Just how naive was Temasek?

International Herald Tribune, October 2, 2006


Among the many measures of a successful foreign investment, helping to trigger a coup d'état is definitely not one of them.

In hindsight, then, the $1.9 billion purchase of a controlling stake in Thailand's dominant telecommunications conglomerate early this year by a group of investors led by the Singapore government's investment arm, Temasek Holdings, has been less than ideal, say analysts and people close to the deal.

Buying the company, Shin, provoked nationalist outrage in Thailand. Buying it from the family of a prime minister widely accused of corruption, moreover, touched off massive street protests that culminated last month in the ouster of that prime minister, Thaksin Shinawatra.

"I don't think anyone perceived there would be such political fallout from the deal," said Stephen Bennett, a lawyer at Hunton & Williams in Bangkok who advised Temasek on the purchase. "They wouldn't have done it had they known this would happen."

On the contrary, Bennett said, political risk did not figure into negotiations. "It wasn't an open-discussion issue," he said.

Thaksin is now in exile in London, Temasek's investment has sunk by almost $690 million, and Thai officials are investigating whether the deal was illegal. Temasek said executives were not available for interviews but issued a statement in response to a list of questions saying it had not violated any laws, was cooperating with investigators and stood by its investment.

"Temasek remains a long-term investor in Thailand, and we believe that the long-term fundamentals of the country remain good," Temasek said in a statement issued through its public relations agency. "We have complied fully with the laws in our investments and will continue to cooperate fully."

On Friday, however, Temasek's senior managing director for investment, Jimmy Phoon, gave interviews to at least three reporters, including one from Bloomberg News. Phoon's comments did not depart significantly from Temasek's earlier statement, though he did reveal to Bloomberg that the purchase had been carried out in Thailand, apparently contradicting earlier speculation in the Thai news media that the transaction might have been carried out in offshore accounts.

The coup has thrust into unusual focus a company that rarely speaks with the news media. Though created, owned and overseen by Singapore's government, Temasek says it operates entirely by the rules of the market. Its troubles in Thailand are a relatively small setback in an overseas investment push in which it spent more than $13 billion in its latest financial year. With Singapore facing increasing competition for investment and trade from China and India, Temasek is helping it hedge its bets by investing around Asia, notably in China, where it is the largest foreign investor in the financial sector. It also plans to move into developed markets like the United States, Europe and Japan.

"It's an insurance policy," said Song Seng Wun, regional economist at brokerage firm CIMB-G.K. Goh in Singapore. "Even if things, knock on wood, didn't turn out domestically, they'd still have a hand or fingers in many pies across the world."

Temasek's portfolio, valued at $81.2 billion, makes it one of the largest state-owned shareholders in the world, according to Thomson Financial. Temasek is adamant that its investments are purely profit-driven, but its appetite and government ownership have nevertheless raised reservations among some other Asian countries.

Analysts say that Temasek may be overconfident but that it is not political. Instead, its investments have a strategic purpose, they say: to raise Singapore's relevance in the global economy.

"The more you invest in the region, the more capacity you have to influence decisions about where people invest," said Garry Rodan, a professor at Murdoch University's Asia Research Center in Perth, Australia.

Temasek's push is part of a broader effort by Singapore to hitch itself to larger economic wagons. A port city with no natural resources, Singapore has long depended on being a middleman. After independence in 1965, it lured multinationals with low taxes and clean government. It also set up companies to build essential infrastructure.

In 1974, the government set up Temasek as a holding company for its stable. Temasek's stakes in about 40 companies now earn an estimated $2.5 billion in annual dividends, part of which Temasek pays the government as income tax and dividends.

The bursting of the technology bubble in 2000, however, threw Singapore into its worst recession since independence. Temasek's portfolio shrank by almost a fifth.

In mid-2002, Temasek appointed a new executive director to overhaul the company: Ho Ching, a Stanford-educated electrical engineer who worked her way up to head the military- related conglomerate Singapore Technologies. What drew as much attention as Ho's résumé, however, was the name of her husband, then the deputy prime minister and now prime minister, Lee Hsien Loong, son of Singapore's founding prime minister, Lee Kuan Yew. The Temasek chairman, S. Dhanabalan, said at the time he had to overcome Lee Hsien Loong's reservations about hiring his wife.

One of Ho's first moves at the helm was to shift Temasek's headquarters from a solemn skyscraper downtown to a new glass-enclosed building with lower rents and an open floor plan to foster collaboration.

Bankers credit Ho with imposing investment discipline and global expertise, often importing it - 27 percent of Temasek's 250 employees are foreigners.

Then there was Temasek's overseas investment drive. Temasek was already gaining overseas exposure through its Singapore subsidiaries. Singapore Telecommunications, or SingTel, bought the Australian cellular operator Optus for $7 billion in 2001. Singapore Airlines owns 49 percent of Virgin Atlantic. And the port operator PSA holds stakes in 20 ports in 11 countries, including 5 in China.

Economists say investing abroad makes more sense for Temasek than investing at home, if only to diversify without increasing the government's dominance of Singapore's economy. Investing abroad also fits Singapore's strategy of building trade and investment links. Singapore has signed bilateral free trade agreements with the United States, Japan and six other countries.

Being a small country in the middle of a volatile region, Singapore has always wanted to keep everybody engaged," said C. Fred Bergsten, director of the Institute for International Economics in Washington.

Temasek's goal for its portfolio is a three-way split among Singapore, developing Asia and developed countries. So far, though, it has been concentrating largely on gaining exposure to Asia's rapidly growing middle class. Temasek's biggest investments have therefore been in Asian banks.

Temasek says the government is not involved in investment decisions. But its board is appointed by the Ministry of Finance, which Lee Hsien Loong also heads, subject to approval by Singapore's president. Temasek's chairman, S. Dhanabalan, is a former foreign minister. One of its two deputy chairmen is a permanent secretary in the ministry of finance.

Temasek's critics abroad say resentment of Singapore's affluence and perceived arrogance help fuel suspicion of the companies motives. Singapore has become a haven for the fortunes of Asia's new millionaires, and not all its neighbors are happy about this fact. Many Indonesians, for example, resent Temasek for what they say is excessive control of Indonesia's cellular industry: ST Telemedia and SingTel control the country's two leading operators.

"It galvanizes the ill feeling the public has toward Singapore," said Drajad Wibowo, an Indonesian legislator.

India, on the other hand, rejected ST Telemedia's $390 million bid last year for a 29 percent stake in its fifth- largest cellular operator because SingTel already owns 30.5 percent of the Indian operator Bharti. This year India blocked Temasek from raising its stake in ICICI Bank because the Government of Singapore Investment Corporation, which manages Singapore's budget surpluses and foreign exchange reserves, already held 3 percent.

Temasek has had better luck in the United States. ST Telemedia's 2003 purchase of a majority stake in Global Crossing overcame opposition by the Pentagon after Singapore's prime minister at the time, Goh Chok Tong, wrote to Vice President Dick Cheney.

Washington was less understanding toward one of its recent partners in China, however. Last year, Temasek and Singapore Airlines took a 49 percent stake in a cargo airline with China Great Wall Industry, a satellite launch company that since 1991 has been repeatedly sanctioned by Washington for allegedly sending missile parts to Iran.

Great Wall Airlines started flying in June with two Boeing jets, and in August the U.S. Treasury Department added it to the list of sanctioned companies, forbidding any American company from doing business with it, including Boeing. Deprived of technical assistance or parts, the airline suspended operations. Singapore Airlines said that Great Wall Airlines was not alleged to have done anything wrong and that China Great Wall Industry no longer had a stake in it.

The Shin imbroglio is another episode that analysts say Temasek should have seen coming. Thaksin became a billionaire building Shin into a market leader; but after becoming prime minister in 2001, he faced repeated allegations of using policies to benefit the company. Even as the deal was being negotiated, tens of thousands of protesters had been attending anti- Thaksin rallies.

After buying Shinawatra's 49.6 percent stake with a group of Thai investors, Temasek and its partners were obliged to make a general offer for the remaining shares and ended up with a 96 percent stake valued at $3.8 billion. Temasek gained control over Shin, Thailand's leading cellular operator, a satellite company, and a local television broadcaster.

What outraged Bangkok's middle class, in addition to the sale of key communications to a foreign government, was that the deal was conducted in a way that enabled the Shinawatras to avoid any income tax.

Investigations into the Shin purchase now center on whether Temasek's purchase violates Thailand's 49 percent foreign shareholding limit on telecommunications companies. Temasek denies that any of its Thai partners are proxies, an allegation they have also denied. Temasek says that it controls only 44 percent of Shin and that Thai entities control the rest. If the Shin deal is found to be illegal, the company could face penalties and a revocation of its licenses. The ministry could also force it to offload shares or void the sale.