I propose to restructure the funds into three new funds to resolve these constraints so that full transparency can be achieved. Such disclosures are critical so that the public takes ownership and participates in the management and use of the funds. This will open up parliamentary debates on the use of the returns from the funds which can form a substantial part of the government’s budget.
Also CPF members can participate in the funds to achieve a significantly higher return for their retirement savings. From the estimated size of the reserves, the returns can have a profound impact on improving the lives of Singaporeans. It is time for the people to know how much money they have. With the entry of 9 opposition MPs/NCMPs and a newly-elected president, this is a good time to relook how our reserves are managed.
Temasek – transformation to asset manager
In the past the roles of GIC and Temasek were clear. GIC invests our reserves outside Singapore for financial returns and Temasek holds the shares of all the government-linked companies (GLC) in Singapore. The chief executives of these were left to run the GLCs and the government did not actively trade the shares of these companies.
In 2002 Temasek went through a transformation. In addition to its holding company function, it set up a fund management arm to actively manage a portfolio of investments. It seek out new investments and actively traded the portfolio. In short, Temasek was transformed into an asset management company like a hedge or private equity fund. It employed a legion of investment bankers and raised funds in the market through bond issues. It invested in several high profile deals and it is perceived in the worldwide financial markets as a significant player.
As a result of this transformation, some argue that the current difference between GIC and Temasek is that GIC takes the long term structural positions while Temasek capitalizes on shorter term opportunities and will trade the investment portfolio for financial gains whenever the opportunity arises. However, in reality the differences are minimal. From the economies of scale perspective, it may be desirable for the two fund managers to work together rather than duplicate functions.
The Temasek annual report disclosed profits of S$13 billion. The problem with assessing Temasek’s performance is that its trading investments and national strategic investments are all co-mingled into one portfolio. This is a structural constraint to report fully the performance of its fund management activities. To mitigate this problem, we should break up the Temasek funds into a holding company type investment and a trading type investment portfolio. The holding company will house shares held in Singapore GLCs for strategic reasons where the shares are not traded for investment gains. These are shares in companies like PSA, Singtel , SIA, DBS, and Singapore Power. The other investment portfolio will cover all the new investments like Bank of China which were made since 2002. These investments are not strategic to Singapore but invested purely for financial returns.
GIC – separate central bank role from fund manager role
GIC’s annual report is even less transparent than Temasek. Although it disclosed its rate of return over different time periods, there are no financial statements. The report does not disclose the size of the funds even though it is owned by the people of Singapore. One of the valid reasons given for the lack of transparency was to deter speculators from attacking the Sing dollar. If these speculators do not know the size of the reserve fund then they will not risk speculating on the Sing dollar.
In such a case, for GIC, we should separate its central bank function of defending the Sing dollar from its fund management role of generating long term financial returns for the country. We can decide on the amount of GIC funds required to manage the Sing dollar exchange rate and transfer it to the Monetary Authority of Singapore (MAS). This amount is typically one and a half years’ value of imports. These funds managed by MAS should be invested in AAA bonds with the objective of preserving capital which will be deployed to defend our currency. Therefore they can keep the size of the funds a secret as the asset class is low risk and not likely to suffer losses. We can trust MAS to use the funds to manage the Sing dollar foreign exchange rates. GIC can now be transparent as it is no longer performing the central bank function.
Merge Temasek and GIC into a Singapore Fund
We can then merge the Temasek fund together with GIC into one large mutual fund with the objective of maximizing returns, and name this fund say the Singapore Fund. It must be fully transparent as it will be assuming more risks to maximize returns. There are many well established funds like the Norwegian Sovereign Fund which already developed a transparent framework for public disclosure. We can model the Singapore Fund after them.
The above suggested proposal will result in three tranches holding our reserve funds. The first tranche is the Singapore Fund which will be transparent and hold most of the reserves to be invested outside Singapore. Another tranche is for holding all the Singapore listed and unlisted GLC shares for strategic purposes. When the government decides it is no longer strategic to hold on to a particular GLC, it can be transferred to the Singapore Fund for divestment. The last tranche will reside with MAS to protect the value of the Sing dollar and this can be kept secret for national security reasons. I cannot see any good reason for the government to continue to limit the disclosures of our reserves if they adopt these proposals.
Dollars and cents
We can debate in Parliament the use of the returns of the Singapore Fund for the annual budget. This is a major departure from the current practice where the public is kept in the dark about the size of the reserves and the returns. Some analysts estimate the size of our reserves to be about S$500 billion. GIC’s report disclosed that it has assets in excess of USD $100 billion.
Temasek’s portfolio is already close to S$200 billion and generating S$13 billion profits. Temasek and GIC stated in their annual report that the 20-year nominal return is 15% and 7.2% respectively. Based on these estimates, the Singapore Fund could easily generate an income in excess of S$25 billion. This figure is significant compared to the 2011 government budget expenditure of S$47.1 billion or GST collections of S$7.9 billion.
Such a large income can cover most of our government expenditure. Imagine a decrease in GST, lower medical and school fees and cheaper public transport. Obviously all these benefits depend on whether the estimated return of S$25 billion is correct. This makes it even more important to move the government towards full disclosure.
Singaporeans will benefit from Singapore Fund
Another benefit of the Singapore Fund is to allow CPF members to generate higher returns for their pension savings. As CPF members are already funding part of the GIC and Temasek funds through government bonds, the Singapore Fund can offer CPF members the option of investing directly into the funds thereby enjoying higher returns. However the risk is also higher but GIC and Temasek have demonstrated they can deliver consistent long term returns in excess of 7% and CPF members should be allowed to benefit from it.
Currently, CPF members are allowed to buy unit trusts. However, when the unit trust managers perform badly, they are not accountable to the CPF investor. In this case the managers of the Singapore Fund will be directly accountable to the CPF members as they are employed by the government. The Singapore Fund will have the economies of scale to offer lower management fees to CPF investors. CPF members can see where their money is invested and it will dispel the notion the government has no money to pay the CPF members when they retire. For CPF members who opt not to invest into this fund, they can remain status quo and enjoy the present rate of return from the government bonds.
Time for Singaporeans to take ownership
As we do not have full transparency on the size and returns of our reserves, we trust the government to manage the reserves and the use of the returns for the annual budget. The general perception is that the government has been hoarding the returns to save for a rainy day. As we do not have full transparency, we cannot question if it has gone too far in this policy and squeezing the people to generate more budget surpluses. Singaporeans must decide if they want to change this status quo and take ownership through Parliament and the elected President to persuade the government to disclose fully the size and returns of our reserves. A simple analogy is that if you have inherited a lot of money when you were a child, then you would have to depend on a set of trustees to manage your funds until you reach 21. After 21, you want to take ownership of your inheritance. I believe Singapore has reached the age of maturity where we want to take responsibility for managing and spending our reserves.
By Eric Tan Heng Chong