Lim Chih Yang / Writer
The on-going financial crisis seems to claim victims in all shape and sizes, from all walks of life and from even the most unlikely of organizations.
Even as the various banks and financial institutions rush to contain the public anger over the failing of Lehman Brothers’ product, Channel NewsAsia (CNA) reported on 28 October 2008 that PAP Town Councils had invested in the same discredited products.
CNA’s report only says that, “Town councils said only a small percentage of their total investments were spent on those affected products.”
It seems the unlikeliest of union when one considers Town Councils’ sinking funds and a failed product from a major investment bank on Wall Street. Is this another black mark in the face of globalization? Not likely. It would nevertheless be prudent that as responsible stakeholders of Singapore, we would ask ourselves pertinent questions on the use of PAP Town Council sinking fund to invest in Lehman Brothers product.
For the uninitiated, it is perfectly legitimate that all Town Council manage sinking fund. This is common for condominium managements, for example, where they manage sinking funds to repair damages to the estate’s common areas or maintaining the elevators. In fact, from the report, it seems that the fourteen PAP Town Councils each manages between $30 million to $150 million in sinking funds. Another report back in 2007 put the amount managed by all the sixteen town councils at about $1 billion. Town Council sinking funds was previously governed by the Trustees Acts. Current guidelines stipulate that each town council can use 65 per cent of the funds to invest in government bonds, while up to 35 per cent can be invested in other financial instruments like corporate bonds and equities. Obviously, corporate bonds and equities carry a much higher risk of default than government bonds.
Re-assuring the public
When the report was first released by Channel NewsAsia, the various PAP Town Councils sought to reassure the public that despite the losses in Lehman Brothers products, the investments are minimal.
Dr Teo Ho Pin, Coordinating Chairman of the 14 PAP Town Councils and Mayor of North West District said:
"Maybe a couple of percentage out of the total investment portfolio (were used in those investments), so the exposure will not affect the overall investment portfolio or the sinking funds per se. There’s definitely no fear that any of the PAP town councils’ sinking funds will be wiped out. All the supporting PAP town councils’ sinking funds are in safe hands."
In fact words like “conservative”, “err on the side of caution”, “guarantees the principal amount”…rattled off the mouth of the various PAP Town Councils management. Jurong Town Council had in fact stated that they did not invest in any of the failed products but had invested about 18% of its sinking fund of $85million into riskier products.
"The position that we’ve taken is really to be very cautious with our investments because we’re very clear that these are public funds, and therefore we decided to err on the side of being conservative in our investment policy. The public do not have to worry... there will not be enough funds in order to take care of their needs.” - Halimah Yacob, Jurong Town Council.
Perhaps I may be old fashion but I had always thought that Town Councils collect conservancy charges for the purpose of maintaining the estates.
When did these Town Councils start operating as fund managers?
Big exposure - to risks
Of bigger concerns are the losses that the Town Councils’ may have incurred in this current financial fallout. Words do not mean much in terms of assurance, not when even behemoths like Lehman Brothers could go bankrupt and file for chapter 11 bankruptcy protection and AIG was nearly brought to its knees if not for the US $85 billion bailout by the Fed.
Assuming that a median sinking fund of $60 million is managed by each of the fourteen PAP Town Council, this will work out to a whopping $840 million in total managed by all the fourteen PAP Town Council. Now given that the guidelines stipulate that only a maximum of 35 per cent of the sinking fund could be invested in corporate bonds and equities, let us assume that only 5% of the sinking fund is used to invest in relatively riskier investment assets like corporate bonds and equities. That will still work out to a whopping $42 million that are exposed to risky assets.
In a bear market that we are facing now, losses of more than 50% in risky assets are not unheard of. Is our sinking fund held by the Town Councils safe from the ravages of the financial crisis?
Town Councils must account to constituents
In the interest of public transparency and accountability, should not the PAP Town Councils give a detailed account to their constituents on the use of the sinking funds and its investment returns – or losses? In fact, given that the sinking funds are public funds, should not the PAP Town Councils provide regular updates to their constituents on their stewardship over the funds?
Words can be evasive, divisive and worse, intrusive. While it is commendable that the PAP Town Councils had sought to allay the concern that the financial investment losses in Lehman Brothers products may lead to bankruptcies of the funds, nothing can be more re-assuring to their constituents than complete and transparent accountability to the public.
A 5% loss in $100 is no more than $5, but a 5% loss in $840 million works out to $42 million, certainly not small change.
Interestingly, Potong Pasir MP Chiam See Tong was more forthcoming with his Town Council’s accounts. He was quoted as saying that of the $6 million in sinking fund held by Potong Pasir Town Council, $3 million is spent on government bonds like LTA bonds, while the other half is in the fixed deposit.
The PAP Town Councils should take a leaf from Mr Chiam See Tong’s approach to accountability and provide real figures of their investment management. Only when a thorough report of the sinking funds’ performance with up-to-date real figures can the public’s concern be put to rest.