Exposing the problems with CPF
Author’s note: This is an edited version of article I originally wrote for TOC which has not been published on my blog before today. Reading this article I surprised even myself, to see that back in 2009 I had already exposed the link between GIC’s funding and Temasek. You’ll read in the article where I say, “However a significant portion of its funding may come indirectly from the CPF which invests primarily in debt issued by MOF.”
If I wrote this today I wouldn’t put in the word “may“. That is because since 2009 GIC has confirmed what I wrote that in fact GIC’s funding comes from CPF. They say so here, “GIC, along with MAS, manages the proceeds from the Special Singapore Government Securities (SSGS) that are issued and guaranteed by the government which CPF board has invested in with the CPF monies”. I have also updated the level of assets of GIC. These are really the only parts of the article that need updating.
Everything else is as true today, so maybe back in 2009 Singaporeans just weren’t ready for the message. Fast forward to the last two years or so and thanks to the dedicated blogging and brave public rallies of Han Hui Hui and Roy Ngerng who started blogging on this in 2012, my central ideas as to transparency and how our wealth is invested have become popularised and a hot button issue. No doubt CPF will be at the forefront of every Opposition Party’s manifesto next GE.
My view on investments is that an extra 1% or 2 % return is a red herring. Investment in our only natural resource, our people, could potentially have a much higher internal rate of return, in the form of a more highly educated workforce, than that achieved by Temasek or GIC on their overseas investments.
What is a Sovereign Wealth Fund?
Sovereign Wealth Funds (SWFs) are not a new idea. According to Wikipedia, the term Sovereign Wealth Fund was first used by Andrew Rozanov in an article entitled, ‘Who holds the wealth of nations?’ in the Central Banking Journal of May 2005. A SWF may be defined as a state-owned investment fund composed of financial assets such as stocks, bonds, property, precious metals or other financial instruments.
Two types of SWFs.
1. The first, and the oldest form of SWF, is one set up to manage revenues from an exhaustible resource such as oil, or one which derives its assets from government budget surpluses.
One example of this type and possibly the oldest known is the Kuwait Investment Authority, a commodity SWF created in 1953 from oil revenues.
A more recent example of this type is the Norwegian SWF which was set up primarily to ensure that the wealth represented by Norway’s oil reserves was not squandered on current consumption but turned into financial assets which would benefit future generations.
The example we are interested in is Temasek. It was set up in 1974 to hold stakes in the various government-controlled companies, such as DBS, SIA and Singapore Technologies, that had previously been held by the Ministry of Finance. The Temasek Holdings website states that, “Our investments are funded through dividends we receive from our portfolio companies, our divestment proceeds, commercial borrowings, a maiden Yankee bond issue in 2005 and occasional asset injections from our shareholder, the Minister for Finance (Incorporated).”
2. The second type of SWF is one set up to manage a country’s excess foreign exchange reserves. GIC is probably an example of this type of SWF since it was set up in 1981 with the explicit objective of managing our foreign exchange reserves for long-term capital appreciation. I say probably, as there is very little transparency, so it is not clear whether it is also funded by capital injections from the Ministry of Finance in the same manner as Temasek. However a significant portion of its funding may come indirectly from the CPF which invests primarily in debt issued by MOF. ( see my note that this information is now updated) No information is available on the current level of assets. The website states only that the investment portfolio is in excess of US$100 billion. However various estimates have put the level of assets at between US$250 and US$330 billion. (Author’s note: I know now from the Statement of Assets and Liabilities that the Finance Minister has to include with the Budget (though I have not been able to access it this year) that the global total of financial assets owned by the Government is about $800 billion. Subtracting Temasek’s assets ($223 billion in 2014) and the Government’s deposits with MAS ($113 billion in 2014) from this leaves a figure for GIC’s assets of about $460 billion. However in the absence of even minimum levels of transparency this is still guesswork and could be completely wrong.)
Does Singapore even need a Sovereign Wealth Fund?
Singaporeans need to ask, particularly in the light of the recent investment losses, why Singapore even has a SWF let alone two.
Look at my definition for the first type and you will see that Singapore does not meet the criteria since we do not need to manage a windfall from any natural resources. If Singapore had expanded its domestic investment and consumption over the last 30 years it would have had smaller current account surpluses and thus smaller foreign exchange reserves needing management. MAS already has sufficient foreign exchange reserves necessary to manage the Singapore dollar. No second SWF was needed to fulfil this function.
Again without transparency we have no breakdown of how much government saving in the form of surpluses has contributed to both Temasek and GIC’s growth over the years. But we do know that the cumulative budget surplus over the last thirty years has been considerable.
Where have these budget surpluses come from in the first place. Well we all know how to save money. We cut back on expenditures. When a country cuts back on the absolute basics such as free education for its children then it creates a budget surplus. Let’s make no mistake here. No other First World Nation only has compulsory education up to the end of Primary school and even that only for a very short day. Even our very minimal compulsory education is not even free (although heavily subsidised). I am not advocating a full welfare state but to put it bluntly, Singaporeans have helped to pay for our enormous overseas investments by going without the brights and benefits that citizens in a democracy demand. So Singaporeans go without free universal education to secondary level, a national health insurance system and other elements of a social safety net which are characteristic of most countries at Singapore’s level of development. By making you go without the PAP builds up a huge surplus for investment overseas.
How the budget surplus should be invested: In Singaporeans
SO, the budget surplus, has been taken from the pockets of Singaporeans and represents money that you not only could have but should have. It could and should, be returned to the citizens of Singapore in the form of lower taxes, fees and charges. It could have also been used to finance much higher domestic investment in education or in health and welfare.
Their website states that Temasek has achieved an annualized return of 18% since inception though that is based on the March 2008 asset figure of S$185 billion rather than on the current valuation of S$145 billion announced by CEO Ho Ching yesterday. Investment in our only natural resource, our people, could potentially have had a much higher internal rate of return, in the form of a more highly educated workforce, than that achieved by Temasek or GIC on their overseas investments.
Instead of the Government investing our money to pick winners through an industrial strategy there could have been greater incentives for investment and R&D in the private sector which might have led to faster productivity growth and higher levels of real incomes. And even if GIC has not been funded directly by the MOF, the growth of our foreign exchange reserves has come about through chronic external surpluses which represent domestic under-consumption and under-investment.
As a final insult, CEO Ho Ching announced on July 29th 2009 at the Institute of Policy Studies that Temasek was thinking of allowing Singaporeans to co-invest alongside Temasek sometime in the next ten years. How kind of her. I thought we had already invested as outlined above. The only positive side of this news is that it would presumably force Temasek to be much more transparent about its investment process and corporate governance. In any case any personal financial adviser would not advise an investment in a company without sufficient transparency that required due diligence.
The next step: issue shares to Singaporeans
As we all know, calls on the government for accountability and transparency in its sovereign wealth funds is not new. However; I would go one step further! Many of you know that I gave a speech at the Foreign Correspondents Association lunch on the 2 July 2009. In answer to a question put to me after the lunch I went on record as saying that Singaporeans should be given a direct stake in our SWFs. One way to do this is through the privatization and listing of Temasek and the issuance of shares to Singapore citizens. Another way is through the explicit linkage of part of the value of these assets to the welfare of Singaporeans, as is done in Norway through the Pension Fund.
To counter one possible objection that our national “crown jewels” could end up being bought by foreigners the government could retain a golden share which would prevent this happening to Temasek’s portfolio of domestic GLCs. Longer term there is no reason for Singapore to continue to run large budget surpluses over the course of an economic cycle.
In conclusion whilst I will not stop any time soon on calling on our government for greater transparency and accountability into how it manages our money, I would urge us to look at credible new proposals such as mine.
” I have always said that WP can consult with me anytime”.
So why don’t they? Are you persona non grata with them?
They badly need an economist or statistician in their midst. It’s a pity that with 7 seats in Parliament all they can talk about are trivial municipal issues. I bet that none of the WP MPs even know that our true budget surpluses every year are of the order of $20 to $30 billion.
No I don’t think I am persona non grata. They have their own style. Maybe you could best address this question to them on their pages and ask them why they don’t take up my offer to consult. I did send WP a letter asking them to join in a joint exercise in finding common Manifesto points for all the Opposition parties. SDP and SPP responded but WP and NSP did not.
Of course WP and NSP wouldn’t respond. Only parties actually interested in changing the system would respond.
I am surprised by your comment “They badly need an economist or statistician in their midst”
Do you really need an economist, statistician, financial, accounting, banking background to ask to be paid higher interest on CPF & have minimum wages’?
Roy Ngerng is not from economic, statistician, financial, accounting, banking background, yet he dare to ask (without parliamentary privileges) a series of tough probing questions.
At one time, Goh Meng Seng, an economist graduate from NUS stood as a candidate under WP ticket. EVEN TODAY THERE ARE 3 PERSON WITH FINANCIAL BACKGROUND IN WP.
Any secondary educated person can also understand higher interest will have higher return.
The faster people acknowledge WP is a “B” party acting as an estate keeper, it will be better off for the other true opposition parties Singapore .
Why don’t you offer your expertise to the Worker’s Party. They don’t have any economists and seem unable or unwilling to ask any questions relating to finance and economics in Parliament.
By publishing publicly I make my expertise available to everyone. Here you can see that I was publishing these issues back in 2009. A lot of what I wrote has trickled down into the mainstream.
I see that before I started writing most Opposition manifestos worked around this idea that in order to give the people a better deal, money needed to be re- distributed. So commonly you see Opposition parties with this idea that cuts have to be made in one place to spend money in another. STypically you see calls for cuts to be made in defence so that the savings can be spent on health or education, for example. Or the idea that taxes have to go up dramatically in order to have safety nets. I hope I have introduced the understanding that we are a rich nation but that we live in Austerity and that we have surpluses that could and should be used to invest in the people. We have immorally huge surpluses and we can re-invest them to give our people a share of the wealth without endangering our reserves. Actually investment in the people gives a bigger boost to the economy and a better return. Here I explain my idea that Temasek shares should be distributed and you’ll see in the last couple of years that it is common to question the need for a SWF.
I also introduced this idea that it is a mistake to believe that clamping down on freedom somehow makes for a stable and therefore more prosperous society. It doesn’t. The opposite is true. Many SIngaporeans discuss now the relationship between democrcay and prosperity. Other ideas I introduced first were the need to drill down the GDP figures quoted by the PAP. I pointed out that the figures only looked good until you compare them with another city or until you look at GDP per hour worked. Even the PAP addressed my statements about our abysmal productivity which I raised again in our white paper on population. My idea about having the freehold of HDB is also taking off.
These ideas and many others of mine can be seen in the manifestos of several parties not just RP and including PAP. For example much of Singapore First’s Manifesto is re-hashed RP economic ideas. So they are listening. I have always said that WP can consult with me anytime.