When our taxi stopped in front of a stately grey building in the heart of Oslo, the driver pointed to the front entrance and said: “That’s the Ministry of Finance where our money is protected.” We looked at each other and wondered aloud “What would the Singapore cab driver say to a foreign passenger as he drops him off at GIC?” Someone playfully suggested “Oh, he would say, ‘that’s GIC where our savings are kept and we don’t even know how much money we have in there’.” We laughed as we walked towards the front gate.
Norway’s sovereign wealth fund (SWF) is a model of transparency. Every relevant piece of information is disclosed to the public. This came out very clearly in the presentation by Bjorn Geir From, director of the asset management division when we visited him recently. He answered every question without hesitation and gave out all information that we asked for.
Discussion with Bjorn Gier From, Norway’s Ministry of Finance and Fatimah Akhtar, Assistant Treasurer, Singaporeans First
The art of selective disclosure (concealing more than it reveals)
Differences with GIC are very stark:
(1) Norway’s SWF reports to Parliament which scrutinises and requires it to publish all relevant information at regular intervals such as the size of its funds, its performance, cost of management, its investment strategy and ethical guidelines. On the other hand, GIC does not report to Parliament who has no authority to scrutinise it. The Government claims that it is a private company even though it manages public money. It publishes at its convenience and chooses what it wants to let the public know.
(2) The obvious big secret of GIC is the size of its funds. When we told Bjorn that the official reason for non-disclosure is to prevent speculative attacks on our Sing$ currency like what George Soros did to sterling some years back, he smiled diplomatically. He said the only reason to fear speculator attacks is if the currency is weak. The Norwegian kroner is appreciating and has not been subject to speculative attacks. We added that the Sing$ is also strong and the MAS has to moderate its appreciation all the time.
(3) Norway publishes the performance of its SWF annually with quarterly updates. GIC selectively discloses its average annual rate of return in 5-year and 20-year blocks but without the annual figures nor figures from its inception in 1981 (as far as I can recall). I also recall that sometimes it presented its performance in US$ and S$ but in another year only in US$. This inconsistency makes year to year comparison very difficult.
(4) The cost of managing Norway’s SWF is 0.09% of funds, the lowest of all SWF’s and cheaper than all of them “by miles” (Bjorn proudly proclaimed) , according to CEM Benchmarking Inc. (CEM stands for Cost Effective Management). Three Asia-Pacific SWF’s are in the benchmark group namely Korea, China and Australia but not GIC (wonder why? but no prize for the correct answer!).
(5) Only 3% of Norway’s SWF is managed by external fund managers; I have not seen any comparable figure from GIC. Norway’s experience with external fund managers has been mixed; they are usually highly paid and since high salaries are not politically acceptable in Norway, it is wary of farming out funds to outside fund managers except for “inefficient markets” like emerging markets.
(6) It is a portfolio, not a strategic, investor as it does not believe that the Government has the necessary skills to develop strategically the companies they invest in; it is also mindful of the political sensitivity of foreign governments as hypothetically, it could buy up Deutsche Bank and relocate it to Norway. Hence it would only invest in a small stake like 1-3%. On the other hand, GIC has not been averse to taking big bets as shown in the last global financial crisis when it bought billion dollar stakes in financial institutions.
7) There are clear ethical guidelines for Norway’s SWF to engage in “responsible investments” that would exclude weapons or tobacco industries. The Norwegian Parliament takes this matter very seriously as its Ambassador to Singapore HE Tormod Endresen explained to me in Singapore before I left for the Norway trip. His Excellency was personally involved in helping to draw up the ethical guidelines some years ago. I wonder if GIC has any ethical guidelines; I would not be surprised if it hasn’t any formal ones; after all, Singapore openly promotes casinos and has a small armaments industry.
Key to fiscal policy
Norway’s SWF started as a petroleum fund with revenue from oilfields in the North Sea. It was later renamed as the Government Pension Fund Global. It has become an important component of the annual national budget. National policy requires it to provide a real return of 4% per annum to finance the non-oil budget spending. With funds estimated at US$880 billion, it provides more than US$35 billion to the national budget this year. In Singapore, the law allows the Government of the day to spend up to half the expected rate of return on our reserves, on the national budget. This is known as the Net Investment Return Contribution (NIRC).
Funding budget spending on the people
In the last few years, the Government has allotted an NIRC of about S$8 billion per annum to the budget. It said this was almost half of the expected long term rate of return on our reserves. What is the expected long term rate that it uses for its computations, GIC has not told us. It would be below historical trends as the Finance Minister told Parliament in March 2009. In the last 20 years, the actual rate of return was 4.1%. How far is the expected long term rate of return below this actual rate? What’s the baseline? Could it go down as low as the actual rate of 0.5% that was achieved in the past 5 years and revealed by the Finance Minister in his reply to a question from Roy Ngerng in July 2014? I believe a conservative Finance Minister would not be averse to doing so however low it may seem as this is the rate of return that his fund managers actually achieved in the most recent 5 years and are not incapable of repeating the performance however “talented” they may claim to be.
If this 0.5% is the baseline rate of return and close to half of this 0.5% yields an NRIC of $8 billion, then the total amount of funds managed by GIC would work out to be about $3,200 billion or $3.2 trillion. At the other end, an expected rate of return of 4% that is below but close to the actual 20-year return of 4.1%, would mean a size of funds of $400 billion. On this basis, the funds under management by GIC would be between $400 and $3,200 billion. If the expected rates of return are 1%, 2% and 3%, then the funds managed by GIC would amount to $1,600 billion, $800 billion and $533 billion respectively.
Transparency and trust
There are so many if’s and so much guesswork in this computation. But only a full disclosure would reveal what the actual figure is. Why is the GIC not doing so when it is public money? Even Communist China discloses its total foreign reserves. Norway says a high degree of transparency is a prerequisite to ensure public trust and support for the management of its sovereign wealth.
GIC’s continued refusal to be transparent does not help in building up public confidence in the government’s management of our national assets. Is it any wonder that a recent international poll suggested that an overwhelming majority (74%) of Singaporeans do not trust PAP government leaders? ( See my FB posting Only 26% Singaporeans trust government leaders)
With Ambassador HE Tormod Endresen outside the Norwegian Embassy in Singapore. His Excellency arranged our meeting with the Ministry of Finance at my request
Tan Jee Say
This post first appeared on http://www.facebook.com/tanjeesay
Categories: CEC member writes