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Role of Government Ownership of Business in the Era of Globalisation & Role of Temasek

Good afternoon.

1. I  would like to share my views on the role of Temasek in the Singapore economy and how Temasek will meet the challenge of the new strategies that the national economy will put in place. Following that, I would be more than happy to take any questions you may have.
2. Let me begin by giving you some background on how the Government through Temasek got involved in business.

Role of Government in Business

3. Temasek's stable of companies came about in two ways. When we became independent in 1965 (actually the process started in 1961, when we obtained self-government), we faced incredible challenges: in attracting investments, creating employment, rolling out infrastructure etc. And restructuring the economy from one that was basically an entrepot into one which was more balanced with the manufacturing sector of at least 20 to 25%. The Government through EDB had no choice but to take the lead in sharing the risk in new investments like National Iron & Steel and Jurong Shipyard. These investments were part of the attempt by the government to be actively involved in restructuring the economy and creating jobs. EDB was not only invited to take equity interest in these projects, but many of these projects would not have started if EDB had not been prepared to share in the risk. When EDB was restructured in 1968 after eight years of operation, these equity investments which the EDB had, were taken over by Ministry of Finance, and the loans were transferred to or taken over by DBS. And all the companies which EDB has an equity interest were then directly owned by the Minister of Finance, Incorporated. These investments owned by the government were later, in 1974, transferred to a separate company that was created to oversee and monitor these companies. The company is what we today know as Temasek Holdings. In the same EDB restructuring exercise in 1968, other institutions were created. There were some statutory bodies, others were companies. DBS and Intraco were established. These were initially held by the MOF and later became part of the companies transferred to Temasek. Over the years, other companies in which government had an equity interest for various reasons were added to the Temasek group of companies. Statutory authorities like the Telecoms, Port and Public Utilities Authorities, were corporatised and held by Temasek. Keppel Corporation came out of the reorganisation of the Singapore Harbour Board, Sembawang from the conversion of the British Naval Base in Sembawang and the Singapore Technologies group from companies set up to meet Defence needs. Many of these companies, having been spun off, subsequently expanded into other businesses which the management saw as opportunities for growth. Through years of prudent management, these public sector owned companies were able to accumulate surpluses and continue funding their development. These holdings by Temasek are part of Government reserves and subject to the supervisory procedures of the Elected President provisions of the constitution of Singapore.
4. Over the years, the extent of Government's participation in business has become an issue of debate and deliberation for public policy makers, not simply to address perceptions of an unlevel playing field, but more importantly, to define the best way forward for the Singaporean growth engine. Let me at the outset deal with three issues which surface frequently in discussions about Temasek companies.
   1. That state should not be in business and should privatise more speedily.
   2. That Temasek companies have an unfair advantage and do not operate on a level playing field with other businesses.
   3. That being state owned, investment decisions are not commercially driven and therefore returns are poor and there have been wasteful investments.

1. Privatisation

5. The frequent call for Temasek to sell off its interests to the private sector is mostly founded on the experiences of state owned enterprises in other countries both in the developed and developing countries. These state owned operations usually make losses, have bloated staff, and deprive the government of the resources needed for more important public investment and expenditure. Apart from these are problems of corruption, nepotism and other ills that state enterprises seem to be heirs to.
6. None of these reasons apply to Singapore. The arguments advanced are therefore not economic but ideological arguments.
7. This is not to say that Temasek has not or should not sell off some of its investments. We have completely or partially privatised many operations and will continue to do so. We have and will do so for various reasons such as exiting from small operations, which absorb too much of our management time, or restructuring an industrial sector, such as what we are doing right now in the power sector, or creating more investment opportunities for the public, such as the privatisation of SingTel and the other companies like Keppel and Sembawang which was 100%-owned by Temasek before they were privatised. Since 1985, Temasek has completely divested all its shareholdings in about 40 companies where the shareholdings ranged from as low as less than 1% to 100%. We also of course folded, or closed down, a number of companies, and exited from these businesses. These divestments were done by sale to other private investors, to the public or to other publicly listed companies, and some of which Temasek has an interest. Temasek has also partly sold its interests in about 25 companies.
8. But we are not divesting because of ideological reasons against Government participation in business. We have and will continue to divest in order to focus our financial and management resources in a few areas where we think that Temasek can make a distinct contribution to the development of the Singapore economy.

2. Tilted Playing Field

9. Temasek companies often have an advantage over other Singapore companies, but this arises because of their size. This is no different from the advantage that any large corporation or an MNC will have against a small corporation in terms of financial and management resources.
10. Temasek companies do not deal with each other on a preferred basis. Talk to the management of any Temasek company and you will soon hear that they wish that they had the old boy network that exist in many countries.
11. There are also the disadvantages that are embedded in the bureaucracy of a large corporation, which you also hear about. So in the same breath, Temasek companies are too competitive but also uncompetitive because they are outmanoeuvred by smaller nimble companies.

3. Poor Returns

12.  All the major Temasek investments, listed and unlisted, publish their financial statements. In fact Temasek companies top the lists of financial transparency. They compare quite favourably with their private sector peers.
13. Entrepreneurship and creativity by its very nature involves some waste. Not all investments will turn out to be profitable. The only way to avoid all risk in investments is not to make investments. So within the Temasek group of companies, there must from time to time be instances where investments turn sour. What is important is to ensure that the corporations have accumulated enough resources to carry these losses and have the financial stamina to avoid taking a very short term view. We at Temasek are satisfied that this is the case with our companies.

The Way Forward

14. Now, as to the way forward, certain sectors have attained maturity and Singapore has spawned companies, both Government- and privately-owned, that can hold their own in the international marketplace. The developmental role played by Temasek is still crucial, but will necessarily be different in terms of focus. We have just made a review of our strategic plan for the next five years or so and have concluded that our way forward should revolve around the following:
    1. have control or influence of projects with strategic importance eg. water as a resource, projects related to Singapore as an international communication and route hub;
    2. participate in high risk growth sectors eg. in risky life sciences investments and efforts; and
    3. (This will absorb quite a lot of our efforts in the coming years) nurture global or regional leaders from the stable of Temasek companies or other non-Temasek Singapore companies which can anchor, especially knowledge-intensive, economic activity in Singapore, for multiplier effects.
15. Outside of these themes, we will continue to reduce our participation, through our divestment policy, basically because we want to focus our scarce management resources in the three areas I just mentioned. As the stakes in existing businesses are large, and there are other minority shareholders involved in the companies which we have privatised but where we still have substantial shareholdings, our divestment plan must take into account both market and liquidity factors. We cannot just turn around and dump the shares in the market without regard for minority shareholders.

Role of Government's Ownership in Era of Globalisation

16. Notwithstanding the constraints to divestment, for as long as Temasek remains a shareholder, and a majority or single largest shareholder in many cases, we will have to play the role expected of a substantial shareholder. We will exercise our due influence as any financial investor would. Before I elaborate on how we at Temasek have been fulfilling this objective, let me first comment on the commercial orientation of Temasek-owned businesses.
17. Survival has long been and will always be the guiding principle for all our companies. We have no sizeable domestic market to speak of. Hence, all our businesses have from the start, been compelled to operate along commercial lines and to compete in a global market. They are expected to yield proper economic returns.
18. In their day-to-day operations, they are supervised by their boards and accountable to all their shareholders, including the non-Temasek shareholders who, in quite a few cases, in fact own the majority of the shares. Incidentally, in quite a few companies, foreign shareholding is very substantial, more so than local private shareholding. SIA, for instance, was told at the beginning that it was not flying the national flag for reasons of national pride. While it does play an important role in maintaining Singapore as a global hub, it has, and it knows it has, to survive against global competition.
19. As a policy, Temasek does not interfere in the strategic and commercial decisions of our companies ie. we do not micro-manage. In the increasingly globalised economy, commercial companies need to globalise or risk being marginalised. Hence regardless of ownership, companies have to aim to be world-class in order to remain competitive. Our companies are no exception.

Role of Temasek

20. As a regulator, the Government will continue to drive liberalisation or deregulation. However as a shareholder, the Government, through Temasek, seeks acceptable returns from our investee companies and continuously drives our companies to create value - no different from any other shareholders.
21. Temasek seeks to be a pro-active shareholder. We will become an even more demanding shareholder who sets and drives high performance standards. Our philosophy is simple: put the right people (boards and top management) in charge, ensure that the decision process is transparent and then let them carry on with their work. The boards and the management must be accountable to all shareholders, not just Temasek.
22. We place great emphasis on corporate governance and talent management.

Corporate Governance

23. For the past few years, we have been working with our companies to enhance their corporate governance standards, to achieve better transparency and accountability. We have drawn up a framework of good corporate governance practices covering areas such as talent, board governance, remuneration, business charter and shareholder value creation. Within this framework, our companies are given the autonomous management of their businesses.
24. 24.  Going forward, we will continue to work with investee companies to institutionalise world-class corporate governance practices, including the extent of disclosure and adoption of minimum accounting standards. We want to stay at the forefront of leading governance practices. I will take this opportunity to share with you two cornerstones of our governance framework:
    1. quality of boards; and
    2. performance of companies.

Quality of Boards

25. Our emphasis on quality of boards should not come as a surprise to you. We see increasing responsibilities for boards, in terms of guiding and charting the strategic directions of a company, in a rapidly changing business environment.
26. 26.  So far, our focus has been more on recruiting the best talent, formation of specialised board committees and rejuvenation of boards. These are still important but we will be enlarging our scope, to further enhance the quality of the boards of our companies through board diversity and director development. The ultimate aim is to have competent directors and effective boards.
27. Board diversity, eg. internationalisation of boards, mix of experience and skill sets, should be seen in the context of good corporate governance. It can help to professionalise boards and should eventually translate into improved performance by companies. This is increasingly necessary with gobalisation, cross-border mergers and acquisitions, changing business environment (e.g. deregulation, technological advancement) and the need to widen the pool of potential directorial candidates.
28. Training for the role of directors has traditionally been informal. This is no longer good enough. Directors are expected to be as competent as their jobs are becoming more demanding and more onerous, not to speak of their legal responsibilities. Director development is thus an imperative. Temasek embraces the view that directors need good orientation training as well as continuous training to keep their skills current. We are working with our companies to draw up a comprehensive director development programme.

Performance of Companies

29. As a commercial shareholder, Temasek monitors its companies' performance closely and has requested them to adopt the principle of Economic Value Added ("EVA") for most companies, and some other companies have some other measures, to focus them on shareholder value creation. I am pleased to say that awareness has increased significantly and that except for market-related write-downs, most of our major companies' operations have been generating positive EVA over the last three financial years.
30. The current economic downturn is a temporary setback. In the long run, we expect our companies to deliver good and sustainable performance. As the Temasek companies become even more focussed on returns to shareholders, they must become more competitive and aggressive in the market place. This will give rise to even more complaints from Singapore businesses because as our businesses more competitive and efficient, more driven to shareholder value, they will of course assume a role which other Singapore businesses will complain. And this is something which we will have to manage.

Talent Management

31. In order for Temasek to continue to be a value-creating shareholder, we will search for world class talent to serve on the boards of our companies or help our companies to source for world class talent to work in our companies. Temasek will assess the performance of directors and key management, and support all measures to incentivise them.

Conclusion

32. Having evolved a proper governance framework, the key challenge now is for us at Temasek and our companies to continue to innovate and reform ourselves. As I have reiterated several times, our smallness as a market makes us very conscious of the parameters for survival. The achievements of some of our companies however reinforce our belief that we need to constantly reinvent ourselves commercially to address the challenges posed by increasing globalisation.
33. I shall be happy to take questions right now. Thank you.