Singapore’s Temasek Hits Hard Going

The world’s markets may have been booming in unison, at least until the last week, but these are not easy times for Singapore’s giant state investor, Temasek. On August 2 it rather sheepishly announced that despite buoyant global economic conditions, profit for the year to March 2007 had fallen by 29 percent.

Chief executive Ho Ching, the wife of Prime Minister Lee Hsien Loong, and board chairman (ex-foreign minister) S Dhanabalan were both absent from the press conference called to deliver the news, which dents Temasek’s reputation under Ho Ching’s stewardship for being a smart, innovative and profit-oriented group, not the safety-first bureaucracy of the past.

Meanwhile Temasek has awakened to the fact that there is rising opposition in many countries to the control or major stakes that state-controlled Sovereign Wealth Funds are taking in foreign private companies. And Temasek has been going overseas with a vengeance, investing across a wide swathe of the planet from Australia to Russia to the UK. In fact, concern about the state investment arm itself might be rather greater if it were more widely realized that it controls a lot more than if commonly realized.

This opposition has been highlighted not just by critics in Thailand who resented the acquisition from former Prime Minister Thaksin Shinawatra of effective control (a 42 percent stake) of the major telecoms provider, Shin Corp, or the growing worries in Australia, where Singapore state entities will soon own US$25 billion (S$40 billion) worth of infrastructure assets. Such concerns have been voiced by a normally open Germany as well as by the French. Even the IMF and the US Treasury have been making negative noises just when lots of countries say they want to follow the Singapore model.

Such responses may be partly driven by nationalism. But they are also driven by lack of transparency on the part of the state agencies buying up the assets and the fact that much of the world, starting with Margaret Thatcher’s Britain, has spent 25 years privatizing, for good or ill, national state assets. So it goes against the grain for critics now to accept, in the name of open markets, foreign state entities acquiring the same assets.

This particularly applies to those states which do not offer reciprocity – clearly the case in Singapore where the government has never given any sign of willingness to give up effective control of most of the republic’s major companies. The government also has been known to use Temasek as an instrument of state policy as well as an investment vehicle – and China would likely do the same.

However, Temasek may deserve credit for creating an ownership structure which to some extent appears to disperse its ownership through separate vehicles and create a classic ownership pyramid which enables it to maximize control of assets while diversifying its investment portfolio. (Although it may in some cases create superfluous layers of management and high-paying jobs).

Temasek itself is not exactly a model of transparency. It is not listed and as an exempt private company under Singapore law, it is not required to publish audited accounts. What it does publish are figures drawn from summaries of audited accounts of its constituent companies, some of which are listed. Thus the published figures could be considered the truth but perhaps not the whole truth.

In the case of the 2006-2007 results, an obvious part of the fall in profits has been attributed to a write-down in the value of its Shin Corp investment following the collapse of its share price as a result of the ouster of Thaksin by the Thai military and allegations that the transaction was illegal. The size of the write-down was not stated. However the exceptional items showed a loss of S$830 million on “share of results of associated companies and partnerships compared with a S$1,163 million gain the previous year.”

However, the Shin disaster appears not to have been the only reason for the profit fall. Although market values were rising almost everywhere, there was a sharp fall in profit on sale of investments. Profit before exceptional items also fell – from S$14.9 billion to S$13.6. Given that publicly listed subsidiaries and major associates such as CapitaLand (40 percent) DBS Holdings (28 percent), Neptune Orient Line (66 percent) Singapore Telecom (55 percent) and Singapore Airlines (55 percent) Chartered Semiconductor (60 percent), SembCorp Industries (50 percent), Keppel Corp (31 percent) were mostly doing well, and unlisted ones such as Singapore Power and PSA International (whose ports span the world) must have been benefiting from the global economy. So there may be some less well known sub-par performers in the portfolio.

Temasek under Ho Ching, once seen as a regular bureaucrat, has become increasingly adventurous perhaps, some suggest, to the point of being carried away by the bullish attitudes of the investment bankers who flock to give advice or sell participation in some private equity fund. Temasek has long been an investor in private equity and buyout firms. Last year it set up a special-purpose vehicle named Astrea to hold its investments in no less than 45 such funds. Astrea then raised US$810 in securitized debt.

What is for sure is that in the face of abundant global liquidity Temasek has been in no hurry to rein in the growth of its balance sheet. Net cash holdings declined last year by S$2.3 billion as outflow on new investment hit S$23 billion.

Temasek has been spreading its wings with investments in Chinese state banks and ventures into Russia, Vietnam etc. The proportion of investments in rich and relatively slow-growing Singapore itself fell to 38 percent from 44 percent and is sure to continue falling. However, although Temasek’s long-term returns over time, as reported, look satisfactory enough measured against both Singapore and global benchmarks, those from its more adventurous recent years have yet to face a bear market. It was a relative latecomer to Asian markets, its big investments beginning in 2003 rather than in the immediate aftermath of the Asian financial crisis when asset prices were at their nadir. Since then almost all Asian markets have been on a sharp uptrend so the quality of investment decisions has yet to be tested.

Most recently Temasek has been stepping up investments in banking, both in China and most recently in the UK – a stake in Barclays and an increase in its Standard Chartered holding. But critics say that bull market peaks are the worst of times to be buying banks anywhere, least of all when (like Barclays) they are bidding top dollar to finance a takeover. Even before these latest buys, Temasek’s holding in financial services comprised 38 percent of its S$164 billion portfolio, with stakes in several Chinese banks as well as Russian, Indian Indonesian, Korean and other ones. But only in Indonesia does it actually control a bank – Bank Danamon. Indeed there is grumbling in Indonesia not so much about that but about Singapore’s 41 percent stake in Indosat, its strategically vital communications company.

It has also, perhaps a little late, been increasing its China portfolio, mainly accounting for the rise from 19 percent to 24 percent in its North Asia ex-Japan portfolio percentage.

On the basis of its accounts it appears that Temasek’s total ownership of foreign equity assets is around S$100 billion (US$65 billion). However, the actual amount it effectively controls is very much greater. Without more details on its accounting, it is not possible to put a number on this. However, it should be noted that most of the assets in Australia said by the Australian media now to be owned by Singapore state companies are accounted for not directly by Temasek but by its subsidiaries, notably wholly-owned Singapore Power and Singapore Telecom and in prime big city real estate via Australand.

Some associates have been expanding overseas even faster. CapitalLand (40 percent owned) has more assets outside than inside Singapore, moving heavily into China and the Middle East as well as Malaysia. It has further leveraged its presence by sponsoring a whole series of real estate investment trusts including one in Malaysia and one with geographically diverse serviced apartment assets.

DBS (28 percent owned) is another with diversification which runs parallel to that of Temasek itself.

And there is very indication that this kind of process will continue with Singapore companies being partly privatized, then launching into their own foreign expansions. In February this year, Temasek packaged local gas distributor City Gas Trust and most of desalinated water supplier SingSpring Trust into an infrastructure trust called City Spring which was floated on the Singapore stock exchange with a market capitalization of over S$600 million. Doubtless it will not be long before it expands overseas.

Likewise, Singapore’s three power generating companies, Tuas Power, PowerSeraya and Sanoko Power, all currently 100 percent owned by Temasek, are to be sold down, providing cash for Temasek but enabling the companies to go in search of opportunities outside Singapore.

However, the Singapore case illustrates how difficult it is going to be for major holders of excess foreign exchange to shift from bonds to stocks and real assets. Singapore has been at this for a long time, yet even assuming that the Temasek group on a generous estimate controls US$100 billion of foreign assets, this number is still dwarfed by Singapore’s official foreign assets, which are mostly invested in US$143 billion of debt securities. And Singapore’s foreign reserves are tiny compared with China’s US$1.3 trillion and Japan’s $900 billion.

It all makes sense – up to a point. That point for Singaporeans is that their huge forced savings are not merely depriving them of consumption opportunities, they are placing investment of vast public wealth in a tiny number of hands, the very same hands which control the political system, the bureaucracy, the army, etc.

The point for foreigners is how far to allow Singapore to practice free markets overseas but not at home. And if times get tough, for whatever reason, assets owned by foreign states may be more vulnerable than most to a nationalist backlash of the sort seen in Thailand.

Diversification of assets through multiple sub-owners for sure limits risks and reduces political exposure. However it can become difficult and costly to manage, and ultimately carry more political risk than investing either through foreign third-party funds or – best of all – distributing the underlying shares to their real owners – the people of Singapore.