Good on Temasek, Shame on the Government

On Recent Events

I have come to know, through very reliable sources, of an incident that has greatly enhanced my confidence in Temasek as being independent of government influence. This incident has greatly influenced my perceptions of Temasek and has deepened my understanding of the regulatory problems that Temasek is facing in Indonesia and Thailand.

Not too long ago, the top officials of a Singapore Government Agency (let's call it ABC) approached the top leadership of Temasek, seeking that Temasek influence one of the corporations (XYZ) under its control to enact a series of plans designed to produce a favourable regulatory outcome for ABC. This occurred because ABC feared that it would not be able to get XYZ to do what ABC wanted without Temasek's influence.

I am extremely happy to say that Temasek turned around to ABC and said that Temasek cannot and would not influence the management of the corporations under its control. This is despite the fact that Temasek could have tried to accede to ABC's requests and influence XYZ without risk of public knowledge. However, I feel that the officials of ABC should have known much better than to try to use the government's position as owner of Temasek to try to get Temasek to influence XYZ in ABC's favour.

Temasek and the Ministry of Finance have clearly stated repeatedly that Temasek is to act independently of the government as a financial investor. Temasek's role is thus not to produce political and/or regulatory outcomes for government agencies. Any act by Temasek to this effect would severely tarnish the credibility and reputation of Temasek in its operations, particularly considering the trouble it is going through with Shin Corp in Thailand and with Indosat in Indonesia.

Thus, I would go so far to say that ABC's behaviour was tantamount to an attempt to abuse one's position of authority and influence. It was a selfish act that only considered the individual interests of ABC without considering the potentially deliterious consequences to Temasek, the Ministry of Finance, and the rest of Singapore. I am hence extremely disappointed with the top officials of ABC. What they did was fundamentally irresponsible and unacceptable.

Once again, I would like to give credit to Ho Ching and Temasek for standing firm in not exercising its influence over XYZ, and hope that this behaviour is indicative of how Temasek conducts itself with the rest of its investments.

On PT Indosat

ST Telemedia has recently completed its divestment of its stake in PT Indosat to Qatar Telecom.

ST Telemedia completes $2.5b Indosat sale to Qtel
S'pore firm transfers stake that had been at centre of antitrust dispute. -ST
Chua Hian Hou

Tue, Jun 24, 2008
The Straits Times

QATAR Telecom (Qtel) has defied some political resistance to complete a controversial acquisition of a Singapore firm's stake in No.2 Indonesian telco Indosat.

The US$1.8 billion (S$2.5 billion) stake was transferred to Qtel by Singapore Technologies Telemedia (ST Telemedia), which held the shares in two holding companies. ST Telemedia is a unit of Temasek Holdings.

The Indosat stake that ST Telemedia held has been at the centre of a legal dispute since last year, when Indonesia's Business Competition Supervisory Commission, or KPPU, ruled that the Singapore firm had breached antitrust laws.

The KPPU claimed that Temasek had engaged in monopolistic practices in Indonesia's mobile-phone market, and had breached anti-competitive laws by holding majority stakes in more than one company in the same industry.

Temasek has a deemed stake of about 20 per cent in Indonesia's No.1 telco Telekomunikasi Selular (Telkomsel) held via SingTel. It also had a 31 per cent deemed stake in Indosat, held via its wholly owned unit ST Telemedia.

The KPPU fined the companies and also ordered Temasek to sell its deemed stake in either Telkomsel or Indosat. It also ruled that buyers could purchase the shares only in 5 per cent chunks at most.

Temasek, SingTel and ST Telemedia claimed that there was no breach of antitrust laws and appealed against the ruling in the Central Jakarta District Court.

But last month, the Indonesian court upheld the KPPU's ruling. The three firms then said they would appeal against this decision to the Indonesian Supreme Court.

But on June 7, ST Telemedia announced that it was selling its Indosat stake to Qtel.

It is unfortunate that ST Telemedia has had to elect to divest its lucrative stake in PT Indosat in order for its parent, Temasek, to avoid further complications in the antitrust lawsuit it is facing against KPPU. While not the most favourable outcome, practically it was probably the most prudent decision on the part of ST Telemedia.

In light of the incident I have narrated above, I have much more confidence in believing that Temasek exerted no strategic influence over its 'effective' stakes in PT Indosat (previously owned thru ST Telemedia) or Telkomsel (currently owned thru SingTel). In light of this, the regulatory decision by KPPU against Temasek probably holds little water and I am inclined to accept the arguments of Temasek's lawyers that Temasek is innocent of the claims of monopolistic practices brought against it by KPPU.

Yet this incident is exemplary of the problems that Temasek faces as it expands out of Singapore to make investments overseas. Even as Temasek makes its decisions on commercial grounds and independently of the Singapore government, its government-linked perception and the close ties to the government do Temasek no favours. Indeed, Temasek's status as a government owned entity is very much a liability when it comes to dealing with political and regulatory knock-on effects. Temasek's actions overseas incite political suspicion simply because it is owned by the Ministry of Finance, and not necessarily because the government actually exerts any influence over its actions.

On Shin Corp

How best, then, to deal with this problem? One solution would be not to take any majority stakes in any prominent or politically-linked foreign companies:

Singapore's Temasek plans to cut its stake in Thailand's Shin Corp
By Amy Kazmin in Bangkok, for the Financial Times
Published: June 18 2008 03:00 | Last updated: June 18 2008 03:00

SINGAPORE'S Temasek Holdings plans to reduce its stake in Shin Corp, the Thai group it took control of more than two years ago, through a public offering of shares.

In a statement to the Stock Exchange of Thailand yesterday, Shin Corp said it was drafting a prospectus for an offering that would increase the minority shareholding, although it also said it would have to monitor the investment climate and sentiment in order to "conduct a successful offering . . . in the future".

Shin Corp gave no details of a timeframe or size for such a deal.
In January 2006, Temasek paid $3.8bn, or Bt49 per share, for a 96 per cent stake in Shin Corp, the telecommunications-to-aviation group founded by Thaksin Shinawatra, who was then Thailand's prime minister.

The deal, Thailand's largest takeover, triggered a crisis as Bangkok residents protested against the Shinawatra family's $1.9bn tax-free profits from the deal.

Critics accused the Singaporean state investment agency of violating Thai laws limiting foreign ownership of telecoms companies to 49 per cent, though the deal replicated similar take-overs.

The furore culminated in the September 2006 coup and the seizure of most of the Shinawatra family's earnings from the sale.

The military government also vowed to investigate whether the takeover violated foreign investment laws.

Like the PT Indosat case, Temasek probably made the investment in Shin Corp in full compliance of the laws of Thailand as they knew it, and were unfortunate victims of the political turmoil in Thailand. In all fairness to Temasek, it had probably no inkling that the military coup and its subsequent fallout could have been triggered by the sale of Shin Corp by Thaksin Shinawatra to Temasek.

Yet in hindsight, the highly politically charged nature of the transaction should have raised alarm bells during Temasek's political due diligence of the transaction. Here was an asset of national pride, changing hands between the Prime Minister of the country and the investment arm of a foreign government body. Surely there had to be knock-on political ramifications.

But nevermind that, what is done has been done and we cannot turn back the clock. Yet Temasek's latest plan to cut its stake in Shin Corp only just having recently acquired it, is acknowledgement that an investment's political fallout is a burden too heavy for the company to bear. This mirrors ST Telemedia's decision subsequent to the KPPU case, on behalf of Temasek.

But adopting such a strategy going forward can place significant constraints on Temasek's investment options. It now has to carefully weigh the potential political ramifications of every investment it makes. Doing so would narrow the universe of potential investment and acquisition targets available to Temasek, and place downward pressures on Temasek's investment returns. That Temasek's assets under management continue to balloon, do it no favours either. Temasek has to deal with the double whammy of having more capital under its responsibility, and fewer options with which to deploy this capital.

Indeed, Ho Ching's job is certianly not one I would envy; it is a tough set of problems she has to deal with. But deal with these problems, she and her team must. Otherwise, it is time to reduce the scale and scope of Temasek, and start returning the money to the people.

Can Singapore's corporate elite come up with the solutions for such tough problems? Singaporeans will surely watch intently, and only time will tell.

The Shin Saga: The Deal That Angered A Nation

'We Complied With the Law'

An executive at Singapore's state-owned investment firm discusses the deal that triggered Thailand's political crisis. The company line: don't blame us.

Ex Chief Investment Officer of Temasek, Jimmy Phoon, gave an interview to newsweek. I must say his comments are quite frank and open. I wonder why Temasek didn't take this sort of attitude earlier.

Read the interview here

A Forum Post on Temasek's Tangle with Shin Corp

[I found this on Sgfunds.com 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.

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.

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
Director
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

Isn't Thailand So Much More of a Democracy than Singapore?

Despite potentially undermining the reputation of his country's reputation as a safe opportunity for foreign investment, Gen. Sonthi not too long declared that he wanted to reverse the sale of Shin Corp from Thai hands into the portfolio of Temasek Holdings, an investment arm of the government of Singapore.

In spite of the military fashion in which he displaced Thaksin Shinawatra, the way Sonthi seems to be going about trying to get back the telecommunications assets seems to be very democratic. Just today, there is news that "Thailand to poll nation on reclaiming satellites from Singapore." It is not sure what sort of poll is going to be conducted, whether it is going to be a national referendum or whether it is just going to be a survey conducted by sampling a subsection of the population to determine the Thai people's sentiments.

Yet, even if the poll is not a full-scale national referendum, the process in which the decision is going to be made is surprisingly democratic, in many ways much more democratic than one might expect from Singapore.

Whatever the case, it appears Temasek's investment in Shin Corp has turned out to be a disaster. And the lessons Singapore can learn are not just to be careful with what may turn out to be politically explosive, it is also a lesson that Singapore's version of democracy is just one that is unlikely to work in various jurisdictions - Thaksin who declared he wanted to follow Singapore's model has been ousted, and Gen. Sonthi's process seems to be working much more effectively.

Sonthi wants Shin Corp Back

Sonthi, the military leader who led the coup to topple Thaksin Shinawatra, has declared that he wants the telecommunications assets which were sold to Singapore's Temasek Holdings back in Thai hands.

Singapore's MFA, has started "seeking clarification," while Thailand's MFA has said the issue will "fade away." But I think the issue will fester, and will not "fade away."

1. This huge multi-billion dollar tangle shows that Temasek Holdings has too much capital on its hands. As its reserves have grown and grown, Singapore has to look in more and more places to invest its money; without the huge glut of capital, Temasek would probably have never had the need to buy a set of (politically sensitive) Thailand's prized national assets in order to grow its money. With more than S$100 billion under management, Temasek should seriously consider returning a decent amount of its equity to its shareholders i.e. the government of Singapore, and hence forth to the people of Singapore.

2. Even if the investment was made on a "purely financial basis" as the ministry of finance has claimed, Singapore cannot ignore the fact that any transaction of this sort of scale and that involves major political figures DOES have political ramifications. And, the fact that Temasek is owned by the ministry of finance and hence the government of Singapore means that it WILL be perceived by foreign bodies to be politically linked and controlled.

Whether Ho Ching likes it or not, she MUST consider in depth the political implications of her actions, and declaring that her investments are made "purely as financial investments" is simply giving bad excuses to avoid what has to be done on her job.

Indeed, knowing that Ho Ching's father-in-law likes Thaksin, it is no wonder that foreigners perceive that Temasek bought Thaksin's assets as a way of giving him an avenue to cash out. Whether or not there is politics going on behind the scenes (and yes, there probably is), Temasek will always be perceived as a political arm of the government, and never as an independent, privately owned company that is just concerned with the profit motive.

3. Why is Singapore's MFA getting involved in the incident? If Shin Corp is 'purely a financial investment' and Temasek and 'independent arm', what has the MFA to do with Sonthi's comment? Indeed, MFA's statement that it is 'surprised,' clearly demonstrates that there is more involved here than just a 'financial investment' - politicians are getting involved in 'private' business affairs.

4. Technically, Sonthi can roll in the tanks and take over Shin Corp by brute force. And should he? Maybe he should. That will teach the Singaporean politicians a good, hard-learnt lesson.

5. Of course, that doesn't mean that i endorse seizing assets which have been 'lawfully sold' and acquired - Sonthi's actions are probably not endorseable within a legal context. But given how Temasek and Thaksin have angered Thais by their insensitive and selfish actions, it shouldn't be much of a surprise that this hoo-ha has happened.