Wednesday, 22 October 2008

Speech on the Constitution of Republic of Singapore (Amendment) Bill: 20 October 2008

This is a significant change to our laws surrounding the use of the returns from our reserves. Indeed, it will inevitably shed more ilght on the reserves, and will allow for more accurate guesstimates on the size of the reserves. Even though the Minister has said that the funds will be used primarily on expenditures that invest for the future, this relieves the strain on our government finances and should indirectly allow for more social spending overall. That is why I am so clearly in favour of it.



Speech on the Constitution of Republic of Singapore (Amendment) Bill


Mr Siew Kum Hong (Nominated Member): Mr Deputy Speaker, Sir, thank you for allowing me to participate in this debate. As a Nominated Member, I will not be able to vote on this Constitutional Amendment. Nevertheless, I wish to express my support of this Bill.

Sir, the world is on the verge of a global recession or has possibly already entered one. Indeed, Singapore is already in a technical recession and things will almost certainly get worse before they get better. The Government has always said that it is building up the reserves for a rainy day. Well, it is going to thunderstorm over the next few quarters and Singaporeans will be expecting the Government to use the reserves to help Singaporeans. So the timing of this Constitutional Amendment could not have been better.

This Amendment will unlock more of the investment returns from our reserves to fund social expenditures than are needed today. The economy has in recent years become less reliant on direct taxes and become more reliant on indirect taxes. But with the upcoming economic troubles that Singaporeans will inevitably start running into, this means that there will be less tax revenue precisely at the time when more help is needed for struggling Singaporeans. So being able to tap on more of the returns from our reserves will go a long way in helping the Government balance its books.

The Minister has explained the mechanics of this Constitutional Amendment and I will not go into that. It suffices to say that the current formula artificially excludes capital gains from the calculation of investment returns from the reserves, and the new formula corrects this by including realised capital gains in the returns that may be used, and hence presents a much more accurate measure of these returns. Having said that, I have a few concerns that I hope the Minister can address and, perhaps, clarify.

Firstly, the new formula will not apply to Temasek Holdings’ portfolio of assets which is not included in the definition of "relevant assets" introduced by clause 3(d) of the Bill. The new formula applies only to relevant assets which will comprise only the assets managed by the GIC and the assets of MAS, less the Government's liabilities.

The Minister has stated the reasons for excluding Temasek Holdings, but this exclusion remains surprising. After all, Temasek is reported to have achieved a historical annual rate of return of 18% or so. Temasek is perceived to be similar to a private equity fund, which is prepared to make higher-risk investments than GIC. In a way, it is the higher-risk and higher-return portion of the Government's diversified portfolio. Presumably, the higher rate of return enjoyed by Temasek over GIC is at least substantially due to capital gains in Temasek’s portfolio. To exclude Temasek’s portfolio from this new formula would be to undercut the new formula and remove much of the potential benefits.

The sizes of GIC’s and Temasek’s portfolios are not publicly known. It is therefore impossible for the public, and indeed this House, to ascertain what are the effects and repercussions of excluding Temasek’s portfolio of assets. Hopefully, the Minister can elaborate on why Temasek’s portfolio is excluded from the new formula, and what impact this exclusion will have on the amount of incremental budget that would have been available to the Government. In this regard, it will also be very helpful if the Minister could shed some light on what are the Government's estimates of the fiscal effect of these changes.

Following from this exclusion of Temasek’s portfolio of assets from the new formula, it becomes possible for the Government of the day to manipulate the actual amounts that become available for use under the new formula. If the Government of the day wants to increase the returns from the reserves that are available for usage as net investment returns, it may seek to transfer assets from Temasek's portfolio into the assets under GIC's management, so that these assets then become relevant assets to which the new formula applies.

This possibility cannot be desirable. There should be more transparency, and more controls, over the allocation of reserves between the respective portfolios of Temasek and GIC, so as to prevent such situations. Of course, bringing Temasek Holdings under the umbrella of the new rule will obviate any such manipulations.

Also, on the point of transparency, the President and the Minister have to agree on the expected long-term real rates of return of our reserves at the start of each financial year, and the Minister then has to certify to the President the amounts available for spending using the agreed expected long-term real rates of return. Prof Thio has rightly noted that the President may have difficulty in determining whether the Minister's proposed rates are appropriate.

Furthermore, the Constitutional provisions do not require the rates of return, or the basis upon which they were calculated, to be published. There is, therefore, no way for Singaporeans or this House to evaluate whether the agreed rates are appropriate. One would also expect the expected long-term real rates of return to be consistent over time, but there is no way for the public to ascertain whether the agreed rates between the President and the Minister are indeed consistent over time, or whether they change radically from year to year. These are potential flaws that could weaken the strength of the system we have put in place to protect our reserves.

Still on the issue of the expected long-term real rates of return, these rates effectively set a benchmark for the performance of GIC. That must be so, because the rates effectively state the returns that we expect the assets managed by GIC to achieve over the long term. That being so, I hope the Minister can confirm whether the long-term performance of GIC will be assessed against these agreed rates, and if so, how that will be translated into a system to measure the annual performance of GIC, which admittedly will fluctuate from year to year. But if the Minister does not intend to use these agreed rates as a benchmark for measuring GIC’s performance, I hope the Minister can clarify why not.

Indeed, this further strengthens the case for including Temasek Holdings under the new formula. When the Government was queried on the performance of Temasek Holdings and GIC in the past, it has consistently maintained that it looks at their performance over the long term. This is an answer that, I dare say, has not sat well with many Singaporeans.

We now have a mechanism for assessing the long-term performance of our reserves. So, why not take advantage of this opportunity to place both Temasek and GIC within this framework, so that in future there is an objective benchmark against which the performance of these companies can be measured? This would be the perfect answer to those who are concerned with ensuring that the performance of Temasek and GIC are adequate.

There is also a question over the treatment of unrealised capital losses. The definition of "realised capital gains" includes realised capital losses. So, how will unrealised capital losses be addressed? Does GIC adopt any form of mark-to-market accounting that would capture such losses? I hope the Minister can shed some light on this.

Finally, I would like to take this opportunity to touch on the investments made by Temasek and GIC in the recent past. I do not propose to discuss the merits or otherwise of the massive investments into the financial institutions. I believe that it is perhaps too early to tell whether or not they were wise.

However, I would make this point. Now that the returns from the reserves have assumed a much more important role in the Government’s budget, the reserves have become even more relevant to the people. This Bill will more closely align the size and performance of our reserves, with the well-being of Singaporeans. Singaporeans frequently ask, "What is the point of having massive reserves that are never touched and are never used to help us?"

With this Bill and with these changes, the point should start becoming clear to the people. That being the case, Singaporeans will expect more transparency, more accountability and sustained good performance in the management of our reserves. That is because the Government’s ability to help and improve the lot of Singaporeans will become more tied to the continued strong performance of our investments.

When the investments by GIC and Temasek perform poorly in a financial year, could this affect the expected long-term real rate of return in the next financial year, which would then affect the amount of funds available to the Government to use in helping Singaporeans? It will be even more unsatisfactory to Singaporeans, if they learn of more big investments using their reserves that do badly, and are told by the Government that it does not micro-manage GIC or Temasek and that they invest for the long term.

That was the answer given when the investment into Shin Corp was made, and when the investments into the financial institutions such as UBS, Citigroup and Merrill Lynch were made, and many Singaporeans were not satisfied with that answer. We can expect them to be much more unhappy in similar cases in future, because their well-being could become much more directly affected by the performance of such investments. The Government will have to be much more conscious of this moving forward, and will have to better accommodate and address the concerns and questions of Singaporeans with regards to our reserves.

Sir, I have made some criticisms of the Bill, and have touched on some areas of concern that I hope the Minister can clarify. But there should be no mistake in whether I agree with the objectives of this Bill. I firmly do, and I endorse it even though I am not able to vote on it. With that, I support this Bill.