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Temasek, Capitalism, Singapore style

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    Temasek First Singapore, next the world Aug 12th 2004 The Economist As it embarks on an international shopping spree, Singapore s Temasek promises to become
    Message 1 of 1 , Aug 14, 2004
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      First Singapore, next the world

      Aug 12th 2004
      The Economist

      As it embarks on an international shopping spree, Singapore's Temasek
      promises to become more transparent. Really?

      FOR a company that is about to open its books to the world, Temasek
      remains surprisingly shy. Ho Ching, the chief executive of
      Singapore's state investment agency, has refused to give interviews
      to journalists since she took the reins in May 2002. After a year of
      requests, this notoriously sensitive company is still "not sure" it
      can grant The Economist an audience with Ms Ho, who "doesn't see the
      point of talking to journalists" explains its head of public
      relations, politely. By chance, Ms Ho is also the wife of Lee Hsien
      Loong, Singapore's prime minister since August 12th, and himself the
      son of the city's founding father, Lee Kuan Yew. Perhaps such well-
      connected folk do not need to sully themselves with the press.

      Or perhaps they are just too busy. While others might take the summer
      off, Temasek's people "work very, very, very, very hard" all year
      round, says Cheo Hock Kuan, a managing director. There is plenty to
      keep them at their desks at the moment. On August 3rd, Temasek bid
      S$2.8 billion ($1.6 billion) for the two-thirds of Neptune Orient
      Lines (NOL), the city state's shipping line, that it does not already
      own. And by the end of the month, the group is to make public its
      annual report for the first time in its 30-year history.

      The moves are related. Aware that it has outgrown Singapore's small,
      maturing domestic market, Temasek is moving overseas. So far, its
      acquisitions and investments have mainly been in Asia, but it wants
      to move further afield. "We will work to transform our portfolio from
      a proxy for the Singapore gross domestic product, into a balanced
      gross national product portfolio leveraging on the growth and promise
      of Singapore, ASEAN, Asia and the world," declared Ms Ho, something
      of a visionary, it seems, in February.

      Founded in 1974 to hold the government's investments in various
      businesses, Temasek, an old Malay name for "sea town", is an odd
      company. It employs 170,000 people and controls more than a fifth of
      the local stockmarket, including a large chunk of Singapore's
      industry and infrastructure, and all or part of well-known companies
      such as Singapore Airlines, SingTel, Singapore Technologies, and DBS

      Capitalism, Singapore style

      While governments elsewhere have mainly privatised their industries,
      Temasek is still lapping them up. And now it is snaffling up firms in
      other countries, too. It remains, however, wholly owned by the
      finance ministry. Think General Electric owned by the American
      Treasury. As Temasek spreads its wings abroad, the questioning of its
      lack of transparency, as well as of its government support and
      investment record, can only get louder.

      To some of these questions and concerns answers might start to
      dribble out, though since they may provide more fuel to Temasek's
      critics, it would be foolish to expect much more openness. Too
      little, and Temasek will find that investors are unwilling to give it
      money; but too much might lead to questions about its raison d'être.
      Temasek needs external capital to help fund its expansion. That will
      require more transparency. Making public the annual report, for
      example, is a step to getting a credit rating from Standard & Poor's
      and Moody's, two big rating agencies, so it can issue international

      But greater transparency would in turn mean that Temasek's investment
      record can be better scrutinised. Superficially, it is good. The
      company's enviable collection of assets, combined with what Temasek
      claims is a management philosophy of maximising shareholder value,
      has produced some notable successes. Singapore Airlines is one of the
      best-regarded, most profitable airlines in the world; PSA its largest
      container-port operator, with operating margins of 30%. And Keppel
      and SembCorp are global leaders in specialised oil rigs and tanker
      repair. In February, Temasek claimed that its total shareholder
      return had averaged an impressive 18% over the past 30 years.

      Following the appointment of Ms Ho, Temasek has been rapidly building
      up its "external wing". Ms Ho sees banking, telecoms, transport,
      education and healthcare (see article) as areas ripe for
      consolidation. Since her arrival, Temasek has spent $1.5 billion
      buying stakes in banks in Indonesia, South Korea and India, a 5%
      holding in Telekom Malaysia, a controlling 62% stake in Global
      Crossing, an American telecoms firm, and a chunk of Quintiles, an
      American clinical-drug trial company.

      But there may be less to Temasek's track record than meets the eye. A
      study earlier this year by LEK, a consultancy, found that Temasek's
      22 major listed companies had made an average return of only 1.7% a
      year since their respective listings. And Ms Ho herself has admitted
      that Temasek's return had dropped to 13% a year over the past decade.
      By contrast GE, which does not receive the same favourable treatment
      from a friendly government, managed 27% a year over the same period.

      Moreover, many of Temasek's best-performing investments are either
      monopolies or operate in protected markets with favourable
      regulation. The capital costs of the city's metro system, for
      example, have been borne directly by the government, allowing SMRT,
      the operator, to undercut its private-sector rival ComfortDelgro.
      Chartered Semiconductor, Singapore's attempt to get into making
      microchips, has been given lots of tax breaks. Given such support,
      the crown jewels in its portfolio, the zealousness with which they
      have been protected, and the rapidity with which Singapore grew in
      the 1970s and 1980s, it should have made much more money.

      Worse, when Temasek or its subsidiaries have ventured overseas or had
      serious competition, they have often flopped. DBS overpaid for its
      purchase of Hong Kong's Dao Heng Bank, argue analysts, while
      SingTel's acquisition of Optus, an Australian telecoms company, and
      NOL's of American President Lines, a rival shipping company, have
      taken years to come right. Singapore Airlines's investment in Air New
      Zealand was a disaster and had to be written off after the latter
      went bankrupt, as was SingTel's in C2C, an underwater-cable operator.
      The biggest lossmaker, however, has been Chartered Semiconductor
      which, with inferior technology to Taiwanese rivals, has bled money
      for much of the past three years and had to be bailed out by Temasek
      in 2002.

      Fed up with complaints from outside shareholders, and concerned that
      her chastened executives would no longer seize opportunities, Ms Ho
      has started using 100%-owned subsidiaries to expand. The NOL bid is
      the latest example. The container-shipping industry is consolidating
      and NOL, as the seventh largest, is too small to survive on its own.
      Owning the whole company will make it easier for Temasek to control
      its destiny.

      But buying out other shareholders and delisting companies' shares fly
      in the face of the privatisation strategy espoused a few years ago.
      They also sit oddly with Temasek's talk of becoming more open. Buying
      up entire companies rather than investing in listed ones will, if
      anything, make Temasek more opaque, not less. And even the rating
      agencies are struggling to understand what goes on at the company,
      which will not obviously reassure outside investors nor, indeed,
      Singapore's taxpayers.

      Temasek says it is becoming a competitive and transparent global
      investment company. But at heart it is still a prime example of
      Asia's paternalistic capitalism: a government-owned collection of
      assets that operate largely in protected markets with a whiff of
      nepotism, and one that will find its addiction to secrecy very hard
      to break.

      Copyright © 2004 The Economist Newspaper and The Economist Group. All
      rights reserved.
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