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Motion on Temasek Charter and EISC'S Recommendations on Government in Business By Deputy Prime Minister and Minister for Finance Mr Lee Hsien Loong - Speaking Points for DPM'S Round-up Speech at The Parliament, 28 Aug 2002

29 Aug 2002

Notice Paper No. 140 of 2002


Mr Leong Horn Kee (Member for Bishan-Toa Payoh GRC)
Mr Inderjit Singh (Member for Ang Mo Kio GRC):

NEW CHARTER OF GOVERNMENT-LINKED COMPANIES: That this House, taking into account the Report of the Entrepreneurship and Internationalisation Sub-Committee (EISC) of the Economic Review Committee and the press release by Temasek Holdings (Pte) Ltd on the new charter of the Government-linked companies (GLCs) and in view of the concerns of the private sector regarding GLCs, urges the Government to implement the recommendations of the EISC which define the new roles and positioning of the Government and GLCs in business and, in so doing, support the growth of private enterprise and entrepreneurship in Singapore.


The story of how GLCs came about has been well told by the various MPs who have spoken. So, no need to repeat the historical background.

The value added of Temasek companies account for some 13% of Singapore's GDP. If government had not got involved in business, many of these companies would not exist today.

Accounting for Government's 9% share of GDP, the non-GLC private sector (local companies and MNCs) makes up 78% of the GDP.

Our objective is to expand the overall pie. That means expanding the productive part of the economy, i.e. the sum of both the GLCs and non-GLCs, while keeping the government share as small as possible.

Question is: do GLCs have a contribution to make in this process? Will growing the GLCs be at the expense of the non-GLCs? More important, will growing GLCs be at the expense of the overall economy? Those are the questions.

Temasek Charter

Everyone agrees that in our earlier phase of economic development, GLCs made a contribution. But now that the GLCs have grown, what should we do with them? Should the government exit from all the businesses? If so, how?

Hence long debate in EISC and within government on role of the govern-ment as shareholder, and what the govern-ment hopes the GLCs will achieve. The result has been the Temasek Charter.

The Charter sets out Temasek's role - to nurture the companies with the potential to grow into successful international businesses. It defines the types of businesses Temasek will hold and those that Temasek will divest. Temasek will have no interest in companies that will only serve the domestic market, unless they are strategic, e.g. broadcasting or the electricity grid.

Do GLCs have a role?

The GLCs are important players in the Singa-pore economy. There are few non-GLCs with the size, organisational strength, and technological depth of SingTel, SIA, Singapore Technologies, PSA. The closest would be the banks - UOB and OCBC, and the property companies, e.g. CDL. We can argue whether had the Govern-ment not built up these companies, more non-Govern-ment private enterprise would have grown, and the Singa-pore economy would have been more dynamic and entrepreneurial. But the Govern-ment decided on a strategy, and it worked.

Now that the GLCs have been created, the Singa-pore Government has a responsibility to ensure they are well run, grow their businesses, and contribute to the economy. This may mean tougher competition for the non-GLCs. But so long as the competition is fair, that is good for the economy, and for Singa-poreans.

The policy question is whether the GLCs should continue to go into new businesses.Leong Horn Keewants to curb the proliferation of GLCs. He asked that no new GLC be formed without the explicit consent of MOF.

Leong Horn Kee's question has to be addressed at two levels. For the listed companies, the decision to enter into new businesses is for the respective board of directors to take. The board must act in the interests of all shareholders, including the minority shareholders. We cannot forbid a listed company from doing certain activities, just because the Government happens to own shares in it. It is wrong both legally, and also from a policy point of view. GLCs, especially listed-GLCs, must operate commercially. That does not mean that DBS should go into manufacturing chips, or PSA should start an airline business. The decisions must make business sense, and fit the companies' business strategy. But there is no original sin attached to being in the GLC family, which taints a GLC from birth and prevents it from doing certain types of business.

As for investments by Temasek itself, we are in a different situation from the early days. There is now less need, and fewer opportunities, for the Govern-ment to go into a new business on its own. We are not likely to start a new airline, or another bank. But we cannot completely rule out the possibility that the Govern-ment may need to invest directly in new businesses, which are exceptionally risky or have long gestation periods, where the private sector is not willing to go. Usually if the private sector does not want to go in, we should conclude that the business fails the market test, and should not be launched at all. But occasionally the Govern-ment may need to impose our judgement, and override the verdict of the market. E.g. the Jurong Island project was such a business judgment, although in that case it was done through JTC, rather than by forming a new company. Hence the clause in Temasek's Charter, to allow Temasek, from time to time, to invest in new businesses, in order to nurture new industry clusters in Singa-pore.

There will be other occasions when Temasek will need to go in. On the one hand, Leong Horn Kee wants the government to stop the formation of new GLCs. On the other, he wants GLCs to help the SMEs by co-investing in them. Indeed Temasek will do this, where it makes business sense. But if we did this, as Indranee pointed out, these SMEs would become GLCs!

Divestment of GLCs

Divestment of GLCs is a hot issue with MPs. The government will divest those that do not have the potential for international growth or serve no strategic purpose - these are mostly the smaller ones. Michael Fam's report in 1987 recommended divesting 41 GLCs over 10 years. Leong Horn Kee said that only two thirds of these have been divested completely or partially. True, but we have also divested some 30 GLCs not listed in the Michael Fam report. Overall, some 60 Temasek companies have been completely or partially divested since the mid-80s, more than the Michael Fam report recommended.

Temasek will continue to consolidate and rationalise its stable of companies. It will divest those that are no longer relevant to its mission. But this must be at the right time, at a fair price, in a way which does not unsettle the market, and which ensures that the GLCs continue to be properly managed after divestment.

Inderjit Singh and Ho Geok Choo urged the government to consider MBOs as a method of divestment. An MBO is certainly one ofthe methods the government will consider, and has used to divest companies. But as Sin Boon Ann pointed out, information is not symmetrical in an MBO. Management knows more about the company than the board or the shareholders. So it is not so simple to ensure that the shareholders receive full and fair value for their shares in an MBO. But we do not entirely rule out MBOs either. Each case will be evaluated on its merits.

At Any Price?

There is no reason for the govern-ment to sell off GLCs below their fair value, regardless of market conditions, by a specific deadline. We do not need to raise revenue through asset sales. If we sold them off in a hurry, MPs would doubtless criticise us for not safeguarding the interest of Singa-poreans, and rightly so.

-It would also be unwise to publish a list of companies that will be divested within a fixed timeframe. The act itself would depress values, alarm customers, demoralise employees, and cause viable businesses to run to seed.

To Improve Performance?

Some have argued that since GLCs are not doing well, we should divest them in order to improve their performance. We do not agree. Firstly, most GLCs are performing well. Over the long term, GLCs have amply returned the Government's initial investment. For example, DBS and SIA were transferred to Temasek in 1975. DBS was then valued at $49m, and SIA at $91m. Today, Temasek's share of DBS' and SIA's market capitalisation is $2.3b and $8.2b respectively.

In the nature of things, not all GLCs do well all the time. Where GLCs are not doing well, the management has to sort out the problems. If necessary, the board may need to make management changes, or the shareholders including Temasek may need to make board changes. Keeping businesses in good health requires tough decisions and clear mindedness, and Temasek has to do that.

Secondly, I agree with Ho Geok Choo that most fund managers do not take an active role in building up the companies they hold shares in. They buy the shares as portfolio investments, and sell the shares when they see the company doing badly, or even merely when the shares are underperforming. Therefore selling GLCs off to some fund manager or new shareholder will not magically solve their problems. The way to upgrade a business is to assemble an experienced board, build a strong and cohesive management team, and do the hard work of improving systems, changing management cultures, developing new capabilities. Having the Singa-pore Govern-ment as shareholder does not stop companies from doing this, provided the govern-ment takes a rigorous commercial approach, and entrusts the task to a capable team.

Sell off Anyway?

Others have argued that the govern-ment should simply divest all its GLCs regardless, because as a matter of principle, the govern-ment should not own companies. We do not agree. As Raymond Lim highlighted, despite the recommendation of World Bank and IMF to privatise rapidly, the benefits of privatisation is not a given, especially if not done under the right conditions. For many of these companies, the govern-ment is the major shareholder. If we are to let the companies go, then, as Koo Tsai Kee says, to whom? Which private companies or individuals are in a position to take over SingTel, SIA, or PSA? Not just financially, but also in terms of management oversight? Can we really just distribute the shares to Singa-poreans, and expect the companies to naturally prosper?

Looking at the success stories around the world, great companies are built by committed, long term shareholders holding major or significant stakes. This is especially the experience in Asia. But even in the US, after Enron it is not so clear that having a diversified shareholding and no major shareholder effectively in charge is a good formula. A major shareholder has a substantial amount of his own money at stake. He will take the trouble find the right people to run the businesses, set the directions, and make sure that the business is run properly. Without a major active shareholder, it is much harder for many small shareholders to get together and do this, as Raymond Lim pointed out. Hence, the government has the responsibility to ensure good governance in GLCs.

In Singa-pore, there are few local individuals/companies with the resources and the capability to buy over and drive the performance of the large GLCs. In Hong Kong, tycoons like Li Kashing and Robert Kuok own and run major companies. Perhaps over time such people will emerge in Singa-pore. But remember: a Singa-pore in which the commanding heights of the economy are controlled by powerful, private shareholders will be quite different from one where major companies are professionally-run GLCs.

Not Frozen in Place

Reiterate - this does not mean that the status quo is frozen, and that the Govern-ment will not divest GLCs. We will restructure the GLCs, we will sell off pieces which do not fit. We will consider mergers and acquisitions which make business and commercial sense. That is the way to make the most of a valuable asset, and to realise the full value of the GLCs that we have built up.

Crowding Out

Inderjit Singh complains that GLCs are entering businesses which private sector are fully capable of doing.

Assurance - no intention of doing so. e.g. the famous roast duck company again recited by Inderjit Singh - this was acquired incidentally as part of a larger acquisition in 1991, and divested in 1994 purely as a business decision! Temasek Charter is oriented towards companies which have the potential to grow internationally, or are strategic to Singa-pore.

EISC have proposed a renovation industry. HDB deals with Hdbay at arms length, but the renovation industry still questions whether HDB needed to create Hdbay at all. The renovation industry could be right, but far better to have civil servants who have the drive and enterprise to start new activities, than to have civil servants who do nothing. Now that Hdbay is up and running, HDB will consider divesting its interest in Hdbay.

Leong Horn Kee says bliss to a businessman is a business world in Singapore without GLCs because there would be less competition and more room for the local businessman to build up his business. He is sadly mistaken. If they were not competing against GLCs, they would still be competing against powerful MNCs, or large local companies in private hands. Life would not be easier. As Halimah Yaacob pointed out, in many privately developed shopping malls Fairprice has not got in, but the developer has brought in private companies, not SMEs. And if we do succeed in reducing competition, which is what Leong Horn Kee is really asking for, this would result in a less competitive local private sector, and fewer choices for consumers. Far better to have keen competition in Singapore to help build strong SMEs which are internationally competitive.

Unfair Competition

Related to crowding out is the issue of unfair competition. Different senses of "unfair" - unfair market practices, inside track, cheap financing, size.

Unfair Market Practices

On unfair market practices, e.g. cartels, predatory pricing, abuse of dominance, the Government does not condone these, whether by GLCs or private companies. MTI intends to enact a competition law. All companies, including GLCs, will be subject to this competition law. Some sensitive activities will be exempted from the law, as in all regimes around the world. Enterprises which feel that they are facing unfair competition can take the matter to the independent Competition Commission.

Inside Track

On whether GLCs should enjoy an inside track, our policy is clear - govern-ment will not tolerate this. We expect GLCs to compete on a level playing field. Ministries and statutory boards will maintain an arms-length relationship with GLCs. They must operate commercially and efficiently, and not receive special subsidies or favours. The corollary of this is that they must also not be asked to do "national service". To favour GLCs at the expense of other companies is to do harm to the economy, and encourage GLCs to be less competitive and efficient. e.g. MAS regulates and supervises DBS, but DBS does not enjoy any special privileges or forbearance - they are treated just like any other local bank.

So, Inderjit Singh is mistaken that SMEs will similarly succeed if only the government would give them the same special treatment it extends to GLCs. Truth is that GLCs do not enjoy protectionist measures from the government.

This speech is continued here.