Telecom Deal by Singapore Roused Thais

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By WAYNE ARNOLD of The New York Times
Published: October 3, 2006
SINGAPORE, Oct. 2 — Among the many measures of a successful foreign investment, helping to set off a coup d’état is definitely not one of them.

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

Buying the company, called Shin, provoked nationalist outrage in Thailand. Buying it from the family of a prime minister widely accused of corruption, moreover, touched off extensive street protests that culminated on Sept. 19 in the military ouster of Thaksin Shinawatra as the Thai leader.

The coup has thrust Temasek into unusual focus. Created, owned and overseen by the government, it has embarked on an ambitious overseas investment campaign that exceeded $13 billion in its latest fiscal year.

And as Singapore struggles to stay ahead of big competitors like China and India, Temasek is helping this small city-state hedge its bets by investing in them.

“It’s an insurance policy,” said Song Seng Wun, regional economist at CIMB-G.K. Goh, a brokerage firm 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.”

But the fallout from the Thai investment has underlined the perils of investing abroad.

“I don’t think anyone perceived there would be such political fallout from the deal,” said Stephen Bennett, a lawyer with 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, Mr. Bennett said, political risk did not even figure into negotiations. “It wasn’t an open-discussion issue,” he said.

Now, Mr. Thaksin is in exile, Temasek has lost roughly $700 million and Thai officials, including those from the Ministry of Commerce, are investigating whether it was illegal. The company said executives were not available for interviews, but issued a statement saying:

“Temasek remains a long-term investor in Thailand, and we believe that the long-term fundamentals of the country remain good. We have complied fully with the laws in our investments, and will continue to cooperate fully with the M.O.C. as we have always done.”

Over all, Temasek’s portfolio rose 24 percent in the year ended March 31, to a value of $81.2 billion. That made it one of the largest government-owned shareholders in the world, according to Thomson Financial. It is the largest single foreign investor in China’s financial industries, and it has plans to move into advanced economies, too, like Europe, Japan and the United States.

Temasek insists that its investments are purely profit-driven. But its appetite and ownership have created reservations within some other Asian countries that look at Singapore, their small but affluent neighbor, with a mixture of respect and resentment. While analysts say the company is not political, they also say its investments have a strategic purpose: to increase tiny Singapore’s place in the global economy.

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

To some extent, Temasek’s frustrations mirror those of other state-owned enterprises venturing overseas, like the Chinese oil company Cnooc when it tried to buy Unocal.

But 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 lured foreign manufacturers after independence in 1965 with low taxes and clean government. It also set up companies to build essential infrastructure and in 1974 established Temasek to oversee them. Temasek’s stakes in those 40-odd companies now earn it an estimated $2.5 billion in annual dividends. Part of that flows to the government; the rest is invested elsewhere.

When the technology bubble burst in 2000, Singapore was thrown into recession, its worst since independence in 1965. Combined with the economic impact of the terrorist attacks of September 2001, Temasek’s portfolio shrank by almost a fifth.

In mid-2002, it appointed a new executive director to overhaul the company, Ho Ching, a Stanford-educated engineer who worked her way up to run a military-related conglomerate, Singapore Technologies. Temasek’s chairman, S. Dhanabalan, said at the time that he had to overcome initial hesitancy about hiring Ms. Ho from her husband, Deputy Prime Minister Lee Hsien Loong, son of Singapore’s senior leader, Lee Kuan Yew. The younger Mr. Lee is now prime minister.

Bankers credit Ms. Ho with imposing investment discipline and global expertise, partly by hiring outsiders. These days, 27 percent of Temasek’s 250 employees are foreigners. Ms. Ho also introduced one of her personal preoccupations, the BlackBerry wireless e-mail device.

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 International holds stakes in 20 ports in 11 countries, including 5 in China.

Economists say that investing abroad enables Temasek to diversify without increasing the government’s dominance of the Singapore economy. Investing abroad also fits Singapore’s strategy of building bridges overseas.

Singapore has signed two-party 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 Asian countries and advanced economies. So far, though, it has been concentrating on gaining exposure to Asia’s rapidly growing middle class, particularly through the region’s banks. It has stakes now in banks in India, Indonesia, Malaysia, Pakistan, South Korea and Taiwan.

China is an even bigger target. In September 2005 Temasek paid $1.47 billion for a roughly 5 percent stake in the China Construction Bank; it also bought 5 percent of the Bank of China for $1.5 billion.

In March, Temasek ventured to Europe, buying an 11.5 percent stake, valued at $4 billion, in the Standard Chartered Bank of Britain, which makes three-quarters of its profit in Asia.

Temasek has refrained from selling strategic domestic assets, saying it would do so only when market conditions were right. It still owns 100 percent of PSA, most of SingTel and Singapore Airlines. Companies it controls account for almost 30 percent of the economy.

Temasek says the government is not involved in its investment decisions. But its board is appointed by the finance ministry, which Prime Minister Lee leads, subject to approval by Singapore’s president. Its chairman, Mr. Dhanabalan, is a former foreign minister. One of its two deputy chairmen is a permanent secretary in the finance ministry.

Envy of Singapore’s affluence helps fuel suspicion of Temasek, analysts say. Singapore has become a haven for the fortunes of Asia’s new rich — and not all its neighbors are pleased with that.

Many Indonesians, for example, resent Temasek for what they say is excessive control of Indonesia’s cellular industry. ST Telemedia and SingTel control Indonesia’s two leading operators.

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

The Indian government rejected ST Telemedia’s bid last year for a stake in one of the country’s cellular operators because SingTel already owned a stake in a larger rival. This year, India blocked Temasek from increasing its stake in the Icici Bank of Mumbai because the Government of Singapore Investment Corporation, which manages budget surpluses and foreign exchange reserves, already held 3 percent.

Temasek has had better luck in the United States. ST Telemedia’s purchase in 2003 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, though, seemed less sympathetic toward one of its recent partners in China. Last year, Temasek and Singapore Airlines took a 49 percent stake in a cargo airline with China Great Wall Industry, a satellite launching company that since 1991 has been repeatedly sanctioned by the United States in the export of missile parts to Iran.

This August, the Bush administration imposed sanctions on the new carrier, Great Wall Airlines, forbidding Boeing and other American companies to do business with it. Deprived of technical assistance or parts, the airline was grounded.

Singapore Airlines said in a statement last week that Great Wall Airlines itself had done nothing wrong and that China Great Wall Industry no longer owns any of it.

As for the investment in Shin in Thailand, analysts say that Temasek should have been more careful about getting involved.

Since becoming prime minister in Bangkok in 2001, Mr. Thaksin was repeatedly accused of using policies to benefit the company. Even as sale talks were under way, rallies against him were drawing tens of thousands of people.

After buying the 49.6 percent stake with a group of Thai investors, Temasek and its partners were obliged to offer to buy the rest, and ended up with a 96 percent stake. Temasek gained control over Shin, as well as 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 vital communications to a foreign government, was that the deal was conducted so that the prime minister’s family avoided paying any income tax on the sale.

Korn Chatikavanij, deputy chief of Thailand’s opposition Democrat Party, said, “If he saw a loophole that allows someone to do a deal like this and not pay any tax, his duty is to close the loophole, not take advantage of it.”

Hundreds of thousands of people took to the streets in Bangkok, with some burning posters of Singapore’s prime minister, Mr. Lee, and Ms. Ho outside the Singapore Embassy.

Investigations into the Shin purchase now center on whether Temasek relied on proxies to exceed Thailand’s 49 percent foreign shareholding limit on telecommunications companies. Temasek denies that any of its Thai partners are proxies, saying that it controls only 44 percent of Shin and that Thais control the rest.

If the Shin deal is found to be illegal, the buyers could face penalties and Shin’s licenses could be revoked. The ministry could also force Temasek to dispose of shares or to void the sale.

Many analysts predict that with Mr. Thaksin gone, the case will fizzle as Thailand’s new leaders choose instead to preserve ties with an important investor. If they do not, Shin represents such a small part of Temasek’s overall portfolio, said Anshukant Taneja, an analyst with Standard & Poor’s in Singapore, that “even if they were to write it off, it doesn’t make any material impact on their profile.”

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