Tag Archives: Markets

Olam, Temasek and a huge pile of debt

Temasek’s offer to buy out Olam in a S$2.53 billion deal comes as the commodity trader continues to pile on debt. While Olam’s politically well-connected management and shareholders may appreciate the sovereign wealth fund’s backing, this is a deal which ticks all the wrong boxes for Singapore.

Olam’s management have been fending off critics of their financials and accounting for years. While Carson Block’s very public decision to short the stock in 2012 was widely reported, less well-known is the fact that top Asian equity house CLSA incurred the commodity trader’s wrath the year before over a research note that raised some of the same concerns. And while the public response from Olam has always been defiant, privately management have admitted defeat – tearing up a flagship six-year plan to generate US$1 billion in profits by 2016 and slashing the debt fuelled growth that Block saw as unsustainable.

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Botched Tender? LTA performs u-turn on private bus operators

The decision to award the first City Direct private bus tender to ComfortDelGro – the parent company of existing public operator SBS transit is baffling. The original intention to use private operator capacity to augment existing public operators appears to have gone up in smoke. Was the introduction of competition to the existing government controlled duopoly operators too dangerous? Or was the tender itself simply botched up?

Original Intention

Lui Tuck Yew, then Minister for Transport, describe the tendering process thus –

“I have also asked LTA to see how we can tap on the resources of private bus operators, given that the two [Public Transport Operator]s’ resources are already very stretched”
Speech by Lui Tuck Yew, Minister for Transport, at the parliamentary debate on the population white paper. 5 Feb 2013

Josephine Teo later re-iterated this point in an oral reply in parliament –

“the move to invite private bus operators to run City Direct bus services is to tap on their existing resources to improve bus service levels. These operators may have existing buses and drivers available in between their other assignments, such as ferrying school children or workers, and it is our aim to contract them for the required bus services.”

Josephine Teo. Oral Answers to Questions. Parliament Reports. 9 July 2013.

On the face of it, this plan seems perfectly reasonable. Private bus operators with spare capacity and an interest in growing their business can be brought into the industry to address an apparent shortage of resources amongst public operators. Another obvious but unspoken change that such a move would bring is increased competition in the transport segment. The current model, where two operators – both of whom have the state as their largest shareholder – enjoy a duopoly is arguably less good at delivering value to customers than it is at delivering guaranteed profits to shareholders.

Private, Public or Parent?

In awarding the tender to ComfortDelGro, the parent company owning 75% of existing operator SBS Transit, LTA appear to have performed an abrupt u-turn. Ms Teo and Mr Lui’s stated goal of using private capacity to supplement public shortages does not appear to have been realised. While CDG does own a bus operator separate from SBS Transit, there is no meaningful independence between the two companies. With such a large shareholding, CDG enjoys almost complete control over SBS Transit – CDG’s owners control a large enough share of SBS Transit to dictate the running of the company. This is underscored by the management structure. The Chairman of SBS Transit, Lim Jit Poh, is also Chairman of CDG. SBS Transit’s deputy chairman, Kua Hong Pak, is listed as “Managing Director/Group Chief Executive Officer” in CDG’s annual report.

Rather than bringing private operators into the industry to bolster capacity, LTA appear to have achieved nothing more significant than enabling the management of CDG to work with the management of SBS Transit (who are in fact the same people) to use the resources of the former to alleviate the constraints of the latter. While the substantive difference Ms Teo and Mr Liu originally sought to draw between public and private operators is not obvious in hindsight – a bus is a bus after all – getting a parent company to assist a child company is not a game-changing achievement. One is left wondering, if the solution were this simple, why did SBS Transit and CDG not find a way to work together sooner to solve the ongoing transport crunch? Were they suitably incentivised to innovate and problem solve?

Whither Competition?

Competition is the greatest spur to innovation, and it is something that has clearly been lacking in many sectors of Singapore’s economy. Enjoying a comfortable duopoly with 54% Temasek owned SMRT in the transport segment, SBS has earned significant profits – achieving a return on equity over 10% from 2008 to 2011 – before falling to 5.5% in 2012. Were SBS complacent in the knowledge that there were no competitors existing or likely to emerge to their bus operations? Probably. Could SBS really not have found a way to increase their “stretched” capacity without waiting for LTA to award a tender to their own parent company? A parent company with the same senior managers? It seems unlikely. The suggestion that management were complacent due to a lack of competitive pressures is hard to avoid.

As it stands, the move does nothing to increase competition in the sector. The current duopoly is not threatened by a “new entrant” which is in fact closely related to an existing player. Will the man who is Chairman of both SBS and CDG allow his new operator to aggressively challenge the position of his existing player? Again, it seems unlikely – and this represents a missed opportunity. While increased competition was never explicitly mentioned as a reason for the tender to private operators, the language used caused many – not unreasonably – to assume this was an expected outcome. The government controlled Straits Times reported on expected bids from both Woodlands Transport and The Singapore School Transport Association – but made no mention that CDG might bid.

The opportunity to bring new blood into the industry, not just in terms of capacity, but new management and new ideas as well, should not have been missed. Faced with a threat to their duopoly, SBS and SMRT would have been forced to re-asses and improve their operations. Conversely, awarding the tender to a government-owned company linked to an existing PTO further entrenches the existing state-duopoly and reduces opportunities for new entrants to break into the industry. It could be that the government feared the effect of competition on the existing players – both of whom have the state as their largest shareholder – and decided to favour a bid from a related party. It is hard to know. It could also be that the government intended to bring in new players from the private market, but botched the tender by not realising that SBS’ parent company would be eligible to bid. If financial parameters were part of the selection criteria, then it is likely that CDG would have an advantage over smaller private operators – and while it could be that this is what happened, it is impossible to say for sure.

As a believer in the driving force of competition, one can only hope for a better outcome in subsequent City Direct tenders. However, only ten routes will be tendered in total and all are likely to be valuable to a new player seeking to establish themselves. For this reason, the decision to award the current tender to CDG is particularly disappointing – with any luck, subsequent routes will go to a new player with real independence from the existing government linked players.

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Why Singapore has no minimum wage

Why does Singapore not have a minimum wage? This may be a million dollar question, but it has a one hundred billion dollar answer.

Most developed countries have one – either in law or negotiated through unions. But oddly this is one feature of first world life that the PAP stubbornly refuses to even consider. It is something that many locals would like to see for many reasons. It would help to level the employment landscape which is currently tilted in favour of cheaper foreign workers who can more easily support a family in their lower cost of living home country. A minimum wage would also encourage employers to work towards more productive economic growth rather than pumping up the wealth of the nation by importing cheap labour inputs of increasingly marginal economic benefit in ever greater numbers.

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Shortage Economy in Singapore’s Housing Market

Singaporeans queued for up to two nights after rumours spread that the Housing and Development Board was planning to make flats available for sale

Singaporeans queued for up to two nights after rumours spread that the Housing and Development Board was planning to make flats available for sale

I would like to introduce you to a famous economist, János Kornai. He pioneered thinking and research on economic behaviour of communist governments that engaged in central planning – particularly in eastern Europe. One of the defining feature of such economies was shortages of everyday household products including food. Growing up in Hungary János had first hand experience of such shortages – queuing in shops was common. Kornai’s breakthrough idea was essentially that shortages were not just a failure of central planning in the sense that planning could be improved with better insights or more careful analysis, rather he showed that shortages were an inherent result of attempting central planning itself. Prices and wages were fixed by the state and producers were typically also state-owned monopolies, allocated some fixed quantity of goods to produce. With a guaranteed market and no competition, companies had no incentive to produce products tailored to the needs of customers. There were no bonuses or profits to be gained by selling more products or opening new markets. If the government production order was for ten thousand shirts, then ten thousand shirts would (usually) be produced. If the fashion was for blue shirts, but red shirts were easier or cheaper to produce, red shirts would inevitably be produced and factory owners would be paid regardless. A shortage of blue shirts would inevitably develop, and customers would ultimately be faced with a few unsatisfactory choices – either try to wait and queue up for a blue shirt, buy a red shirt instead, or go with no shirt at all.

At this point let us take a time out. First of all, I am not an economist. Second of all, Singapore doesn’t have food shortages or people queuing up for bread – in fact Singapore is hardly comparable to communist Eastern Europe at all. But there are a few curious similarities. One thing that caught my eye in the Wikipedia article on Shortage Economies [5] was the statement that queues were not just limited to everyday essentials. Even people wanting to buy cars and houses had to queue – in the Eastern Block the waiting time for a government apartment was measured in years. Up to thirty years in Poland, six to eight in Czechoslovakia and a mere three to four years in East Germany.

Anyone who remembers the Singapore Housing and Development Board (HDB) “walk in selection” debacle of 2007 knows what is coming next – until relatively recently Singapore did literally have people queueing up for the chance to buy a house. In early February of that year, a rumour started that HDB would soon be releasing a block of flats for sale in desirable locations. Almost immediately a queue started to develop outside the HDB office in Toa Payoh – but the pent-up demand for housing was so great that things quickly turned ugly.

A 26-year-old professional, who gave his name only as Dave, said he and his fiancée had taken urgent leave to join the queue.

He said: ‘Most people were satisfied with the organiser. Since no one was taking charge, it was good that someone tried to make sure there was no queue-jumping.

Said one man: ‘There was more than one queue and a group thought that theirs was the ‘official’ queue. So they started behaving like gangsters.’

‘People were shoving and pushing. We don’t want trouble. We just want a flat,’ said Ms Tan X M, 25, a housewife.
Unofficial queue list sparks evening ruckus at HDB – The New Paper – February 03, 2007[1]

To clarify momentarily, while the story above mentions people queuing for a few days, the reality is that the backlog for housing in Singapore is, just like in communist eastern Europe, measured in years. It was only at the moment that houses were rumoured to be released into the market that the people who had been waiting for years actually formed a queue. Since 2007 the system has changed – while there are no longer physical queues, overall waiting times are just as long. A story from early 2013 about young couples breaking off their engagements because they had initially rushed into marriage in a bid to be eligible to join the electronic queue for housing was particularly moving.

You could put it like this – the third party was HDB. I feel like I was forced to decide to get married early because if I waited until I was, say, 30 and ready to settle down, to wait another three to four years to get a BTO flat would leave me no time to start a family.
Janice

“I was so scared I couldn’t breathe, but I knew I had to do us both a favour and call it off. Before the course, I was so caught up in his ‘idea’ of getting a flat – everyone was saying how difficult it was to get a good unit, horror stories about a five year wait stuck in bad rentals, I just got carried away, I guess.”
Marianne
Runaway brides in Singapore – Yahoo – January 2 2013[2]

Even more recently, from February 2013, we have a story of families in subsidised rental flats being required by the state to pair up and share accommodation with other families.

“HDB told The Straits Times it had capped the number of occupants in a three-room flat at eight, and in a four-room flat at 10”
Families paired in rental flats see benefits – The Straits Times – 18 February 2013[3]

So the presence of multi-year waiting times for housing in Singapore is very much a reality. But what of the central planning angle? Kornai’s key insight remember was that central planning inherently causes shortages. In Singapore housing is very much planned by the government. In its simplest form this is reflected by 85% of citizens living in government built flats. The government owns and supplies the land to HDB – a statutory board under the Ministry of National Development – and the number and types of houses to build is very much government policy.

National Development Minister Khaw Boon Wan has announced measures to build more Housing Development Board (HDB) flats and at a faster pace in Singapore.

Minister Khaw said that he has ordered the HDB to ramp up capacity and to bring forward projects scheduled for early next year to this year.

He also directed the HDB to sustain the new pace of building, suggesting that at least another 25,000 flats would be built for next year or a total of 50,000 flats over a two-year period.
HDB ordered to ramp up building of flats – Yahoo – 28 May 2011[4]

So the two key pieces of János Kornai’s shortage economy puzzle are in place in the Singapore housing market, we have the central planning and we have the shortages, just as in communist eastern Europe. This is obviously concerning – it means that the struggle Singaporean’s face in getting a flat are inherent to the planning system and not just a function of incompetent government that can be fixed by replacing one minister with a better one. But first let us take a slightly broader look at shortage economies. It could just be a co-incidence that Singapore has these features, so it seems wise to take a step back and look at what else Kornai said.

The common results of these shortages for consumers are forced substitutions between goods which are imperfect substitutes and forced savings as consumers are unable to fully utilize their current purchasing power. The institutional outcomes involve the so-called soft budget constraint, in which production units under a planned economy form expectations of always being bailed out by central authorities, paternalistic behaviour on the part of the planners who blame the shortages on the fact that consumers demand “wrong things”, and in macroeconomic terms, repressed inflation resulting from pent-up demand.
emphasis Added [5]

This paragraph, from Wikipedia, contains many insights into the Singapore housing market and wider economy. Forced substitutions refers to the case where someone wishing to buy a HDB but cannot, may have to rent privately, purchase from the resale market or accept some other alternative. The point about forced savings is probably only interesting to conspiracy theorists who fear CPF insolvency and may like to point out that preventing people from withdrawing to purchase a house helps to keep CPF balances in the black. The argument about soft budget constraints is quite complex, and I may have misunderstood it myself, but imagine a government-owned company tasked with implementing government policy, if the policy suddenly becomes harder to implement, the company finds itself in a position where it can negotiate for a larger budget to implement the policy. Since the government generally only judges the success of the company on how able it is to support the implementation of policy, it tends to suit both parties to over rather than under-allocate resources. So state companies tend to grow in size and become bloated and inefficient. In this instance the parallels with government handouts to bus operators are more obvious than in the housing market, but the point is still interesting. The most telling point however for Singaporeans is likely to be the one about “paternalistic behaviour” on the part of the planners who “blame the shortages on the fact that consumers demand ‘wrong things'” I imagine this is hard to believe for people outside planned economies, but in fact this is exactly what we see in Singapore. How often does a government minister come out to manage our expectations, or tell us we are being “too choosy”. The final point is about inflation being repressed under a centrally planned economy with shortages. This is presumably a side effect of people being forced to save and wait rather than spending now, so while it may be interesting to note that Singapore struggles with high inflation and further that the situation may be worse without pent-up demand for housing, this is more a symptom rather than a cause.

János Kornai had plenty of other observations to make on shortage economies which I will only touch on briefly. He noted that companies tended to become unproductive and bloated and suffered persistent shortages of labour – these are all results of the “soft budget constraint” wherein state enterprises are continually able to benefit from government handouts to smooth the path to effectively implementing policy. It is instructive to note that low productivity and on going labour shortages are exactly what we see in the Singapore economy today, so I think it’s not unreasonable to suggest that the shortage economies of eastern Europe appear, at least in part, to be replicated in Singapore.

[1] http://finance.groups.yahoo.com/group/RealEdge/message/2655
[2] http://sg.entertainment.yahoo.com/blogs/singapore-showbiz/runaway-brides-singapore-janice-story-part-1-035439074.html
[3] http://www.cpf.gov.sg/imsavvy/infohub_article.asp?readid={173429169-16181-3188832401}
[4] http://sg.news.yahoo.com/blogs/singaporescene/hdb-ordered-ramp-building-flats-071846737.html
[5] http://en.wikipedia.org/wiki/Shortage_economy

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