Constitution of the Republic of Singapore (Amendment) Bill

Mr Liang Eng Hwa (Holland-Bukit Timah): Mdm Speaker, I wish to declare that I work in a company where Temasek owns a substantial stake. When the Finance Minister announced at this year Budget speech that Temasek will be included in the NIR Framework, similar to the other two investment entities GIC and MAS, my immediate reaction then was, are we again looking to the kitty under the bed to fund our ever-growing spending needs?

As I went back to read the Second Reading speech for the Constitution Amendment way back in 2008, the Finance Minister did mention then that it would be prudent to leave

Page: 65

Temasek out of the new framework for the time being and to review again after some years. So, this is indeed the unfinished part or the final instalment of the constitutional changes to our returns' spending framework.

The question is what has changed in the last seven years to now justify the inclusion of Temasek into the NIR framework?

Temasek's investment mandate has largely been unchanged; which is to invest in both public and private equity including taking concentrated stakes in a number of companies. Compared to GIC and MAS, Temasek manages a more risky portfolio and its returns are a lot more volatile.

Take for example the recent volatility in the Chinese and Hong Kong equity markets that we saw in the last few weeks. Obviously, the impact will be more on Temasek than on GIC and MAS.

Given the difficulties in projecting a long-term expected real return for an all-equity portfolio, it was the right decision then to defer the inclusion of Temasek into the new NIR framework.

Deputy Prime Minister Tharman mentioned in the Budget Statement speech that MOF has since worked with Temasek to develop an approach to project its expected long-term returns, taking into account the nature of its investment portfolio.

Can the Minister share more details on the approach and how would the computing of the expected long-term real return for Temasek be different from that for GIC and MAS? Are there different risk-weightings applied and what are those?

Under the current framework for Temasek, the contributions are from dividends and interest earned – which are essentially realised cash contributions. With the inclusion of Temasek into the NIR framework, there is now a long-term returns trajectory to keep up so as to meet the Government's funding needs.

While Temasek already measures its performances based on Total Shareholders Returns (TSR) approach but contributes on NII basis, it is very different now where the actual contributions are based on expected long-term real returns. The question is whether Temasek's investment strategies and portfolio management would change as a result.

Under the framework, non-realised capital gains also constitute part of the net investment returns. In addition, actual returns would also likely be different from expected

Page: 66

long-term real returns. Hence, with the inclusion of Temasek, which would require actual cash contributions to the Government, the cash flow impact would become significant. How would the Government ensure sufficient cash generation and liquidity as our Budget is essentially accounted on a cash flow basis?

Temasek holds significant stakes in companies, on behalf of the Government, that are of strategic importance to Singapore and its economy; such as Singapore Airlines, PSA, SingPower, NOL, SBS Transit, SMRT and so on. I fully support Temasek's continued ownership in these Temasek-linked companies (TLCs) as we want these companies to be firmly rooted to Singapore and to be aligned to our national interests and our long-term economic strategy. These companies account for a significant portion of Temasek's portfolio. The share prices and values of these companies do have their fair share of ups and downs; often due to external global market sentiments. There may be times when, for example, equity analysts would call for a "sell" in these shares due to perceived high valuations. Under the NIR framework, would the investment managers of Temasek now be more inclined to actively trade the shares of these TLCs so as to preserve the long-term returns of the portfolio?

I would be very concerned if, for example, they decide to sell the entire stake of SIA if they find the company's market valuation to be overly high and it is timely to lock-in on the gains.

How does the Government balance the national strategic need to hold the major stakes in certain companies versus giving Temasek the full independence to manage the valuations and returns of its portfolio?

The Net Investments Return Contribution (NIRC) has increasingly become our key revenue source rather than a Budget-balancing item; which was what it used to be and in the manner it was presented in the Annual Budget indicate that it is still a balancing item because it is always in the finer lines of the statements. But we know that NIRC is now a major contributor. Reserves are now our strategic resources and competitive advantage, and its returns reduce the need to have high taxes and allow us to invest in economic and social infrastructure even during periods of economic downturns.

However, the natural concern is whether it would lower our guard to spend prudently and sustainably, given that it is a less unpopular funding source. It may breed the mentality to always look to reserves whenever we have a major spending programme.

There may also be times when the expected long-term real returns could fall over time, during prolonged periods of economic slowdowns and market slumps.

Page: 67

Therefore, the need to have a diversified source of sustainable revenues to fund Government's expenditures remains a vital necessity while maintaining the constant check and oversight on the prudence of our spending, especially those that are of long-term nature and those that are cross-generational implications.

As the election draws nearer, it is again not surprising to expect political parties in their bid to win over voters, to start dangling promises to spend from reserves' returns and even reserves itself. It is always so easy to come up with a very appealing election manifesto, listing the big popular items to spend and then say the money to pay for these items can come from the "reserves ATM". The fact of the matter is the NIR is already funding a major part of our capability investments as well as our social programmes. We need to retain and re-invest part of the investment returns just so that we can, at the very least, maintain the purchasing power value of our reserves, which is why the real returns is being used, as well as re-investing part of the returns for future generations.

Finally, while we debate over the constitutional amendments as to what we should spend, how we should spend the returns, let us not forget the Pioneers and the generations thereafter that have built up the reserves painstakingly over the last few decades and now render us available this strategic and precious option. If at any time, the Government of the earlier years were less steadfast in their position, there would be less reserves for us to benefit from today.

In my view, how we judiciously and how discipline we manage and use the reserves has a direct bearing as to whether Singapore will continue to thrive and whether we have a SG100 to celebrate or not.

The still unfolding sad state of affairs for Greece is a very relevant case study for us. We could be like Greece or even worse if we badly mismanage our finances. And we have no equivalent of the EU to bail us out. So, Mdm Speaker, I support the amendments.

Mdm Speaker, the inclusion of Temasek Holdings into our Net Investment Returns framework, first announced at this year's Budget, envisages additional monies comprising the Net Investment Returns contributions to be set aside for healthcare, transport, new Changi Terminal 5, domestic security and SkillsFuture, amongst others – all of which are aimed at improving the quality of life of Singaporeans. Including Temasek in the NIR framework allows the Government to expend the NIR for the benefit of Singaporeans. Including Temasek in the NIR framework is the right thing to do by our people who have to face a more challenging and competitive workplace and a fast-changing world

Page: 68

where the iron rice bowl has become a relic of the past. Our social safety nets require constant strengthening, improvement and upgrading. A more crowded Singapore has also stressed our infrastructure. We also need to plan for new engines of growth to power the economy and to create and take advantage of opportunities in the future.

In the same breadth, the Workers' Party acknowledges that fiscal prudence must represent a fundamental aspect of the Singapore system because Singapore does not have any natural resources. While our self-sufficiency is a virtue, we must also be careful not to make this too much of a mantra, which risks Singaporeans deserving of assistance falling through the cracks. In fact, the unpredictable marketplace of jobs and the reality of looking after loved ones, one's parents in their old age and not to mention children, are more likely to make it difficult to elegantly pigeon-hole individuals who ought to qualify for the different types of assistance currently available.

I have two questions for the Minister. The first pertains to his reply at the Budget round-up speech on liquidity management should Temasek's expected long-term real returns not match up with its actual returns. The Minister informed the House in the 2008 debate on the NIR framework that with the inclusion of GIC and MAS, the Government does not foresee a shortage of liquid funds should this eventuality come to pass. Does the Minister foresee this prospect with the introduction of Temasek, given its different investment strategies and approaches, and are there specific contingencies that have been drawn up for this purpose beyond those highlighted by the Minister in the 2008 speech?

Secondly, has the Government projected the percentage of NIR it has earmarked for the next five years, in view of Temasek's inclusion in the NIR framework? Specifically, how close or how far is the projection from the 50% threshold and how much of a buffer is estimated? Mdm Speaker, the Workers' Party supports this amendment to the Constitution.

Mdm Speaker, thank you for allowing me to join this debate. The Amendment Bill comes almost seven years after Parliament debated the introduction of the NIRC framework for reserves invested by GIC and MAS in 2008. It has been long anticipated.

The intention of moving from the NII framework to the NIRC framework is to increase the amount of funds which the Government of the day can draw upon to finance its Budget. As Deputy Prime Minister and Finance Minister has just explained, the increase in amount that will become available is substantial, almost 1% of GDP.

Page: 69

What I would like to do is to begin by revisiting the issue about the volatility of Temasek Holdings' returns and therefore the possibility of fine-tuning the percentage limit of returns that should be used for spending. Secondly, I would also like to take this opportunity to discuss how this Amendment Bill, even though it has every intention of adhering to fiscal prudence, seems to me, anyway, to be a shift away from fiscal conservatism.

During the 2008 debate on the constitutional amendment which first introduced the NIRC framework, the Deputy Prime Minister and Finance Minister explained that Temasek's strategy was evolving, and that it was operating very differently compared to six years before that. Since giving the strategy room to evolve was clearly an advantage, it is not entirely clear if the current Amendment Bill takes full cognisance of the potential repercussions of the commitment it may be holding Temasek's performance to.

There are a host of risks to contend with when estimating the value of returns. Even if the investments themselves perform well, there are country risks, exchange rate risks, business cycles. Then, there are the more severe risks associated with fluctuating global economic conditions which is something Singapore will always be more exposed to than others. Finally, Mdm Speaker, there is the impact of pandemics − such as the one MERS is having on South Korea at this very moment.

Over the last few decades, Temasek has proven itself more than up to the task in taking these challenges in its stride. However, as our democracy develops, the question should also be asked as to whether there could come a time when the decision we make today becomes a burden on Temasek to deliver results. Given that Temasek's investment strategy is already challenging, will there come a time when Temasek could feel pressure, no matter how slight, to meet the demands of the growing Budget?

As Deputy Prime Minister has mentioned on more than one occasion, Temasek's returns tend to be more volatile and can be quite high when times are good. For instance, the latest Temasek Review reports a one-year return to shareholder of 19.2%. The Review also tells us that the exposure to growth economies is 45%. In terms of geographical region, 42% is invested in Asia, excluding Singapore. In terms of sector, 28% is invested in Financial Services. These exposures are clearly borne out in the fluctuations of Temasek's net portfolio over the last 20 years. The record shows that while the over performance in terms of net portfolio value has been steadily improving, the dips caused by SARS and the Global Financial Crisis were both sharp.

Given how much volatility has been increasing in recent years, this is surely a cause for concern and a reason for being more cautious in tapping on Temasek's NIR. If there is recognition of the different nature of the investment remit of Temasek, should we not consider applying a different proportion of usage to the NIR of Temasek, compared to GIC?

Page: 70

Specifically, would the Bill allow for a lower limit, say 40% rather than 50%, to be imposed on NIRC for Temasek?

The main concern with the switch from the NII framework to the NIR framework is that capital gains, unlike income earnings, are estimated rather than realised. It becomes a technical challenge to define what should be prudent access to gains from the reserves.

To address the fact that the value of the asset base moves up and down, I would like to ask if MOF has considered using a more conservative rule where the low end of the value in the probability distribution of the asset portfolio be used instead? Even though systems such as variance at risk are not completely reliable, they can be designed to offer more conservative estimates of value. So, my question is whether the smoothening rules that are used presently are sufficiently conservative in ensuring that a greater proportion of real reserves are preserved in the long term.

On my second point, despite the Government's reassurances that it is continuing to adhere to disciplined spending practices, I would just like to express my concern at the gathering momentum of what I perceive to be a shift away from half a century of fiscal conservatism. It is not spending itself that I am concerned with, but the inexorable shift towards large spending increases.

It is true that Singapore's spending is at a relatively low level compared to other advanced economies. For 2013, a cross-country comparison shows that among those economies for which data is available from the World Bank, Singapore ranked 46 out of 163 in terms of Government spending when measured by the General Government Final Consumption Expenditure (GFCE). It is also true that depending on which year you choose, the growth rate in such spending could be very low for Singapore − 2014 was a case in point. But a very different picture emerges, Mdm Speaker, when we consider how this has been changing over time. In particular, I would like to point to two aspects of the change: first, the change in the ratio of Singapore's GFCE compared to those of other economies; and second, the growth rate of such spending.

I have used the same database from the World Bank that I mentioned earlier and focused on those economies for which complete data is available for the period 1975 to 2013 inclusive. The cumulative annual growth rate of GFCE for Singapore exceeded those of prominent economies like Hong Kong, Australia, New Zealand, the United States and even the Nordic countries. Among Nordic countries, the highest cumulative annual growth rate in constant local currency terms during this period was seen in Norway at 2.9%. This is less than half of the 6.6% increase in average annual terms that Singapore achieved. Where others spend more, they have taken time to reach a level which I believe we should not be in haste to match in much less time. Incidentally, the comparisons I had mentioned produce

Page: 71

essentially the same result regardless of whether you carried them out using expenditures measured in constant local currency units or current US dollar. So, we should ask ourselves how much faster we want expenditures to grow and whether an even more rapid pace of growth than we have seen will really bring us closer to our objective.

Every Singaporean in distress deserves help, but the reason for more social spending should never be based merely on whether Singapore can afford to. Although many of our fellow citizens still need more help, I do not think the solution is simply for the Government to enact more social spending. Ultimately, nobody wants hand-outs − everybody wants to stand on their own.

As a matter of priority, Singapore's approach should be, I believe, to expand opportunities for everyone − especially the disadvantaged − to participate in the economy, eliminate vulnerabilities to exploitation and exposure, and emphasise that a future of self-reliance supported by the state is realisable.

It is very easy to overlook the fact that the main threat to Singapore's economy remains, as it had been in the past, unemployment. If Singapore's economy loses its relevance in the global economic order, unemployment would rise and remain elevated − that is the scenario that Singapore must counter.

The main difference between the policy shifts we see now and those of the past is that we now have more emphasis on "spending increases". Spending increases − whether it is for social support or wage support − are virtually irreversible owing to the stickiness of increased reliance on such spending. You would not even be able to keep such spending increases frozen, because the calls to ensure they keep up with cost increases will be too loud to ignore.

In 2005, $579 billion was spent on "Special Transfers Excluding Top-ups to Endowment and Trust Funds". This figure grew to $4.3 billion in 2014 and is now estimated to leap to $5.6 billion in the current fiscal year. When it comes to support schemes, permanent entitlements could turn out to be exclusionary rather than inclusive. From a practical perspective, rapid increases in Government spending could lead to crowding out of the private sector, as well as cause surges in demand that the domestic supply base alone will find difficulty in meeting.

While it is true that we still have one of the lowest levels of Government spending in the world as a proportion of GDP, that is not something we need to overturn in a hurry. Indeed, it is the reason why Singapore also has one of the lowest tax-to-GDP ratios in the world. Together with all the other achievements we celebrate this jubilee year, these attributes have set Singapore apart during the turbulent post-Independence era, ensured

Page: 72

that we kept pace with the leading economies of the East-Asian miracle after that, and subsequently gave us with a keen eye for external opportunities which accompanied the surge in emerging market activity after the Cold War.

Singapore was always able to do more with less. In that way, our nation carved out a unique position for itself in the region and the world. Singaporeans were always willing to do more with less, with a workforce capable of taking advantage of whatever they had at hand and learning how to do better from whomever they can. My concern is that, that is changing, and a lot of these intangible qualities which contributed to Singapore's original economic success would soon be lost.

I recognise that the Government will have to continue to expand spending to prepare for the future as well as to meet the growing aspirations of Singaporeans for more social spending. Nonetheless, I hope that, as it does so, it will not only look at how much our reserves can enable us to increase spending, but also use the lessons of how much we have managed to achieve with the fiscal discipline in the past as a core guiding principle.

To conclude, just as the early generations of nation-builders did, we should continue to focus firmly on our economic security. Despite the advances Singapore has made, there remain too many challenges in this regard. In this region alone, our position as the leading global city is the dominant concern.

Although Singapore is well-placed in the region and has had a half-century of consolidation, the possibility of displacement as the leading global city in the region is not a fantasy. In ASEAN alone, the competition is significant. The five most populous ASEAN nations are also the least urbanised and account for more than 90% of the total population of ASEAN in 2013. All of them already have leading urban metropolises. As they continue to urbanise, new better-planned metropolitan cities will be developed in these countries. Whether they become a threat or a partner to Singapore in future depends very much on how we prepare ourselves to embrace their rise.

In order to fully celebrate the achievements of 50 years of nation-building, we should also revisit the realities about Singapore's position in the world which has driven our Pioneers' sacrifices. We are competing against countries which are still able to do more with less.

The steady accumulation of Singapore's reserves has been a tribute to the toil of multiple generations of nation-builders. Any discussion about accessing the benefits of these reserves should not be too dismissive of the relevance of fiscal conservatism. Mdm Speaker,

Page: 73

I support the Bill. [Applause.]

Mdm Speaker, I wish to declare that I am the CEO of Wealth Management Institute, a wholly-owned subsidiary of the Temasek Group.

Madam, I rise in support of the proposed amendment to include Temasek Holdings Limited in the Net Investment Returns (NIR) framework. This amendment will widen the sources of revenue that help to fund expected increases in Singapore's future spending needs. It is tempting to look to the country's reserves whenever we need to support an increase in spending, so it is good to remind ourselves of the strategic importance of these reserves.

As our Prime Minister said in 2008, I quote: "We have no natural resources. All Members who enter this House memorise that as a catechism – no timber, no iron, no gas, no gold – just our wits and our strength and our financial reserves which we have built up. These financial reserves give people, Singaporeans and investors alike, confidence that Singapore is sound, strong and able to cope with anything which may come its way."

Singapore's reserves help underpin confidence in our country and our ability to weather storms. Any decision to draw on these reserves must be taken with great circumspection, and we must guard against any policy that is financially unsustainable, however popular it may be.

Madam, in recent years, we have seen significant increases in spending across many areas, from social programmes, housing, education and healthcare to productivity initiatives. At the same time, the Government is projecting a lower growth trajectory in GDP, due partly to a maturing economy. We have not made enough progress in improving productivity. And an uncertain global economy will make it difficult for our Government investment agencies to sustain returns of the past. On top of that, our ageing population will increase the demand for more resources to care for the elderly. We have entered a new era of financial planning for our country. It is no longer "business as usual". As revenue streams come under pressure, our debates over spending plans should be ever more robust and informed.

For example, even as we welcome the addition of Temasek as an additional source of funds under the NIR framework, we should ensure that spending is prioritised towards investments in the country's future, or on items that will boost our capabilities and competitiveness. So, I would like to ask Deputy Prime Minister Tharman, with respect to our planning parameters, what proportion of spending is geared towards investments in national

Page: 74

development? How are prospective projects assessed, not just on their financial viability but also on their impact on growing the country's capabilities? What mechanisms, disciplines and KPIs are in place to track "investment returns" of projects and to ensure that we "sweat our assets"?

Mdm Speaker, the constitutional amendment in 2008 changed the formula for computing NII, so that the Net Investment Returns (NIR) framework was applied to GIC and MAS only. Back in 2008, then Minister for Finance Tharman explained that the Government had decided not to include Temasek in the NIR framework for two reasons.

First, there were no established methodologies for projecting the long-term expected real returns on Temasek's portfolio, given its investment approach of taking concentrated stakes in companies, including direct investments.

Second, Temasek's investment strategy was still evolving, having begun a major effort to diversify its investments geographically as well as sectorally in 2002.

Can Deputy Prime Minister Tharman provide more details to the House on how the Ministry is now able to forecast the long-term expected real returns of Temasek, taking into account the nature of its investment portfolio? How has Temasek's portfolio investments evolved since 2008? Are Temasek's investment strategies expected to change in any way, as a result of coming under the NIR framework? How will the country's aggregated NIR be impacted by the inclusion of Temasek's portfolio, given that its portfolio is likely to be more volatile than those of MAS and GIC?

Madam, the NIR framework is based on a forward-looking assessment of the overall returns over the long term. The expected returns are based on an investment horizon of 20 years. I would like to ask Deputy Prime Minister Tharman about the challenges in trying to look so far ahead, given such volatile market conditions and investment climate. In today's uncertain world, many find it hard enough to forecast one year in advance, let alone 20 years. As our spending is based on expected real returns, we need some degree of confidence that the forecasting model is robust and time-tested.

Since the implementation of the NIR framework in 2008, we have also experienced an unprecedented global financial crisis with economic shocks that much of the world is still recovering from. Singapore fared relatively well, even during the darkest days of the crisis and was even considered a safe haven in the financial world, maintaining its enviable AAA credit rating. I would like to ask if the financial crisis had any impact on the NIR framework – are there any lessons we can draw from the financial crisis that could shed light on the robustness of our framework and the investment strategies of our state investment

Page: 75

organisations?

In addition, I would like to ask the Deputy Prime Minister to provide a comparison of the performance of MAS, GIC and Temasek against other sovereign wealth funds or government investment entities, using relevant benchmarks.

Madam, during the 2008 Constitutional amendment, the Prime Minister explained how the Government had based their level of spending on 50% of the long-term expected real returns. I quote the Prime Minister: "It is not an exact science why we came to this number, but I think 50% has a certain neatness and feels intuitively acceptable, because it underlines our commitment to continue growing our reserves, while allowing the Government to tap on part of the investment incomes for current spending. In a sense, we have put equal emphasis on both objectives – the present and the future."

May I ask the Deputy Prime Minister: under what circumstances would the percentage of 50% be up for review? Whilst a spilt down the middle would have seemed, in 2008, an equitable balance between providing for present and future needs, future circumstances may require the Government to increase their spending, say, for social programmes or other needs. So, what signposts should we be looking out for that might signal a timely review of this percentage? How soon would the Deputy Prime Minister expect us to encounter these signposts?

Madam, in closing, as we enter an era of increasing spend and diminished growth, the NIRC will be a welcome source of revenue. We are fortunate to have the nation's reserves, but must continue on the path of prudence and sustainability, for the sake of future generations. Ultimately, the focus must be on building a strong and globally competitive economy that will continue to generate strong operating revenues to meet increasing demands for expenditure. Mdm Speaker, I support the amendment.

Mdm Speaker, I would like to thank Mr Liang Eng Hwa, Prof Randolph Tan, Mr Pritam Singh and Ms Foo Mee Har for speaking in support of the Bill. They raised some fair questions and, indeed, these are questions which we have thought through very carefully − first in 2008 when we introduced the NIR framework and again now, when we are amending the framework to include Temasek.

There are basically three sets of issues. First, how much should we be spending and how do we spread the benefits from our reserves across generations? It is a basic question of equity − equity between generations. It is a question of our obligations to current and future

Page: 76

generations. So, that is the first set of issues.

The second question is, having decided on the appropriate balance between spending today and spending tomorrow, how do we ensure that we do not veer from that intended balance or inadvertently overspend beyond that balance?

The third question has to do with our investment entities themselves − Temasek and GIC in particular. How do we ensure that their strategies are not compromised or shaped by this NIR framework?

Let me address each of these briefly in turn.

First, the question of balance between spending today and spending tomorrow, what is the right balance? Our NIR framework aims to achieve a fair and judicious balance between today's needs of Singaporeans today, tomorrow's needs of today's generation of Singaporeans and the interests of future generations.

Our reserves are basically an endowment, an endowment built up over 50 years. We should get some of the benefits of that endowment today. But we should also ensure that future generations of Singaporeans benefit from that endowment. An endowment is meant to be a permanent benefit for Singaporeans − draw some today, but ensure that future generations continue to enjoy that endowment.

And it is not just about preserving the endowment so that there will always be a stream of income coming onto the Budget for regular spending. It is also about providing security for Singaporeans.

Without any natural resources, our financial assets are a critical part of our defence against any future crisis. And we do not know what crisis it may be − it could be a financial crisis, a natural calamity, or a crisis coming out of geo-political disorder. We do not know what crisis it may be, but it is critical that we allow our reserves to grow, not excessively but to be able to grow together with our economy and future conceivable spending needs.

Is a 50% cap the right balance? Ms Foo Mee Har has just reminded us of what the Prime Minister had said in 2008 when we introduced the NIR framework. There is nothing scientific about the figure 50%. It is a judgement. It is a judgement of what is a fair balance between the needs of today and those of the future.

As I had mentioned in my speech earlier, we expect NIRC to be about 3% of GDP, with the amendment to the framework that we are proposing today. The NIR framework will also

Page: 77

mean that we have a reasonable chance of sustaining this stream of income for spending on the Budget for many years to come. So, we will get a lift in resources, roughly speaking of about 3% of GDP, but the framework – because of its checks and balances and its safeguards – will give us a reasonable chance of sustaining this stream of income in the Budget for many years to come, rather than seeing a dwindling stream over time because we draw too much for spending today.

The second issue is whether the safeguards are in place so that we do not risk a situation where the expected returns over the long term, which is the basis for today's spending, do not materialise and we find that in the meantime, we have drawn on too much NIR monies and inadvertently overspent. It is a fair question because there is no assurance that actual returns over the long term will match expected returns. And I would like to emphasise that when we thought through the NIR system in 2008, we paid particular attention to ensuring that the system will be sustainable, and that there is no bias in favour of over-optimism in expected returns and thus the likelihood of facing a situation where actual returns are, in fact, much lower than expected returns.

There are several safeguards in our system that will ensure sustainability, and I will go through each of them briefly. First, the 50% cap itself − ensuring that at least 50% of real returns are retained in the reserves and we do not face depletion of the reserves over time.

Second, ensuring that it is real returns and not nominal returns that we look at, so that we do not get a situation where you have high inflation globally and high nominal returns, and you spend on the basis of the nominal returns, when really what you are doing is depleting the real value of the reserves. So, that is the second safeguard.

The third safeguard, which is important, is that the spending is based on investment returns on net assets, not total assets. In other words, it is based on the excess of assets over the liabilities of the Government, which includes borrowings such as SGS and SSGS. The net assets are basically the unencumbered assets and the spending rule is based on these unencumbered assets rather than the full gross amount of the assets. We do not spend any of the returns earned on the encumbered assets, in other words, the assets that provide backing for our liabilities. And what this means is that we ensure that the full investment returns on the encumbered assets are available to cover the debt servicing costs on the liabilities.

The fourth safeguard is the smoothing of the asset base − the asset base on which we apply expected long-term returns. This means that the temporary booms and busts in the market that lead to changes in the value of our asset base are smoothed. A sudden boom in asset prices, which will happen from time to time, does not mean that we can immediately

Page: 78

spend more through NIRC. So, that is the fourth safeguard − the smoothing of the asset base.

The fifth safeguard is very important. The four safeguards I have spoken about are in the design of the NIR framework. But there is an important fifth safeguard, which is in the governance processes in the NIR framework, that also ensure that we do not spend on the basis of over-optimistic assumptions about expected returns. The process by which expected long-term real rate of returns are decided has checks and balances, and is shaped by a sense of realism about the risks in the investment world.

The process involves annual review within each of our investment entities so that the Boards can make a proposal to the Government. It is not just about the Boards coming up with a number, Government ratifying the number and the Council of Presidential Advisors (CPA) and the President agreeing to the number.

It involves detailed deliberation at each stage of the process.

First, within the organisations themselves, within the investment entities – Temasek, GIC, MAS. It is a rigorous process, to project the expected rate of return over the long term, based on the views of seasoned professionals and experts. They take a long-term view, based on history as well as an assessment of the future environment and seek not to be swayed by short-term sentiments. That is an extremely important part of the culture – not being swayed by the short-term sentiments of the markets.

The Government then decides whether to accept the Boards' proposals. We consult independent experts when necessary. And where there is significant uncertainty in the outlook, the Government will err on the conservative side when it recommends the expected rate of return to the President and the Council of Presidential Advisors (CPA). The President and the members of the CPA themselves are experienced people. The CPA comprises people with very serious, proven track records in their professions and businesses. They are people who can question Government on the assumptions we are making, or the judgements we make. They can question the Government as well as the investment entities themselves.

So, the process that I have described has features which mitigate the risk of over-spending, particularly the risk of having expected returns that are above what can be realistically achieved in the markets.

What if there are persistently low actual returns, lower than expected? Well, this will in fact be reflected in the asset base, because the asset base is not based on expected returns. The asset base is based on actual returns. And if you have persistently low or negative actual returns, it will mean that the asset base grows more slowly, and that affects how much

Page: 79

spending we can have because the expected returns are applied to that asset base. So, that is another check on the system and it constrains how much we can spend.

So, the system that I have described involves several layers, not just one layer, that amount to a strong structural safeguard in how we spend our reserves. The system helps to safeguard against over-spending based on over-optimistic expected returns.

Assoc Prof Randolph Tan and Ms Foo Mee Har pointed out that the Temasek portfolio, in particular,was a more volatile one. I think there were some useful questions. Let me first say that when we designed the NIR framework, we designed it for all three entities. The 50% rule and the other features of the framework were designed for all three entities, although we first proceeded with GIC and MAS.

Assoc Prof Randolph Tan had a couple of questions and suggestions. One was whether we should apply a different spending cap to Temasek compared to GIC and MAS because Temasek has a higher risk portfolio. It is a meaningful question. We have a range of investment entities with quite different risk profiles. MAS at one end, the most conservative; Temasek at the other, which takes more concentrated stakes and is basically an equity investor, which has higher risk compared to an investor with a balanced portfolio. We can, in theory, apply different caps to each of them but I think there are merits in keeping the system simple and applying a common 50% cap to all the sources of investment income under the NIR framework and being conservative in the way we go about operating the system. I am satisfied that with the safeguards we have, that conservatism will be maintained.

I should add, in relation to Assoc Prof Randolph Tan's suggestion, that we do not look at projected values of the asset base, whether it is based on value at risk or any other way of drawing a cone of possibilities. We actually use the asset base that is based on historical values. That itself is a form of conservatism. Smoothed historical values are the asset base on which we apply our expected returns to determine spending. So, there, too, is some conservatism built into the system.

Next, the impact on the investment entities themselves. Will their investment strategies be influenced by the NIR framework? Ms Foo Mee Har, Mr Liang Eng Hwa and Assoc Prof Randolph Tan had asked this question. I had mentioned this during the Budget debate and I will have to emphasise it again. Being included in the NIR framework does not change the investment strategies of GIC, Temasek or MAS. It leaves their strategies unaltered.

The NIR framework does not set a target rate of return for the investment entities. They have to be faithful to their mandates. Their mandates, particularly in the case of Temasek

Page: 80

and GIC, are to invest for the long term, to aim to grow the value of their assets over the long term and to ride out short-term market cycles. They determine how much risk they can accommodate, and within that amount of risk they aim to maximise their returns over the long term.

Why are we able to take that approach of letting them focus on their mandates of investing for the long term? The reason is because our NIR framework is purely about the unencumbered assets − I explained this earlier − assets that are not matched by liabilities. And this allows both GIC and Temasek to adopt an endowment mindset − of investing for the long term and growing the value of their assets by taking advantage of opportunities that short-term investors or those who are liquidity-constrained cannot take advantage of. Overall, this approach has enabled both GIC and Temasek to perform creditably in relation to the market indices and they are both extremely well regarded amongst their peers.

What if future returns are expected to be structurally lower because of a deterioration in the investment environment? It is possible. It is entirely possible given the problems in the world today – the fiscal challenges, low productivity growth, and the possibility of disruptions in the international environment. It is possible that we have to settle for a structurally lower rate of return over the long term. If that is the case, then the Government has to adjust its spending. We will have to accept that as a reality that there will be lower expected returns, lower NIRC and we have to adjust our spending, or we have to find alternative forms of revenue through domestic sources. That is the right approach, rather than asking the investment entities to take more risks in the search for yield so that we can still get the same amount of NIRC. And that is the approach we must stick to.

Ms Foo Mee Har has asked whether we have learnt any lessons coming out of the Global Financial Crisis. I think it has been a very useful episode. The main lesson is that spending based on expected returns instead of actual returns was the right decision. We made our amendment to the Constitution in good time. Spending based on expected returns rather than actual returns turned out to be a wise decision. It helped us to avoid going through a "feast and famine" in NIRC and in Government spending.

We all know what happened during the crisis. If we look at equity indices, say, we take the MSCI World index, it declined by almost 40% in 2008 and recovered by 31% the next year – a big crash and then a big recovery. And we would not have wanted Government spending to be shaped by those sharp gyrations in world markets. We have instead been able to avoid pro-cyclical Budgets. If you spend based on actual returns and actual returns are highly volatile, it will typically mean that you are pro-cyclical; in other words, during good times, you spend more, and during bad times, you spend less. That would not be wise from an economic policy perspective.

Page: 81

Liquidity is an important issue. I think Mr Liang Eng Hwa and Mr Pritam Singh had asked about how we manage liquidity within this framework. The essential issue is this − if we are spending on the basis of expected returns, and expected returns are not matched by actual returns year-to-year, where do we get the cash in order to spend? Expected returns is the basis on which the spending rule is defined, but if actual returns vary from expected returns and, in particular, may fall well short of expected returns, where do we get the cash? And that is an important question. I had addressed it in 2008 when we introduced the NIR framework and I touched on it briefly in this year's Budget debate as well, but I will explain it again.

First, to be very clear, this is not an issue about the spending cap. It is not an issue about investment strategies. It is purely a cashflow management issue. It does not have to do with the size of our Government Budget surplus or deficits. It is a cashflow management issue. The spending rule caps how much we can spend based on the expected returns of our investment entities. Having determined the maximum amount that we can spend, the question is whether we have got sufficient cash for that spending.

The Government has a variety of sources of cashflow from which it can meet its cash needs. These include our tax revenues which are coming in at different times during the year. It also includes funds raised outside the Budget, such as the proceeds from land sales. These land sales proceeds cannot, under our constitutional rules, contribute to the Budget and they do not count as Government revenues. But they are part of the cashflow that the Government receives.

There is also a healthy level of Government deposits placed with MAS. A substantial amount of Government deposits placed with MAS that we can draw on when we need it, if we need it, for cashflow purposes.

The Government basically pools all its sources of cashflow, all its sources of liquidity together and manages its cashflows as a whole through a disciplined procedure.

We have more than sufficient cash to ensure that NIRC spending based on expected returns can be met. There is, hence, no need, even when actual returns are weak or negative, to require the investment entities to divest existing investments in order to provide cash to the Government.

Finally, let me move on to a broader theme that came up in Members' comments, which is the whole issue of fiscal conservatism. I am glad that it was raised. Mr Liang Eng Hwa, Ms Foo Mee Har, Assoc Prof Randolph Tan, in particular, raised valid questions over how we should shape our spending priorities and how we ensure that we are getting value out of our

Page: 82

spending.

Our aim is not and cannot be to spend all the revenues we have. Our aim is, first and foremost, to ensure that we are spending wisely, in the interest of Singaporeans today and tomorrow. And as Assoc Prof Randolph Tan pointed out, we have got to guard against an inexorable rise in spending. He noted, and I think you will see this if you were to look at the history of social spending in many countries, that social spending only goes up, it does not come down. Unless you are forced to bring it down in a deep crisis, which is what Greece and some European countries are going through in a very painful way. Not just painful adjustments in crisis but also quite inequitable, I would say, because the people who are taking the pain of budget cuts are typically the young and the poor.

So, we must avoid in normal times, an inexorable increase in spending, where promises today are layered upon promises yesterday. It is what has happened in so many countries and it is a natural tendency in society, a very human tendency for that to take place. We should guard against that and Assoc Prof Tan sounded a useful caution.

Our spending is increasing. Why is it increasing? First, because we are engaging in a major new cycle of investment in Singapore's future. In our healthcare capacity, our transport infrastructure and our human capital. It is a major new cycle of investment that I spoke about in this year's Budget, and those are the big three drivers.

We are also recalibrating and rebalancing between collective and individual responsibility, in various areas of social support – from the early years all the way to the retirement years. But the big drivers of increased spending on the Budget are healthcare capacity − because of an ageing population – transport infrastructure, and, thirdly, investing in our human capital, in Singaporeans themselves, because that is the ultimate source of strength in our society and our economy. Those are the big drivers.

We have essentially followed the life cycle of our society. Many other countries, during their younger and rapid growth years, spent the larger revenues that came up. We saved surplus revenues when there were Budget surpluses in good times and during the years of rapid growth. We saved Budget surpluses and did not spend them simply because they were there. This now puts us in a very strong position today. Because now, as our society goes through the second half of the life cycle – gradually getting older and our economy is slowing down – we are now in the position of having this endowment, which we can draw on in a disciplined fashion.

Following the lifecycle of our society has been a sensible and prudent policy that we have through the years. We should never see our aim as that of looking for new spending

Page: 83

needs and then looking for the revenues in order to meet that spending. Our aim should be, first and foremost, focused on outcomes. The real outcomes we want are: a vibrant economy that provides good jobs and careers for Singaporeans; a low tax burden on the middle-income group – and it is, in fact, much lower than in most other countries; and a fair and equitable distribution of taxes and benefits in our society. That is what we focus on, rather than looking for new spending and then looking for revenues to be able to meet these needs.

And I would like to assure Ms Foo Mee Har that we do take very seriously the assessment of spending effectiveness even after we have started. Our healthcare infrastructure is a very important area, where we are putting a lot of emphasis on this – MOH and MOF – on assessing the effectiveness of spending and where it should be spent. Should it be in the acute hospitals, or should we be spending more on step-down care and primary care; how do we spend in a way that truly enhances benefits for citizens, and a critical issue - how do we ensure that future treatments, particularly as technology advances, provide real value rather than just higher costs? How do you ensure that SkillsFuture, which is a major new investment in the future, will be money well spent and not just money chasing after educational programmes? Important issue. We have got to assess our spending as we go along and ensure that they are providing value for money.

Let me conclude briefly, Mdm Speaker. First, I thank all the Members for having emphasised the need to maintain fiscal discipline. I note in particular Mr Pritam Singh's statement, that the Workers' Party supports our commitment to fiscal prudence, as a key part of the Singapore system.

Singapore has an unusual strategic advantage of having a financial endowment – the opposite of most countries' debts. For a country without natural resources, this financial endowment that we have is critical.

If we have to start from zero today, it would take us far longer to build up the reserves, and in fact, it may not even be possible at all. If we had to start today, with a population that is getting older, an economy that is slowing down and an international environment that is quite different, much less favourable than before, it would take us far longer to build up these reserves, or it may be not possible at all.

So this unusual strategic advantage that we have, and that our children and grandchildren will have, is something that we should cherish and protect. But remember, it is a result of deliberate, conscientious and continuous efforts of successive governments over 50 years.

Page: 84

As Mr Liang Eng Hwa emphasised, we must never lose the values of fiscal conservatism that got us here, and the sense of obligation to both current and future generations that our pioneer leaders bestowed on us. Mdm Speaker, I thank you. [Applause.]

Thank you, Madam. I have a clarification for the Deputy Prime Minister. The Deputy Prime Minister mentioned in his speech that the Net Asset is the basis of calculation for NIRC. I would like to know what type of asset class he is referring to and how does he consider "Net".

Thank you. Well, if I could just explain this again to Mr Low. Essentially, on the Government's balance sheet, there are assets in the GIC, MAS and Temasek, and there are liabilities. Some of them have their own liabilities. For instance, the MAS issues treasury bills and Temasek issues bonds – they have their own liabilities. In addition, the Government has liabilities. It issues Singapore Government Securities. The Government also issues Special Singapore Government Securities (SSGS) to the CPF Board.

We ensure that all the liabilities are deducted from the assets, so that we arrive at net assets that are the basis of what we can spend on the Budget. This way, we ensure that the investment income on the assets that match the liabilities – that provide backing for the liabilities – are fully available to meet the debt servicing cost of the liabilities. That is the first thing that we ensure.

Second, it enables us, and it enables, in particular, GIC and Temasek, as investment entities, to take an endowment mindset. They think about how to grow the endowment over the long term, as unencumbered assets and invest for the long term. This is the privilege that we have in Singapore.