WHY HO CHING AND EVERYBODY GOT IT WRONG ABOUT RESERVES

This is the 2nd installment of my Eh, Goondu series.

In her 24 Jun Facebook post, Ho Ching also touched on national reserves and past reserves. Just about everybody who has written or commented on national reserves, got it all wrong. President Ong Teng Cheong got it wrong. Ho Ching got it wrong. So did Kenneth Jeyaratnam, Leong Mun Wai, Prof Christoher Balding, one Michael Petreaus, and many other luminaries. A bold statement, but let me explain.

Reserves

It is not a matter of who said what reserves are. It is not subject to interpretation. The Constitution of Singapore defines reserves as “the excess of assets over liabilities of the Government, statutory boards or Government companies”, the last of which refers to GIC and Temasek. The Constitution does not mention whether the entities are to be taken on a group consolidated basis, ie, inclusive of hundreds of companies fully and more than 50% owned. It is assumed to be group consolidated.

What an entity owes to shareholders is Equity, which is represented by assets less liabilities. Hence the Constitution takes the accounting term of Equity as “reserves”. To drill down a bit, Equity comprises of Paid-up-capital, Undistributed Profit & Loss and General or Specific Reserves which are funds set aside for some purposes.

If there are “reserves” it means there are net assets to back it. But except for cash, the assets are not fungible. Cash is mutually interchangeable, one can easily replace another. What this means is that you cannot identify which are the assets that represent the “reserves”. A simple example makes this clear.

Suppose an entity has Capital of $200m which is deposited with a bank. It borrows $400m, again deposited with a bank. It now has total assets of $600m cash. So now the “reserves” comprise of only Capital of $200m, represented by Assets $600m less liability $400m, ie net assets of $200m. So if you want to identify the assets that make up the “reserves”, you go down to the bank and count $200m cash, put them aside and say these are “reserves”.

Suppose the $600m was spent to buy a piece of property. So now the “reserves” is still $200m and total assets remain $600m. It is now impossible to identify the assets to represent the “reserves”. You can’t cut up the land and say this part is worth $200m and is the “reserves”. The “reserves” is simply backed by a portion of the total assets. And this is the real case in almost all situations.

Anyone who talks of a compilation of assets to present as our “reserves” have fundamentally misunderstood the whole thing. OTC chased after a list of government assets which is technically near impossible. How do you quantify the cost of Nichol Highway, Ridout Road, Anderson Bridge, etc. Even if that is possible, all the assets aggregated do not represent “reserves”. They are total assets. How do you split the assets, which to represent reserves and which to liabilities? To add to the complexities, which part of the assets of subsidiary companies which are not 100% owned, belong to our national reserves?

Ho Ching went down the same rabbit hole as OTC when she wrote “Of course, at the margin, we can count other assets like computers, buildings, tables and chairs, as well as flower pots and curtains as part of our reserves.“ She spent several paragraphs of her post discussing these physical assets.

On the other end of the spectrum, folks like KJ, LMW, Balding, Critical Spectator, and almost everyone who has commented online, refer to the investment portfolios of GIC and Temasek, as well as the foreign reserves of MAS, as national reserves. Going by the definition of “reserves” above, these investments and foreign reserves are not totally our national reserves. That is because on the other side of their balance sheet, they have massive liabilities. Only a portion of the investment portfolios form our national reserves. It is impossible, and neither is it necessary, to identify them.

But this does not mean it is not possible to determine how much the “national reserves” are. To do this, simply follow the Constitution. Add up the net assets of the government, statutory boards, the 2 sovereign wealth funds. Takes only a few man-days to do that.

Past reserves

The present administration is the 15th Goverment and was formed in July 2020. Thus any reserves accumulated before 2020 are considered past reserves. The President has the authority to veto any spending by the government if in his opinion, past reserves are being, or will be, used. This is crystal clear to everybody.

Job of the President as regards government spending

Online comments indicate a general public very concerned about government spending excesses and wrong priorities. There is heightened demand for an independent President with a more socialist soul. Many want to see a President who can play a more active role in influencing policy making and help steer the moral compass of a government that seems to be hitting new lows again and again. I believe presidential hopefuls like Tan Kin Lian and George Go have also made expressions in that direction.

Sorry to disappoint. The President’s role is strictly ceremonial. There is no way the President can interfere with the Executive on any policy matters except in 3 areas – (a)the appointment or removal of certain key personnel specified, (b)over-rule the Prime Minister and green-light a graft investigation by CPIB, and (b)spending on past reserves.

The budgets of government and statutory boards are discussed in parliament and then presented to President to rubber stamp his approval. Approve he must. He has no option. Unless the Government and statutory boards inform him the spending is dipping into past reserves, which by law they have to pre-advise him, or in his opinion, he thinks the budget will cause past reserves to be utilised, then he MAY exercise his right not to approve the budget and send it back for revision. Other spending bills are processed similarly. In this way, the President holds the 2nd key to past reserves.

Ho Ching wrote : “Hence, the function of a 2nd key is not to peer into the safe, but to judge if there is a real emergency, and if the amounts being asked for is reasonable as a rainy day need or even as a contingent need.“

Madam is right that it is a situation the President has to make a judqement call whether a dip into past reserves is justified. That is the crux of his responsibility.

However she is wrong about “not to peer into the safe”. By that I take it to mean to check the asset inventory. This, as explained above, is impossible. The assets are not fungible therefore it is physically impossible to identify what represents the past reserves. But it is relatively easy to obtain the combined net assets of the government, statutory boards and sovereign wealth funds. In other words, the book values of our national reserves.

Just like the guards in the first Eh, Goondu blog, it is incumbent on the President to know what is the book value of past reserves he is taking over. In addition, he has to know the book value of reserves accumulated in the current administration. Without this information, there is absolutely no way he can diligently discharge his duties as required by the Constitution independently.

The Constitution specifically provides the President access to any information he asks. OTC could have the information to determine the size of our national reserves, at least the book value. He just didn't know what to ask.

Intricacies

Under the Constitution, the entity presenting the budget or spending bill must advise the President when they are accessing past reserves. It’s a sort of “ownself declare ownself” (thanks to Low Thia Keng for giving us this sort of easily understood term). In order not to be blind-sided by a rogue government, the argument for the President to have his own database of past and current reserves of all relevant entities is self-evident.

Under the Constitution, when there is a transfer of reserves by one entity to another, the transferee entity must also record it as reserves, and not liabilities. Furthermore, it has to be recorded as past or current reserves accordingly. The Constitution is silent on the role of President in this and we can only assume he is not in the loop. The President needs to be in on this or how else is he going to be up-to-date in his information.

What happens when an entity makes a huge loss that wipes out general reserves and capital, just like MAS this year. Crafters of the legislation obviously missed this sort of intricacies. The Constitution does not address this, but I read somewhere the government does not consider it a raid on past reserves. I suppose they simply assume it as a negative current reserve. This avoids the need to go back and revise past reserves figures reactively which in time will become one big mess.

Conclusion

It is apparent to me the President must maintain his own database on past and current reserves. The data is dynamic due to intricacies above. This information must be readily handed over to an incoming new President. I wonder if this is actually being done and whether the Office of the President is adequately staffed to manage this. I doubt this is being done, why else would OTC felt like he was operating in the dark. If this is not done, then the President is just a lame duck rubber stamp and all talk about the 2nd key to the reserves is only for show.

In my concluding installment on the Eh, Goondu series, I will dwell on the issue of SLA land as past reserves.

A parting shout out :

Plato said “The price good men pay for indifference to public affairs is to be ruled by evil men.”
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