INDRANEE THE MAGICIAN EXPLAINS THE RESERVES CONUNDRUM

Matters of national concerns arising from new or amendments to legislation draw no comments from the Law Society. The general medical community stays absolutely silent on serious concerns over mRNA vaccines. Zero input from the Society of Accountants to the conundrum of our reserves is no surprise. The apathy of people in leadership roles in relevant professions in Singapore is a crying shame. It is testament to the veracity of my old blog on kiassu, kiassi, bo-chup.

Indomitable opposition MP Leong Mun Wai had spoken recently in parliament on the high cost of public housing in which land cost is the underlying factor. Leong's argument was the government sells land at market value thus making significant gains in reserves, and since the state already has a reputedly high reserve, public housing cost can be lowered with land sales at below market prices. The 2nd Minister of National Development M/s Indranee Rajah responded thus:

“When we sell State Land, we convert the physical asset into a financial asset. For example, if we sell a parcel of State Land at its fair market value of, say, S$1 million, we no longer have the land for the term of the lease sold, but we have S$1 million. There is no net increase in the reserves. We have merely changed the physical land in our reserves into a distributed amount of financial reserves. There is no new value created and hence no addition to the reserves.”

This legal-economic obfuscatory statement to an accounting issue is now template explanation in various government websites. Never mind that it goes against the grain of every ordinary person's understanding of changes in asset values. Obviously, the intricacy of government accounting has a lot to do with this. Should we walk quietly into the financial hell of astronomical HDB prices in accepting this anguished verbiage, or do we try to understand what it is all about?

Let's look at simple accounting 101

Supposing a plot of land is bought for $1m. It was sold 5 years later for $2.5m, netting a profit of $1.5m. Government accounting is on a cash basis, thus recognition of the net profit is upon sales of the land.

Reserves is the net unencumbered assets. Thus in year 1 where assets-liabilities = 0, there was no reserves. Upon sales, it is irrefutable wealth has increased by $1.5m. This is so fundamentally simple I am insulting readers' intelligence with the above chart.

In magic tricks, the performer uses what is known as the Art of Misdirection. It is a deception to get the audience to focus on something else so they miss out on the mechanism of the actual trick. In reference to the chart above, Minister Indranee attracts your attention to the left, the Assets. Like all good magicians, she fills your mind with irrelevant details to retain your attention on the deception. She tells you it is purely a monetisation of land, changing one form of asset to another. And so she talks of land as non-earning assets and cash as financial earning assets. For good measure, she screws your brain with term of leases. By then, brain fog would have gotten hold as you go thinking of 99 year HDB leases which she did not even have to bring up. Meanwhile, you are missing out on the right hand side and see the increase in wealth of $1.5m. Indranee's explanation in parliament was either a verbal magic trick or mis-information.

Land acquisition and land reclamation by the government is funded by past reserves. To this extent, Indranee's explanation about changing reserves from one form to another without increase in reserves is absolutely correct, but only in respect of year 1, the year of acquisition, not sales. A financial asset ($1m of cash from past reserves) is changed to land (investment). There was no change in reserves, thus I assume presidential consent was not necessary in year 1.

The more discerned readers would surely be asking where is the cash coming from when past reserves fund some payments, such as land acquisition, land reclamation and pandemic aid packages? To explain this, I refer to my old chart on government cash inflows and outflows. Regular readers should be familiar with this chart by now.

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The operating revenue cash inflow (from taxes, duties, fees, fines, rental, NIRC from SWF. part of earnings from MAS) all goes into the Consolidated Fund to meet the government's fiscal obligations.

Using past reserves to pay non-fiscal disbursements, the transactions are not routed through the Consolidated Fund. The government simply pays out from the cash account at MAS. So for the land acquisition in year 1, there is no change in the net value of assets. In the government Statement of Assets and Liabilities, there are only 2 asset types -- Cash and Investments. So cash goes down by $1m and Investments increase by $1m. A change from a financial asset to land. No net change in reserves.

On disposal of the land in year 5, Cash goes up $2.5m, investments down $1m as the land has been sold, making a net asset increase of $1.5m. This should be matched by $1.5m on the liabilities side in one of the fund accounts, representing the profit on the land sales, in other words, the increase in reserves. I am not certain which funds account it ended up with. My guess is The Development Fund.

I am not quite sure if Indranee said this, but a Petir (PAP newsletter) article in relation to this subject matter, stated :

"The land will not do much for Singaporeans when it’s just left unsold. But converted into liquid cash at fair market value, it helps appreciate Singapore’s reserves indirectly and eventually for the next generation."

This could be referring to the fact that proceeds of the sales are invested by GIC which provides investment returns in the form of NIRC to help fund the national budget. It could also mean when converting to liquid cash, or sales, at market value, it appreciates the reserves, meaning, it increases the reserves. Take it which way you want.

This here is a bit off track, but I cannot help resist a little tale to add spice in connection with the Petir quote "... "land will not do much for Singaporeans when it’s just left unsold". SLA is the agency that manages some of the government properties as well as the sales of state land, amongst other functions. Some state land is left for temporary use, managed by SLA. Readers may remember a large plot of fantastic land in the Dempsey Road area. In deference to ONE very important gentleman who likes to jog in the area, the plot has been left undeveloped for decades. So a small community of quaint little shops prospered there and were left undisturbed by officialdom as there was no development plan. By and by, SOMEONE UNKNOWN came along with new ideas for the land. Not a full land development, but just to spruce up the area. Whose idea, we don't know. The agency concerned started talking to existing shop owners who were all sub-tenants. As compensation is an issue, a brouhaha ensued as it became clear no one knew who was the MASTER TENANT, and the government had no master tenancy agreement with anyone. Those in the know knew the master-tenant is the brother of another VIP. Eventually the area was tendered out which was not won by the highest bidder, but by someone with a lower bid. The reason was the winner had a better proposal, ahem. And the winner is a well-know VIP who is the wife of another VIP, someone who likes vroom-vroom, hint, hint. So unsold land can and do help earn some returns for the benefit of Singaporeans. Sometimes, we wonder which Singaporean.

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