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Government’s Spending Gap: Now you see it ……… then you won’t.

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Now that we know the government has a $6.67b shortfall in its budget, isn’t it fortuitous 
it is announced effective from 2017 the application of the expected long term rate of
return rule to Temasek’s share of the Net Investment Return Contribution which can
make that fiscal shortfall disappear, as if by magic?

  Temasek delivered only dividends
First, the writer is ticked off by the Ministry of Finance explanation of the NIRC on 
its website,
“comprised up to 50% of the net investment returns on the net assets managed by MAS 
and GIC and up 
to 50% of the investment income from the remaining assets which
includes Temasek”

In the disclosure following the announcement of the changes, this is now revealed to 
be incorrect. Temasek had delivered its declared dividend which was far less than 50%
of its net income. Moody’s October 2014 credit opinion reported that Temasek paid a
dividend of $2.8b to the government, far less than $5.3b if the MOF was correct.
So the MOF’s communications department did not know what it was communicating.

 What is Real Returns?
The actual or nominal returns comprised dividends, interest and valuation of its 
assets minus investment costs such as operational costs and management expenses.
Real returns is a calculated rate of return in which the inflation rate is subtracted
from the actual or nominal return, e.g. GIC’s S$ nominal return may be 4%, its real
rate of return is 2% assuming 2% inflation rate.  

Using the real rate of return on GIC and MAS is economically sound and follow best
practice such as Norway’s GPF. It permit spending while compensating for the effect
of inflation. The actual question is a political one: is the 50% cap necessary given
the already massive size of the reserves? In comparison, there is no cap on the GPF.

 The Spending Gap’s Disappearing Act

How much will Temasek deliver under the new rules? Based on its current $223b 
portfolio, the amount of NIRC derived per Temasek’s reported rates of return 
calculated below

Period Reported

Actual Returns

Real Rate of Return

(2% inflation rate)


share of NIRC

Increase over


Inception from 1974 16% 14% 15.6b +12.8b
20 years 6% 4%   4.46b +  1.66b
10 years 9% 7%    7.8b +  5.0b


We do not yet know Temasek’s dividend contribution to the 2015 NIRC of $8.94b 
but it appears the budget shortfall can only be closed by basing the expected
real return on the inception rate.

 Spending Past Reserves?

If the inception rate of return is used, then it must be remembered that the GLCs 
were transferredto Temasek at nominal prices, i.e. well below their actual market
value. Therefore, part of the inception rate of return of 16% was unearned by Temasek, representing the difference in the GLCs’ nominal transfer prices and market prices.
In other words, it includes past reserves realised in the rate of return.

If expected real return is based on the inception rate, is that therefore not
spending past reserves?

Can secrecy be justified in a potential breech of the constitution?
 Whatever the expected long term real return, it should now be
of national interest.

 The Trouble with Temasek

What is problematic with the change of rule from dividends to expected real return 
is that delivering dividends is delivering realised cash, i.e. dividends and
interest earned by Temasek. Delivering returns is delivering not just dividends
and interest but also the unrealised market value of assets.

In this Temasek differs from GIC and GPF as it holds huge bloc of shares
exceeding 20% of a portfolio company’s market value up to 100%, a risk
highlighted by its spat with S&P. It takes majority control or  seek
to have a major influence from risk concentration. However delivering returns
means Temasek will require to sell down its holdings which affects its control
over portfolio companies. This is not faced by GPF in particular since it does
not acquire more than 10% of any company.


Mr. Tharman even admits:

“Temasek’s inclusion in the NIR framework was deferred in 2008. One reason was 
that there were no 
established methodologies for projecting the long-term expected real return 
on its portfolio. This is in 
light of Temasek’s investment approach of 
taking concentrated stakes and making direct investments.”

Since Temasek’s investment approach has not materially changed, why is there now an 
established methodology when previously there had been none? Is this more a leap in
the dark made imperative by the budget shortfall?



The writer had always called for greater use of the reserves and such use of the 
reserves be ringfenced specifically for mandatory social entitlements such as a
retirement pension or allowance to back up CPF, reduce citizens’ healthcare spending,
childcare support etc. But, despite a 55% increase, total spending on social transfer
is still below the NIRC.

Estimated Social Transfer for 2015 NIRC provisioned in Budget 2015
$7.15b $8.94b


However unlike mandatory social entitlements, few of these binds the government 
since most are one-off top-ups and rebates and transfers to endowment funds, all of
which can be granted, withdrawn or in the latter not disbursed at the sole discretion
of the ruling party.


Which means, if the rule change on Temasek and the tiny tax hike do not deliver 
enough revenues the government can still close the deficit simply by reversing social
transfers, preferably right after the next general election. Or it can raise GST to
piss off the masses. Or it can rein in elevated spending on defence and the world
highest government and civil service salaries together with a more meaningful tax
hike on the wealthy and the corporations. Hurt the masses’ pockets or their own?
Easy option or Hard Truths for the PAP?


Chris K


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