I was recently notified of a rebuttal to some of my writings and specifically attempting to clarify how Temasek Holdings has earned 17% annually since 1974 as they claim. The author claims that Temasek investment returns are entirely reasonable because Temasek received these companies at “zero or nominal cost”. Consequently, earning 17% annually is relatively easy given the low initial valuation. I will begin by discussing the implications of what the author claims and then in a later piece move to analyzing if what the author claims actually happened.
- Despite the author writing that I was “hinting that the returns are unbelievable and must be the result of Mickey Mouse accounting by TH”, the author states that the returns are unbelievable and are the result of Mickey Mouse accounting. Let me explain. The author correctly notes that the government of Singapore “started certain enterprises” in the 60’s and 70’s but then transferred those holdings to Temasek at “zero or nominal cost”. Ask yourself this: when the government of Singapore started these capital intensive enterprises in shipping and airlines which required large investments, did it start them at “zero or nominal cost”? Definitely not. The government invested large amounts of money to start those companies but then transferred those assets to Temasek well below value, if what the author claims happened. The first implication: the government is absorbing significant losses to start companies with large initial investments and subsidizing the profits of Temasek by transferring these corporate assets at “zero or nominal cost” incurring a loss for the government.
- The second implication of the authors claims: Temasek is engaging is Mickey Mouse accounting. The author claims that the government of Singapore can transfer companies to Temasek at “zero or nominal cost” because these were not publicly traded companies at the time. That is incorrect. Just because these companies were not publicly listed does not mean that Singapore and Temasek can value the transfer of assets at “zero or nominal cost” or whatever value it wants. As the primary or sole shareholder, those assets even in the absence of a public market, the government should have transferred those assets to Temasek based upon some measure of historical cost. Let’s take a simple example. If the government of Singapore creates the Acme Manufacturing company and invests $1 billion SGD and is the only or the majority shareholder, it should transfer the Acme company to Temasek based upon some value of the historical cost after accounting for profit and loss of the company say $1.1 billion SGD if the company made a profit. The Singapore government cannot invest $1 billion SGD and then transfer that $1 billion SGD asset to Temasek at “zero or nominal cost” because it wants to artificially boost their returns. That is truly Mickey Mouse accounting.
- The third implication of the authors claims: Temasek returns claims are only “accounting” returns and not actual returns. Just as Temasek declared a significant profit from its sale of Virgin Atlantic despite purchasing the stake for $1.65 billion SGD and selling it for $360 million, the author is saying the same thing about all Temasek returns. By transferring the assets at “zero or nominal cost” as the author claims, this significantly increases Temasek’s accounting returns but lowers the actual returns. Let’s take a simple example. Let’s assume that the government of Singapore spends $100 million SGD to create Acme Manufacturing, transfers it to Temasek at “zero or nominal cost” of say $50 million SGD, and Temasek then takes it public after which the market capitalization is let’s say $100 million. Temasek enjoys a $50 million SGD profit and declares a return of 100%. If Temasek receives the asset for $1 million SGD its profit is $99 million SGD and it declares a return of 9,900%! The Singapore taxpayer however, suffers an offsetting loss of $50 million SGD (or $99 million) to subsidize Temasek “returns”. In other words, the author is saying Temasek returns are inaccurate and should be considered accounting returns similar to declaring a profit after selling an asset for $360 million purchased for $1.65 billion.
- The fourth implication of what the author says: is that Temasek accounting does consider the cost of the capital. This might be the most damaging and concerning implication. Just as employers pay employees in the form of wages, companies have to pay and account for the cost of capital. Capital may be a financial asset like stock in a company or a machine used to make things. However, companies must account for their cost of capital. A bank with deposits has to pay its depositors a small amount of interest. A real estate development firm typically borrows money to builds a new apartment building or mall and it pays interest to a bank. If Temasek is receiving assets for nothing then of course their returns should be enormous. Let’s return to Acme Manufacturing for a moment. What if they received their building and machines for free and didn’t have to pay for the cost of the building and machines? Of course they would make a lot of money. They should make a lot of money. The author of this piece is stating that Temasek and other companies are not paying for their capital. That is an enormous problem.
To briefly recap what this author has stated. First, Singapore tax payers are suffering losses by subsidizing Temasek profits. Second, Singapore and Temasek are engaging in Mickey Mouse accounting. Third, Temasek returns are inflated by the “zero or nominal cost” assets it received. Fourth, Temasek accounting does not consider the cost of capital. Mind you this is what this anonymous author has said by arguing assets are transferred at “zero or nominal cost”. Their argument not mine.
As I have repeatedly said, Temasek and Singapore have created an enormous problem for themselves. If they try to tell the truth in one area, the enormity of the deception increases in other areas. Today, I have focused only on the implications and arguments made by this anonymous author. Next week I will examine what the data shows about whether what this author says is true.
Update: Thanks to a loyal reader for catching a small typo.