19 January 2015

Transparency and Temasek

Minister of State for National Development Desmond Lee Ti-seng recently claimed that Aljunied-Hougang-Punggol East Town Council, which is run by The Workers' Party, is not transparent.

How transparent is Temasek?

Temasek boasts a total shareholder return ("TSR") of 16 per cent since inception (i.e., 25 June 1974) and 6 per cent over the past 20 years[1][2]. We can estimate its TSR for the first 20 years[3] since inception (i.e., 1974-1994) as approximately 27 per cent (or, more precisely, between 25.4 per cent and 28.8 per cent)[4].

Starting in the early 1990s, the Government corporatised certain key services such as telecommunications, ports and electricity supply, and transferred them to Temasek. Singapore Telecoms's initial public offering ("IPO") in November 1993 — the largest on the Stock Exchange of Singapore then — helped increase Temasek's TSR from 18 per cent (1974-1992) to 27 per cent (1974-1994). This is no mean feat: the IPO and whatever else happened in 1994 raised Temasek's TSR for 1974-1992 from 18 per cent to 27 per cent, not just for one year but every year over a period of 18.5 years[5]. The TSR for 1994 is approximately 400 per cent[6].

There is nothing wrong with Minister for Finance (the entity formed pursuant to Minister for Finance (Incorporation) Act, not the office holder) transferring assets from itself to Temasek at any price, even $1. It doesn't make sense for the Minister for Finance to charge Temasek $40 billion, for example, for Singapore Telecoms and for the Government to make loans to, and/or inject capital into, Temasek to fund that purchase.

However, if (as it seems) Minister for Finance transferred its holding of state-owned telecommunications, ports, electricity supply and land to Temasek at below fair valuation, it is quite nonsensical for Temasek to claim the benefit of the entire valuation differential upon their subsequent sale or IPO.

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Notes

1. TEMASEK HOLDINGS (PRIVATE) LIMITED Temasek Review 2014.

2. TSR is stated in per cent per annum. However, for brevity, the words "per annum" have been omitted unless the context requires their inclusion for clarity.

3. The years referred to in the section on Temasek are its financial years, not calendar years. Temasek was founded in June 1974. Its financial yearend was changed from 31 December before 1993 to 31 March from 1994 onwards. The first 20 years since inception is, more precisely, the period between 25 June 1974 and 31 March 1994, or a period of 19.75 years (disregarding the days in June 1974).
 
4. The TSR of 27 per cent for 1974-1994 was derived from the TSR for 1974-2014 and the TSR for 1994-2014 as follows:

(((1+0.16)^39.75)/((1+0.06)^20))^(1/19.75)-1 = 0.271 (0.27 or 27 per cent, rounded)

The TSR data provided by Temasek are rounded to the nearest whole number (other than the TSR for the most recent year). A TSR stated as 16 per cent is a number between 15.5 per cent and just below 16.5 per cent; and a TSR stated as 6 per cent is a number between 5.5 per cent and just below 6.5 per cent. Based on Temasek's TSR data, the TSR for 1974-1994 is a number between 25.4 per cent and 28.8 per cent, derived as follows:

(((1+0.155)^39.75)/((1+0.065)^20))^(1/19.75)-1 = 0.254 (25.4 per cent)
(((1+0.165)^39.75)/((1+0.055)^20))^(1/19.75)-1 = 0.288 (28.8 per cent)

For the reason behind the fractional years, see note 3 above.
 
5.  Singapore Telecoms's IPO in November 1993 would have impacted Temasek's results for its financial year ended 31 March 1994.
 
6. The TSR for the 15 months in financial year ended 31 March 1994 lies between 207 per cent and 767 per cent.

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