The Temasek Model

The Wall Street Journal
23 Mar 07

China recently announced what could be the world’s largest investment fund, with assets possibly totaling several hundred billion dollars. The fund draws on the model of Singapore’s Temasek Holdings, a state-owned investment company. So it’s worth asking: Is emulating Temasek such a good idea?

State-owned investment funds have gained currency because many Asian and Middle Eastern governments are sitting on huge foreign-exchange reserves, invested mostly in low-yielding U.S. Treasury bonds. South Korea and Malaysia have already created such funds; Vietnam, India and Dubai are examining the idea. The premise is that the public sector can kickstart investment outflows and invest more efficiently and productively than the private sector.

At face value, Temasek – set up in 1974 as a holding company “to hold and manage the Singapore government’s investments in companies for the long-term benefit of Singapore” – looks like a great success. Its portfolio has grown to S$129 billion ($84 billion) from S$350 million ($228 million), according to its 2006 annual review. Last year, the company reported an 18% total shareholder return, compounded annually and measured by market value, since its founding. Group net profit hit S$13 billion last year, a 71% rise from the prior year. Temasek’s average dividend yield to its shareholder – the Singapore government – stands at more than 7%, which isn’t shabby.

The trouble is, most of Temasek’s claims have to be taken on trust. Under Singapore law, Temasek isn’t required to release audited financial statements. Under CEO Ho Ching, Temasek started doing so anyway in 2004. But the statements are limited. Temasek releases only consolidated accounts, so cash flows between its subsidiary investments and the holding company aren’t detailed. Historical financials are provided only back to 2001, which means some claims – such as that 18% compounded shareholder return – can’t be independently verified.

That may work OK in Singapore, where the civil service has a reputation for clean management. But China’s bureaucracy has proved to be riddled with corruption. Party leaders are probably attracted to the Temasek model because their power rests on keeping a tight grip on information and capital. How profitably, and properly, will an opaque Chinese agency reporting to the State Council manage billions of dollars without public supervision? Transparency aside, when was the last time a government agency made better investment decisions than the private sector?

Temasek grew out of the Singapore government’s wish to distance itself from the management of its various state-created enterprises. But since Ms. Ho was brought in, she’s helped morph the company into an international investment fund, with the goal of splitting its portfolio evenly among Singapore, Asia and OECD countries. Does that mean that Temasek’s main goal has shifted from domestic industrial strategy to something more akin to private equity?

That raises other questions: How much profit should be paid back to the government, how should that money be deployed, and – most important – who decides? China might want to prop up failing state-owned enterprises, or hand out cash to its acquisition- hungry energy companies. In Singapore, Temasek pays dividends back to the Ministry of Finance, which is financed by Singapore taxpayers. Yet Temasek maintains that it’s run as a “commercial entity.”

If you’re as confused as we are, you’re not alone. So is the U.S. Securities and Exchange Commission, which we’re told has talked to Singapore about how its government-owned companies report their investments in U.S.-listed stocks. Under U.S. law, any investor that holds more than 5% of a publicly listed stock has an obligation to reveal that position. Temasek may be becoming more transparent, but its larger peer, the Government Investment Corp., isn’t. As GIC farms out more of its investments to outside fund managers, the SEC wants to ensure that GIC’s aggregate ownership of a stock is made clear.

If China adopts similar practices, it may come under similar U.S. scrutiny, especially from a Democratic Congress itching for a fight. Even in Singapore, where public dissent about Temasek’s practices is rare, an MP recently questioned a Temasek-led consortium’s $1.9 billion investment in Shin Corp., a Thai purchase that Bangkok’s military government is investigating for possible breach of foreign ownership laws.

“Perhaps it’s a good time to take stock of the lessons learnt, and to consider Temasek’s role in the management of Singapore’s reserves and how it’s carried out,” the Straits Times reported nominated MP Eunice Olsen saying. “It’s not unreasonable for a company that manages our reserves to be more forthcoming in explaining its decisions and sharing its assessment.”

Well said.

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