Tuesday, February 14, 2006

Govt holds Temasek liable for good returns - Feb 14, 2006

*Further contributions to Public Law*

Govt holds Temasek liable for good returns

IN HIS letter 'Watch out for fallout from Temasek's move' (ST, Feb 10), Mr Quek Soo Beng said political risks should be considered and asked about the Government's role in the 'approval process' for Temasek Holdings investments.

I wish to assure Mr Quek that Temasek has a comprehensive risk management framework to help guide its investments. This framework addresses all major categories of investment risk including market, credit, regulatory, operational and political risk. Temasek does consider political risk in deciding whether to take up investment opportunities.

As shareholder, the Government's role is to ensure that Temasek has in place a competent board of directors to guide its investments and a clear set of processes to ensure accountability and rigour in its investment decisions. The Government does not approve individual investments by Temasek, nor does it second guess Temasek's risk assessments. These are business decisions for Temasek to take. The Government holds Temasek accountable for delivering a good rate of return on the overall investment portfolio.

Damien Tan
Governance and Investment
Ministry of Finance

One of the original reasons for the creation of the Elected President scheme was to safeguard our financial reserves from an fiscally irresponsible populist government (what happened to all the Jun Zi then?). Along the way, certain constitutional amendments (art. 151, art 22H and the transfer of reserves amendment in 22B and 22D) and clarifications (art 144) have made inroads into this area.

Of course there was also the non-cooperative attitute on the part of the Civil Service complained of on the part of ex-President Ong and his inability to get his hands on accurate figures of the reserves so as to be able to properly execute his function.

I think what this letter shows very clearly is the level of autonomy these GICs actually have. This is very evident in the last paragraph of the letter, as long as Temasak delivers good returns, no questions are asked.

I would be a lot happier if I knew what the risk matrix Temasak was using but I have to admit that this is not possible because it would give an insight into their investment strategy.

However, I think it is worth pointing out that while the above is generally in line with most hedge funds (I am not insinuating that Temasak does anything of that sort, but that their level of opagueness rivals that of those hedge funds), the people who choose to engage in such risky activity do so willingly and with their own money (or if it is done through a unit trust, they know they are buying into hedge funds). Furthermore, the government is not the only shareholder in this area because the basis of the funds that Temasak uses come from the taxpayers. In any other normal investment corporation, shareholders actually have the right to see the relevant documents, in this instance however, much is not shown.

So I guess, once again, it has to be a matter of trusting them (it's entirely on the onus of the board to state whether their budget or transfer will draw down the reserves and merely requires a resolution to be passed by the board) and the government instead of relying on institutional measures and checks and balances. At least now we know more about how the situation works.


Addendum: I think it's also worth mentioning that the Singtel-Optus move faced similar problems to the Shin Corp takeover both political (Buy Australia anyone?) and economic (overvalued) in nature.

It took a few years before the investment paid off (although for the poor consumer like me I wasn't sure how it benefitted to be a Singtel subscriber when I used the Optus network in Australia). The wise investor would have pull out and bought when the shares price sank. For the rest of the populace who originally bought the Singtel shares because of its blue-chip nature would have suffered losses for quite sometime before recouping it. An opportunity cost in other words.



At 9:48 AM, Anonymous ted said...

I would point out that GIC is itself a government owned entity, and that GLCs are largely public companies that are very closely linked to the government because of historic and shareholding reasons.

GIC = The Government Investment Corporation Pte Ltd

It is an interesting entity because it invests OUR entire (or so we are told) foreign reserves globally, and is controlled entirely by the Cabinet ministers and a few select government men who are very close to the Chairman (e.g. Richard Hu), there is no Woman director at all.

Anyway I thought to point this out because you used 'GICs instead of GLCs instead, and there is a difference between them.

At 11:00 PM, Blogger Shaun Lee said...

*Wince*, sloppy editting. You're right of course. Thanks for pointing that out.

The point I was trying to emphasis is more about the restriction of the EP's power to oversee these statutory boards (art 22A and 22B and in particular art 22B(9)) and government companies (art 22C and 22D and the restriction at art 22D(9))


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