The Temasek Charter 2009 – a Post Mortem

Temasek Holdings Charter 2009 has generated considerable debate within Singapore.

Given the size and importance of Temasek, one can understand why.

In 2008, Singapore’s GDP was measured at S$257 billion, while at the last count, Temasek’s investment portfolio was valued at approximately S$130 billion.

The numbers indicate why constructive debate about Temasek’s future is meaningful for all Singaporeans.

Modification to the Charter

The 2009 Charter has made two key changes. Both the modifications are interlinked.

Firstly, the new Charter defines Temasek as “an investment company managed on commercial principles to create and deliver sustainable long-term value for our stakeholders.”

As a corollary to the above, the new Charter declines to mention any explicit role in ‘Godfathering’ any part of Singapore’s economy or capital markets.

The door remains ajar in case the Board and the Government decide active intervention by Temasek is required. This is due to ambiguity in the new Charter on the Board’s ultimate responsibility.

Is Temasek a commercial investment company responsible to stakeholders?

Is Temasek “an active value-oriented investor … in order to create and maximise shareholder value” ?

It may sound like semantics but note that stakeholders include all Singaporeans whereas the Government is Temasek’s sole shareholder..

What is Temasek’s role in the modern Singapore economy?

Consider the situation whereby the Government encourages the Temasek Board to invest in the under-construction casinos or some other investment for ‘the public good.’

Whether such an investment will result in long-term value creation for Singaporeans can be endlessly debated.

Institutional investors like Temasek make investment decisions based on a proprietary decision making process and the consequent lack of transparency may raise the hackles of the wider public.

Temasek Holdings was formed to manage the investments of the Singapore government. Until recently, it played a pivotal role in developing the city-state’s economy.

However, a lot has changed since Temasek’s incorporation in 1974.

Singapore is now a developed nation with a sophisticated economy and a capital markets structure. The government may have directed growth in the last four decades but the future now lies with the private sector.

In a recent opinion piece the Money Editor of the Straits Times asked:

“Who will grow the next SIA or Keppel? Shouldn’t this special nurturing role be part of Temasek’s role?”

The answer is the domestic and international capital markets.

If any business is commercially viable then, at a price, it will be able to raise financing for itself. Size is not an argument any longer. The international capital markets can absorb transactions of almost any size.

Today’s Singapore no longer requires Temasek to play the role of the stock and bond markets.

The author goes on to suggest that Temasek can play a part in developing an ‘eco-system’ to support industry clusters. “There have been many calls for the investment agency to earmark some of its resources for investment in smaller Singapore companies that need that extra boost to grow.”

Nothing wrong with the suggestion provided that any such investments by Temasek be made on commercial terms, in line with its charter. If Temasek wishes to create a unit to invest in unlisted small businesses or act as an incubator for others then it is free to do so.

For a long term institutional investor, there is no contradiction between acting commercially and investing in large green field projects / initiatives as long as the target investment returns are quantified.

If subsidies are required then they should come directly from the government’s operating budget and not from the savings of Singapore citizens.

Temasek is not the government’s ‘investor of the last resort’ and nor is it a charitable organisation

Recognising Singaporeans as stakeholders

Temasek is an investment vehicle that is managing money on behalf of Singaporean citizens, the ultimate beneficiaries. How do Singaporeans or the Temasek Board measure the long term performance of Temasek?

Performance measurement is critical not just to ensure that the management is held accountable for its action but also as a means to utilize the returns.

To illustrate, let’s say an individual investor makes an investment of S$100 and he expects an 11% p.a. return over 5 years. At the end of 5 years the investor determines that the return on his investment has been (say) 14% p.a.

In all likelihood the investor will take a portion of his excess returns (the equivalent of 3% p.a. for 5 years) and use it to reinvest elsewhere or for consumption purposes.

Now substitute Singapore citizens for the investor and Temasek as their investment manager. In other words, if Temasek exceeds its target investment return then as the owners of the funds Singaporeans should see the benefits.

At some point the government must create a mechanism for returning excess investment returns to their source – the Singapore taxpayer.

The Norwegian sovereign fund provides 4% of its annual return to the government each year. This not necessarily the preferred way of returning a national fund’s benefits but it illustrates the principle. It may be difficult to execute an equitable mechanism for distribution but an effort must be made.

Temasek has been entrusted with public money to invest on behalf of the nation. If it does well the benefits should accrue not just to its employees but to the nation at large. When there are investment losses the entire nation feels the pain, if only in sentiment.

In order to avoid future controversy the government will be wise to offer greater clarity to the Board about Temasek’s sole purpose, i.e. to invest profitably for the benefit of Singaporeans.

Some have cautioned against dropping the reference to Temasek’s nurturing role but business entities operate best when focused on clear long term objectives. There is too much money at stake in Temasek for there to be any confusion about possibly conflicting roles between ‘stakeholders’ and ‘shareholders.’

Being transformed into a commercial investment fund operation will reduce the temptation of a political government using Temasek as an investor of last resort.

Imagine how many proton car manufacturers can be supported by Temasek if a future government of Singapore decides that such projects are required for ‘national development purposes.’

This article was first published at The Grand Moofti Speaks