Singapore's State Capitalism Works. Or Does It?:

Andy Mukherjee

Sept. 1 (Bloomberg) -- The commercial success of Singapore's government-linked companies has always been something of an enigma, chiefly because experiments in state socialism have been glaring failures in China, India, and elsewhere in Asia.

To what do companies like Singapore Airlines Ltd., Asia's most profitable air carrier, owe their success, especially when International Monetary Fund researchers find no evidence that companies controlled by the state's investment arm have benefited from privileged access to cheaper bank credit, the telltale sign of political patronage?

To be sure, commercial success is one of the many ways to judge Singapore's public sector. Although for companies which are now co-owned by individual and institutional shareholders, it certainly isn't the best measure. A more critical question is how do these companies fare in terms of shareholder returns?

To begin to answer that question, CLSA Ltd. researcher Atul Goyal looked at company annual reports and corporate Web sites. Out of 15 companies he chose to study, as many as eight don't seem to communicate a strong commitment to shareholder returns.

For example, DBS Group Holdings Ltd., Singapore's largest bank by assets, says it's ``well positioned to tap exciting growth opportunities.'' Is the bank as well positioned to deliver exciting shareholder returns? It most probably is, though it doesn't explicitly say so, according to CLSA.

Shareholder Focus

Chartered Semiconductor Manufacturing Ltd., the world's third- biggest provider of made-to-order chips, has a mission to ``provide world-class silicon wafer manufacturing.'' A noble goal that's of little consolation to investors who have seen the company's shares slump about 38 percent this year.

Or take Singapore Airlines, which thanked its management, staff, unions and the board for helping the company cope with the slump in travel following the outbreak of SARS, or Severe Acute Respiratory Syndrome. Shareholders who held on to their investments amid a slump in airline stocks didn't rank a mention.

``Interestingly, in the letter to shareholders for some companies,'' Goyal and his boss Prabodh Agarwal note in their study, ``customers, employees and board members seem to take precedence over shareholders.''

The commercial success of Singapore's public sector may have done little for minority shareholders. CLSA estimates that over the past 20 years, government-linked companies have given investors an annual return of just 6 percent. The return was -1.6 percent over the past 10 years, and -4 percent over the last five years. By comparison, private companies in Singapore and state- owned companies in neighboring Malaysia have done a lot better.

Temasek Holdings

Curiously, Temasek Holdings Pte. has earned 16 percent annually over the past 30 years on its investments in government- linked companies. Temasek is the Singapore government's investment arm, which controls seven of the island's 10 biggest publicly traded companies by sales.

Why did it fare better than other shareholders? Possibly because a large part of its investments was in the nature of riskier ``private equity,'' for which it got a premium.

Now that Temasek itself is driving the companies in its stable to deliver shareholder value above all else, minority investors also can look forward to better returns.

Unlike in the past, business decisions are no longer to be made with only market share or sales growth in mind. The new catchphrase in Temasek-linked companies is ``Economic Value Added,'' or the profit they earn over and above the cost of capital. Some of the public sector companies have linked executive pay to EVA.

``The power of EVA,'' Temasek Chief Executive Ho Ching explained in February, ``is not simply the potential for staff to share the wealth creation with shareholders. It is more importantly a mindset change toward ownership.''

Improved Performance

Returns have already started improving. According to CLSA, Temasek-linked companies, as a group, have given an impressive 33 percent return to shareholders over the past year, and not just because the stock market has been favorable.

Will the momentum last over the next five years, or 20? Perhaps it will, at least for some of the companies.

Making shareholder returns a key objective is only the easy, first step. Aligning employees' and shareholders' interests is the harder part. As the following excerpt from the annual report of a U.S. company shows, it's quite possible for a management to say one thing and do another:

``We plan to leverage all competitive advantages to create significant value for our shareholders,'' the chairman and chief executive of the company wrote in 2000.

That was one of the last promises Kenneth Lay and Jeffrey Skilling ever made to Enron Corp. shareholders.



To contact the writer of this column:
Andy Mukherjee in Singapore amukherjee@bloomberg.net.

To contact the editor responsible for this column:
Bill Ahearn at bahaearn@bloomberg.net.

Last Updated: August 31, 2004 16:56 EDT