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Singapore sovereign wealth funds – Part 1: The transparency problem

By Benedict Chong

“A disastrous intellectual package-deal, put over us by the theoreticians of statism, is the equation of economic power with political power.” – Ayn Rand

Sovereign wealth funds (SWFs) have sparked much global interest and scrutiny in the wake of the 2007 Great Financial Crisis. Several such institutions had bought huge stakes in teetering financial institutions, injecting life-saving liquidity and pulling several major banks from the financial precipice.
Closer to home, the debate generated around Singapore’s Central provident Fund (CPF) issue had thrust Singapore’s two key SWFs, Temasek Holdings and GIC, into the spotlight once again. Even more telling is the government’s relentless effort to encourage citizens to trust that their CPF money is safely invested in credible investments by GIC, and that such investments are “risk-free”.
But shrouded in secrecy, our SWFs can hardly be accountable to their real shareholders, the citizens of Singapore, much less ask for their implicit trust. In addition, no investments are entirely “risk-free”. Risks can be limited and/or diversified, but they can never be written off altogether.
It is perhaps timely to take a look at why citizens are reluctant to trust our SWFs with their retirement funds, and more importantly, to better understand why SWFs need to be more transparent.
A recent exchange between blogger Roy Ngerng and DPM Tharman at a forum on CPF organised by the Institute of Policy Studies (IPS) only served to showcase the incredible opacity of the state’s SWFs and our CPF. There were and still are numerous things people do not know that they do not know, which they should definitely know about. As citizens of Singapore and the rightful owners of the SWFs, we ought to be ashamed as shareholders of these multi-billion dollar entities.
Before the IPS forum was conducted and prior to the defamation suit between Mr Ngerng and PM Lee, it was common knowledge that Temasek was the entity tasked with investing our CPF monies. But in its aftermath, it is now understood that Temasek has never invested a single dime from our CPF.
Instead, our CPF monies was ‘chartered’ and channelled into Special Singapore Government Securities (SGSS) which the state then proceeded to use for infrastructure developments. On hindsight, the results were mostly well and good. But do the ends justify the means?
It is inherently immoral to spend monies belonging to other individuals without their knowledge in the hope of a greater benefit, even it is to both the owner and the undertaker. For when the plan fails, it is the owner who bears all the risks.
Had the Asian economic boom not materialised, CPF assets would have been wiped clean with nothing to show. Should such risks have been taken with the hard-earned monies of the people? Had a private individual undertaken something similar, the charges would have been embezzlement and misappropriation, no matter the intention.
However, from the state’s perspective, they had the backing of a frequently amended constitution. The fact that the Singapore constitution is so easily amended points to a system of dilemma. While proponents will justify it as providing flexibility, civil rights activists will see it as a form of supreme state control. The constitution may only be a glorified piece of paper, but it limits government actions through the rule of law. An easily amended constitution gives government free reign in governance and potentially unlimited power.
During the exchange, when probed about GIC’s portfolio, DPM Tharman stated that generally, “it is the government that takes the risk” when it came to GIC investing CPF funds. To hear such a fallacious statement originating from one of the most educated and academically decorated members of the cabinet is extremely disappointing.
The buck never ends with the government but the people. This false sense of security given to citizens is a façade designed to reassure people of the safety of their CPF contributions. Ultimately, if the government takes a wrong turn, taxpayers pay the price.
Government finance their operations primarily from tax dollars. The collapse of a state linked entity would necessitate its rescue, transferring liabilities to the state and ultimately, the people. Although such entities may no longer be part of the state’s balance sheets, they are still inextricably linked (off-balance sheet assets) and the possibility of systematic risk through widespread shareholdings would entail rescue.
The collapse of European banks in the Euro area is an example whereby banking collapse led to state rescue in Greece, Portugal, Spain and Cyprus. Governments shifting unfunded liabilities from these businesses onto state balance sheets. When the state failed to finance these debts from existing income streams, they turned to the people in the form of higher taxes and even raised the forced ‘contributions’ (confiscations) from savings deposits.
As the entity now known to be solely responsible for the investment of CPF contributions belonging to Singaporeans, GIC operates with a level of transparency that any self-respecting citizen of a democracy should ask more of. Little is known about this multi-billion dollar entity besides the pro forma yearly reports it issues.
In 2008, an index measuring and rating transparency was developed by Carl Linaburg and Michael Maduell at the Sovereign Wealth Fund institute. In this Linaburg-Maduell Transparency Index, out of a maximum score of 10, Temasek received a perfect score while GIC scored 6. Unfortunately, the mere fact that we only now know that CPF assets are invested in GIC and not Temasek as initially believed demonstrates the shortfalls of this index.
SWFs are generally opaque entities and there are no transparency and accountability benchmarks to follow. But this does not mean they can be condoned and justified in operations and existence. In fact, the purported difficulty of providing due transparency should mean that their existence itself is questionable.
In a free market, the lack of transparency within a private enterprise would significantly reduce the number of willing investors. But SWFs, with state funds injected, will have no such problems due to its self-sufficiency.
When everything goes smoothly, the rewards come in the form of bonuses and state recognition, but when this house of cards collapses, it becomes a social problem. Fundamentally, it is a personal victory when investment returns are great, and a social issue when they turn negative.

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