporeans should automatically abdicate their rights (and responsibilities) to manage their own retirement money, to the government. This is enshrined in the fact that CPF is compulsory for all Singaporeans.

If Singaporeans accept the compulsory nature of the CPF and take no political action to the contrary, then they have to also accept whatever it is that the government gives them. After all, if you don't want to take responsibility for your own retirement, then you have no say in determining the return on your retirement monies. In other words, if you let the govt manage your money, then you have to accept whatever the govt gives you, 4% or not.

And, if the govt is able to invest the money at 15% (thru its investment arm like Temasek) but it only gives you 4% per annum, it may be earning the spread of 11%. You may be unhappy with the fact that the government is getting in a sense a low interest 'loan' to make its investments, but the fact is that Singaporeans as a whole keep quiet and do nothing to change the status quo.

Now, you might say, many people do not have time to look after their savings investments and are willing to let someone else who knows what they are doing, manage it for them.

How about those who have the time to manage their investments? Perhaps an option is to make the CPF an optional scheme. For those who want to opt into CPF, the government will be responsible. For those who want to opt out, they will have to be responsible for their own retirement. But this is a political issue.

Or perhaps, we could retain the compulsory nature of the CPF, but instead of forcing Singaporeans to contribute 20% of their salaries, they should only be required to contribute less, like maybe 10%. This is a number that is closer to other countries' pension funds, like the Canada Pension Plan. This, again, is a political issue.

We could even ask another question and say, I'm not sure that the CPF is giving me as much money as I should be getting. I think the government should be more transparent about the CPF and the returns it is getting so we can figure out if we deserve more. But transparency is a political issue.

The issue about how much returns can the government give on our CPF monies is a economic issue. But the question, should CPF be compulsory and/or should we have the freedom to manage more of our retirement monies and give less to the CPF, is a political one. The question whether the govt should be transparent with their books, is a political one.

And as long as the politics of the CPF remains as it currently is, there is no point arguing that the government should be giving more than 4%. Because as long as Singaporeans abdicate their rights to manage their own retirement money, the returns on the CPF are not for the people to decide, it is for the government to decide.

I think the real issue ultimately boils down to whether the people want to be spoon fed and let the govt take the responsibility for their retirement, or they want to take responsibility into their own hands. i.e. without solving the political issues of the CPF, it means very little to debate over the economic ones.

Telstra: a Political Operation, or a Free-Market Business?

Phil Burgess, head of public policy at Telstra, has been on the record as having made the following comments:

"We've been aggressive because there is a move under way to confiscate something that is owned by 1.6million mum-and-dad investors and give it to a Singapore company," Dr Burgess told The Australian.

"We're talking about turning over Australia's only nationwide telecommunications network to a consortia run by the Singapore Government. That's a government that executes people, number one, and doesn't allow competition in its own country. It's unbelievable.

"We've had a national broadband plan since August 2005. It's been vetoed twice by the (Australian Competition and Consumer Commission). When people say we're threatening not to do broadband, it just isn't true. We need to have our costs accepted by the ACCC. We are not going to build it if we can't get a commercial return on our investment."

If you scrutinise this statement carefully, what Phil Burgess is saying is the following:

a. Telecommunications business in Australia should be given to Telstra because Telstra's shareholders are mum-and-pop shareholders.

b. Telecommunications business in Australia should be given to Telstra because it is an Australian company and Australia does not execute its people.

c. If Telstra cannot competitively operate a national broadband infrastructure, no other company should be allowed to do so.

Well, how's that for a competitive company?

The last time I checked, business should be conducted based on the ability of a company to offer its customers the best services and the best value, not some call to political arguments or human rights issues.

In my view, these statements are just shameful and show that Telstra does not compete on the basis of economic competitiveness but on the basis of slimy political maneuvering. And it just goes to show that business simply cannot be separated from its political environment.