Who holds the sovereign wealth of this nation and why?
Thursday, 30 July 2009, 11:22 am | 119 views
Kenneth Jeyaretnam
Investment in our only natural resource, our people, could potentially have had a much higher internal rate of return, in the form of a more highly educated workforce, than that achieved by Temasek or GIC on their overseas investments.
Sovereign Wealth Funds (SWFs) are not a new idea. According to Wikipedia, the term Sovereign Wealth Fund was first used by Andrew Rozanov in an article entitled, ‘Who holds the wealth of nations?’ in the Central Banking Journal of May 2005. A SWF may be broadly defined as a state-owned investment fund composed of financial assets such as stocks, bonds, property, precious metals or other financial instruments.
Theoretically one can distinguish two types of SWFs. The first, and the oldest form of SWF, is one set up to manage revenues from an exhaustible resource such as oil, or one which derives its assets from government budget surpluses. An example of one based on resources, and arguably the first SWF was the Kuwait Investment Authority, a commodity SWF created in 1953 from oil revenues before Kuwait even gained independence from Great Britain. A more recent example is the Norwegian SWF which was set up primarily to ensure that the wealth represented by Norway’s oil reserves was not squandered on current consumption but turned into financial assets which would benefit future generations.
Temasek could be said to be an example of the first type of SWF. It was set up in 1974 to hold stakes in the various government-controlled companies, such as DBS, SIA and Singapore Technologies, that had previously been held by the Ministry of Finance. The Temasek Holdings website states that, “Our investments are funded through dividends we receive from our portfolio companies, our divestment proceeds, commercial borrowings, a maiden Yankee bond issue in 2005 and occasional asset injections from our shareholder, the Minister for Finance (Incorporated).”
The second type of SWF is one set up to manage a country’s excess foreign exchange reserves. GIC is probably an example of this type of SWF since it was set up in 1981 with the explicit objective of managing our foreign exchange reserves for long-term capital appreciation. I say probably, as there is very little transparency, so it is not clear whether it is also funded by capital injections from the Ministry of Finance in the same manner as Temasek. However a significant portion of its funding may come indirectly from the CPF which invests primarily in debt issued by MOF. No information is available on the current level of assets. The website states only that the investment portfolio is in excess of US$100 billion. However various estimates have put the level of assets at between US$250 and US$330 billion.
Singaporeans need to be asking, particularly in the light of the recent investment losses, why Singapore even has not one, but two, SWFs. Singapore does not meet the criteria for the first type of SWF since we do not need to manage a windfall from any natural resources. If Singapore had expanded its domestic investment and consumption over the last 30 years it would have had smaller current account surpluses and thus smaller foreign exchange reserves needing management. MAS already has sufficient foreign exchange reserves necessary to manage the Singapore dollar. No second SWF was needed to fulfil this function.
Again without transparency we have no breakdown of how much government saving in the form of surpluses has contributed to both Temasek and GIC’s growth over the years. But we do know that the cumulative budget surplus over the last thirty years has been considerable.
Where have these oft lauded budget surpluses come from in the first place. Well we all know how to save money. We cut back on expenditures. When a country cuts back on the absolute basics such as free education for its children then it creates a budget surplus. Let’s make no mistake here. No other First World Nation only has compulsory education up to the end of Primary school and even that only for a very short day and that minimal compulsory education not even free (although heavily subsidised). I am not advocating a welfare state but to put it bluntly, Singaporeans have helped to pay for our enormous overseas investments by forgoing free universal education to secondary level, a national health insurance system and other elements of a social safety net which are characteristic of most countries at Singapore’s level of development
The budget surplus, having been taken from the pockets of Singaporeans, then represents money that not only could have, but should have, been returned to the citizens of Singapore in the form of lower taxes, fees and charges. It could have also been used to finance much higher domestic investment in education or in health and welfare. Their website states that Temasek has achieved an annualized return of 18% since inception though that is based on the March 2008 asset figure of S$185 billion rather than on the current valuation of S$145 billion announced by CEO Ho Ching yesterday. Investment in our only natural resource, our people, could potentially have had a much higher internal rate of return, in the form of a more highly educated workforce, than that achieved by Temasek or GIC on their overseas investments.
Instead of the Government investing our money to pick winners through an industrial strategy there could have been greater incentives for investment and R&D in the private sector which might have led to faster productivity growth and higher levels of real incomes. And even if GIC has not been funded directly by the MOF, the growth of our foreign exchange reserves has come about through chronic external surpluses which represent domestic under-consumption and under-investment.
As a final ignominy, CEO Ho Ching announced on July 29th at the Institute of Policy Studies that Temasek was thinking of allowing Singaporeans to co-invest alongside Temasek sometime in the next ten years. How kind of her. I thought we had already invested as outlined above. The only positive side of this news is that it would presumably force Temasek to be much more transparent about its investment process and corporate governance. In any case any personal financial adviser (and I am not one) would not advise an investment in a company without sufficient transparency that required due diligence.
As we all know, calls on the government for accountability and transparency in its sovereign wealth funds is not new. However; I would go one step further! Many of you know that I gave a speech at the Foreign Correspondents Association lunch on the 2 July 2009. In answer to a question put to me after the lunch I went on record as saying that Singaporeans should be given a direct stake in our SWFs, either through their privatization and the issuance of shares to Singapore citizens or through the explicit linkage of part of the value of these assets to the welfare of Singaporeans, as is done in Norway through the Pension Fund.
To counter one possible objection that our national “crown jewels” could end up being bought by foreigners the government could retain a golden share which would prevent this happening to Temasek’s portfolio of domestic GLCs. Longer term there is no reason for Singapore to continue to run large budget surpluses over the course of an economic cycle.
In conclusion whilst I will not let up on calling on our government for greater transparency and accountability into how it manages our money, I would urge it also to look at credible new proposals such as mine, rather than confining itself to the limited steps outlined by CEO Ho Ching in her speech.
Thursday, 30 July 2009, 11:22 am | 119 views
Kenneth Jeyaretnam
Investment in our only natural resource, our people, could potentially have had a much higher internal rate of return, in the form of a more highly educated workforce, than that achieved by Temasek or GIC on their overseas investments.
Sovereign Wealth Funds (SWFs) are not a new idea. According to Wikipedia, the term Sovereign Wealth Fund was first used by Andrew Rozanov in an article entitled, ‘Who holds the wealth of nations?’ in the Central Banking Journal of May 2005. A SWF may be broadly defined as a state-owned investment fund composed of financial assets such as stocks, bonds, property, precious metals or other financial instruments.
Theoretically one can distinguish two types of SWFs. The first, and the oldest form of SWF, is one set up to manage revenues from an exhaustible resource such as oil, or one which derives its assets from government budget surpluses. An example of one based on resources, and arguably the first SWF was the Kuwait Investment Authority, a commodity SWF created in 1953 from oil revenues before Kuwait even gained independence from Great Britain. A more recent example is the Norwegian SWF which was set up primarily to ensure that the wealth represented by Norway’s oil reserves was not squandered on current consumption but turned into financial assets which would benefit future generations.
Temasek could be said to be an example of the first type of SWF. It was set up in 1974 to hold stakes in the various government-controlled companies, such as DBS, SIA and Singapore Technologies, that had previously been held by the Ministry of Finance. The Temasek Holdings website states that, “Our investments are funded through dividends we receive from our portfolio companies, our divestment proceeds, commercial borrowings, a maiden Yankee bond issue in 2005 and occasional asset injections from our shareholder, the Minister for Finance (Incorporated).”
The second type of SWF is one set up to manage a country’s excess foreign exchange reserves. GIC is probably an example of this type of SWF since it was set up in 1981 with the explicit objective of managing our foreign exchange reserves for long-term capital appreciation. I say probably, as there is very little transparency, so it is not clear whether it is also funded by capital injections from the Ministry of Finance in the same manner as Temasek. However a significant portion of its funding may come indirectly from the CPF which invests primarily in debt issued by MOF. No information is available on the current level of assets. The website states only that the investment portfolio is in excess of US$100 billion. However various estimates have put the level of assets at between US$250 and US$330 billion.
Singaporeans need to be asking, particularly in the light of the recent investment losses, why Singapore even has not one, but two, SWFs. Singapore does not meet the criteria for the first type of SWF since we do not need to manage a windfall from any natural resources. If Singapore had expanded its domestic investment and consumption over the last 30 years it would have had smaller current account surpluses and thus smaller foreign exchange reserves needing management. MAS already has sufficient foreign exchange reserves necessary to manage the Singapore dollar. No second SWF was needed to fulfil this function.
Again without transparency we have no breakdown of how much government saving in the form of surpluses has contributed to both Temasek and GIC’s growth over the years. But we do know that the cumulative budget surplus over the last thirty years has been considerable.
Where have these oft lauded budget surpluses come from in the first place. Well we all know how to save money. We cut back on expenditures. When a country cuts back on the absolute basics such as free education for its children then it creates a budget surplus. Let’s make no mistake here. No other First World Nation only has compulsory education up to the end of Primary school and even that only for a very short day and that minimal compulsory education not even free (although heavily subsidised). I am not advocating a welfare state but to put it bluntly, Singaporeans have helped to pay for our enormous overseas investments by forgoing free universal education to secondary level, a national health insurance system and other elements of a social safety net which are characteristic of most countries at Singapore’s level of development
The budget surplus, having been taken from the pockets of Singaporeans, then represents money that not only could have, but should have, been returned to the citizens of Singapore in the form of lower taxes, fees and charges. It could have also been used to finance much higher domestic investment in education or in health and welfare. Their website states that Temasek has achieved an annualized return of 18% since inception though that is based on the March 2008 asset figure of S$185 billion rather than on the current valuation of S$145 billion announced by CEO Ho Ching yesterday. Investment in our only natural resource, our people, could potentially have had a much higher internal rate of return, in the form of a more highly educated workforce, than that achieved by Temasek or GIC on their overseas investments.
Instead of the Government investing our money to pick winners through an industrial strategy there could have been greater incentives for investment and R&D in the private sector which might have led to faster productivity growth and higher levels of real incomes. And even if GIC has not been funded directly by the MOF, the growth of our foreign exchange reserves has come about through chronic external surpluses which represent domestic under-consumption and under-investment.
As a final ignominy, CEO Ho Ching announced on July 29th at the Institute of Policy Studies that Temasek was thinking of allowing Singaporeans to co-invest alongside Temasek sometime in the next ten years. How kind of her. I thought we had already invested as outlined above. The only positive side of this news is that it would presumably force Temasek to be much more transparent about its investment process and corporate governance. In any case any personal financial adviser (and I am not one) would not advise an investment in a company without sufficient transparency that required due diligence.
As we all know, calls on the government for accountability and transparency in its sovereign wealth funds is not new. However; I would go one step further! Many of you know that I gave a speech at the Foreign Correspondents Association lunch on the 2 July 2009. In answer to a question put to me after the lunch I went on record as saying that Singaporeans should be given a direct stake in our SWFs, either through their privatization and the issuance of shares to Singapore citizens or through the explicit linkage of part of the value of these assets to the welfare of Singaporeans, as is done in Norway through the Pension Fund.
To counter one possible objection that our national “crown jewels” could end up being bought by foreigners the government could retain a golden share which would prevent this happening to Temasek’s portfolio of domestic GLCs. Longer term there is no reason for Singapore to continue to run large budget surpluses over the course of an economic cycle.
In conclusion whilst I will not let up on calling on our government for greater transparency and accountability into how it manages our money, I would urge it also to look at credible new proposals such as mine, rather than confining itself to the limited steps outlined by CEO Ho Ching in her speech.
