Below is the transcript of the Parliamentary exchange between Nominated MP, Ms Eunice Olsen, and Senior Minister of State for National Development, Ms Grace Fu. From the Singapore Parliament website.
Also, read Singapore Law Watch's article: Can town councils invest in structured products?
INVESTMENTS BY TOWN COUNCILS
Ms Eunice Elizabeth Olsen asked the Minister for National Development (a) what are the investment guidelines that Town Councils use, especially with regard to complex and risky financial instruments; (b) whether the Ministry will further cap the proportion of Town Council investments that are allowed to be made in non-government securities and bonds; and (c) whether the Ministry will consider requiring Town Councils to publish a breakdown of the types of investments which they make.
The Senior Minister of State for National Development (Ms Grace Fu Hai Yien) (for the Minister for National Development): Mr Speaker, Sir, before I discuss the investment guidelines that Ms Olsen has asked for, we should first understand the nature of the funds for which the investment guidelines were adopted for.
Town Councils (TCs) maintain two funds: an operating fund for short-term expenditure needs, and a sinking fund to cater to the long-term maintenance expenditure needs of the common property in HDB estates.
Long-term or cyclical expenditure needs generally involves more expensive works. There are lifts, pumps and pipes to be replaced, roofs to be re-roofed and repairs and redecorations to blocks to be done. TCs also use their sinking funds to fund their co-payment of lift upgrading, so that residents pay an even smaller percentage of the total lift upgrading cost.
The funding for these large expenditures is collected over time as part of the monthly service and conservancy charges. This way, residents do not have to fork out a large sum every time one of these works needs to be done. The larger the number of flats under a TC's management, the larger the funds need to be accumulated to cater to such works. The Town Councils Act governs the use of sinking funds. In other words, the Town Council could not just use sinking funds for any other purpose but what has been prescribed in the Town Councils Act.
To ensure that the Town Council funds are not eroded by inflation as they are being accumulated, TCs need to invest their funds prudently. Therefore, MND has guidelines in the Town Councils Financial Rules that regulate what TCs can invest in.
TCs are allowed to invest funds that are not required for immediate use in Singapore denominated fixed deposits, stocks, funds and securities. Investments in stocks, funds or securities must be on the advice of a qualified person. Examples of qualified persons are an investment adviser holding a licence under the Securities and Futures Act and an approved bank or a merchant bank approved as a financial institution under the Monetary Authority of Singapore Act.
MND has imposed an investment cap of 35% on TCs' investments in stocks, funds or securities that are not issued by the Singapore Government or any statutory board, or not guaranteed by the Singapore Government. In other words, of the total funds that they can invest in, only 35% can invest in such stocks, funds or securities that are not issued by the Singapore Government, statutory board or guaranteed by the Singapore Government. The investment guidelines for TCs seek to achieve an optimal balance between reasonable returns and financial prudence.
Based on the TCs' financial statements for FY2007, which ended 31st March 2008, and additional investment details recently submitted to MND, about $12 million, or about 0.6% of the TCs' total funds available for investment are invested in Lehman Minibond notes and other credit-linked notes for which early redemption has been triggered. The latter refers to DBS High Notes 5, Merrill Lynch's Jubilee Series 3 and Pinnacle Notes Series 9 and 10. Of the 16 TCs, only two have invested some of their funds in the said products. Holland Bukit-Panjang and Pasir Ris-Punggol TCs have invested about 6.7% and 2.6% of their total funds available for investment in them.
Within the investment guidelines that MND has put in place, TCs are in the best position to determine the balance that suits their respective financial requirement and risk tolerance. It is neither practical nor desirable for MND to be overly prescriptive. MND has no intention to amend the investment guidelines.
TCs' financial statements are audited and published annually. These financial statements are prepared in accordance with the Financial Reporting Standards, which prescribe disclosure requirements for investments. In addition, the Town Councils Financial Rules require that the type of investments placed by a fund manager appointed by the TC and the market value of such investments be disclosed in the annual accounts. MND will continue to monitor closely for compliance with its financial guidelines.
Ms Eunice Elizabeth Olsen: I would like to thank the Senior Minister of State (SMS). I have three supplementary questions for her. First, town councils have invested in structured products. What is the investment process like? Were the town councils or the people in charge of approving these investments aware of the risks involved which included losing the entire sum? Second, my question is whether the intent for allowing town councils to invest is to go for higher returns or to seek stable returns. Does the SMS think there is a need for town council to invest in risky and complex financial products since the higher the return, the higher the risk? Can I ask what is the value of those investments now?
Ms Grace Fu Hai Yien: I would like to take the third question first, ie, whether we should allow town councils to take higher risk or lower risk, or whether we should prescribe generally a risk tolerance. I think if you go back to the objective of setting up town councils some 20 years ago, the idea was really to devolve estate management functions to the local MP and, with that, it comes along the responsibility and accountability for all the decisions relating to that, including decisions like what are the charges that you should impose, how do you intend to run the town council functions, how you should provide for the sinking fund needs over the long run. We cannot cut out one part for the other because if you do that, it will be making the town councils impossible to operate. The town councils will have to decide for themselves what are the kind of charges they like to impose and how do they intend to meet their long-term needs with the sinking funds that they have collected. Some town councils perhaps would prefer to charge a higher town council S&C charges so that they can put their savings in very, very safe investments. If they have put it in a fixed deposit with the bank, they would have earned 1% over the last few years, for example, on an average. With the inflation of 6% to 7% that we have witnessed in the last one year, that leaves a very significant inflationary gap that the town councils would have to meet over the long run. The town councils would then have to decide for themselves how do they want to meet this need. Some town councils prefer to take the other extreme position. They prefer to collect very low S&C charges and perhaps leave the decision about sinking fund to a much later time. That is something that they could decide. Like some private estates, they may have to, when the time comes, collect from their residents a significant amount when they want to undertake major repair works. Some town councils decide to take a position somewhere in between, collect an average S&C charges, invest their sinking funds in the middle range, in terms of risky assets, so that they can try to mitigate the inflationary gap that they are seeing such that they are able to meet the needs in the long run, at the same time not imposing significant pressure on their residents. So the town councils would have to make that decision and it is something that they will have to be accountable for to their residents over the long run. It is for that precise reason that our town councils do require residents to be appointed to the town councils. They will be in a position there to scrutinise the accounts, to comment on the performance and basically to look over the funds that they have been paying to the town councils.
Are the town councils aware of the risks? I think that is the answer that we should ask the town councils and it is for each of the residents to pose that question to their town council. First of all, we have already mentioned in the reply that the product has to be advised accordingly by the regulator, the person with the licence, and also that most of the town councils would engage the necessary town councillors with the experience to be on the council to advise them.
On the value of the investments, I think that is something that is out in the open. The few instruments that I have listed earlier on, these are instruments that already have an event triggering its default. So in that sense, I think it is left to the trustee to decide what is the ultimate redemption value. I do not think I have any more information to give at this point in time.