Knotty problems of loss-making SOEs

Faced with massive losses amounting to Rs. 605 billion from key State-Owned Enterprises (SOEs), the Government is looking for fresh solutions in tested places and has mooted Singapore’s famed Temasek Holdings model as a possible option. But the possibility of setting up Sri Lanka’s version of Temasek throws up interesting challenges of governance and transparency. 

At face value, Temasek – set up in 1974 as a holding company “to hold and manage the Singapore Government’s investments in companies for the long-term benefit of Singapore” – looks like a great success. Temasek’s average dividend yield to its shareholder – the Singapore Government – stands at more than 7%, which isn’t shabby. It began investing in foreign equities in 2002 and had record assets of S$ 266 billion at the end of March last year.

It is an active shareholder and investor, and its portfolio covers a broad spectrum of sectors including financial services, telecommunications, media and technology, transportation and industrial, life sciences, consumer, real estate, as well as energy and resources. Temasek has a multinational team of over 530 people, in 10 offices globally including London and New York.

Under Singapore law, Temasek isn’t required to release audited financial statements. Under CEO Ho Ching, who also happens to be the Prime Minister’s wife, Temasek started doing so anyway in 2004. But the statements are limited. Temasek releases only consolidated accounts, so cash flows between its subsidiary investments and the holding company aren’t detailed. Historical financials are provided only back to 2001, which means some claims – such as that 18% compounded shareholder return – can’t be independently verified.

That may work okay in Singapore, where the civil service has a reputation for clean management. But other countries, China and Bhutan to name just two that have tried out the model, with shady bureaucracy have proved to be riddled with corruption. Party leaders are attracted to the Temasek model because their power rests on keeping a tight grip on information and capital, which would be a clear concern in Sri Lanka’s case. How profitably, and properly, will an opaque set of appointees by politicians manage billions of rupees without public supervision? Transparency aside, when was the last time a government agency made better investment decisions than the private sector?

To be fair, the Government is aware of these constraints. Public Reforms Deputy Minister Eran Wickramaratne has already acknowledged the problems within the Temasek model and insisted the Government is considering a system where the Constitutional Council or a similar body could nominate professionals to the holding company. The board could be protected from changing governments by legislation, allowing for the removal of only a few members at any given time, much like the format for the Public Utilities Commission, so that political influence can be controlled.

Despite its shortcomings, Temesak remains an attractive model with Indonesia the latest country to announce a copycat policy where major commercial SOEs will be clumped into one company. If and when Sri Lanka is ready to do its own version, there will certainly be plenty of examples to follow.