Saturday, November 24, 2007

Temasek, a reality check

Temasek, a reality check


TEMASEK'S ongoing investment woes over its stakes in Indonesia's two biggest mobile telcos bring to mind some simple, eternal facts of corporate life.

First, investing abroad has always carried the risk that assets can be seized by foreign governments.

HSBC and Jardines lost control of their Chinese assets in 1949 when communists came to power in the mainland. In the 1960s, the Australian government forced mining firms to "Australianise" their shareholdings, upsetting the then predominantly British shareholders.

And just last year, energy companies operating in Venezuela and Bolivia had to accept new and less advantageous contracts to avoid cancellation. Shell and BP, too, have had their share of problems — in Russia.

Second, investments in banking and telecommunications (two of Temasek's favourite sectors) have three major weaknesses. Value in these sectors can be easily destroyed by government action or inaction. Both sectors are highly regulated because most governments regard them as "strategic industries". Nationalists are also sensitive to foreigners owning big stakes in these sectors.

The controversies surrounding Temasek's acquisition of Shin Corp — the telco once controlled by the Thaksin family — and the two investments in Indonesia's Telkomsel and Indosat, illustrate these weaknesses vividly.

And it is difficult to exit major investments in these sectors. Whatever the law may say, any sale must have the blessing of the host government. If Temasek wants to cash in on the huge returns it has made from its 6-per-cent stake in China Construction Bank or its 5-per-cent stake in Bank of China, potential buyers would want the assurance that any sale was acceptable to the Chinese authorities.

Third, most countries, developed and developing, have a history of economic nationalism. Who can blame Asian nations for being afraid of foreign investors?

India, Indonesia and South Korea were colonies of Britain, the Netherlands and Japan respectively for almost half of the 20th century, and in the first two instances, the whole of the 19th century. The British and French interfered extensively in Thailand while China was bullied and occupied by the Western powers and Japan.

And don't forget that the British and Dutch began as traders before becoming colonisers.

Incidentally, Britain and Australia, at least on the surface, seem to be the only two countries which are not too worried about foreigners owning major stakes in "commanding heights" companies. British ports, airports, power stations, water utilities and financial institutions are owned by foreigners.

The British appear to have adopted this attitude: If foreigners are prepared to pay huge sums for assets that cannot be moved, the locals should take the money and invest it elsewhere.

And if the foreigners have overpaid — as some analysts believed was the case in the purchase of the British Airport Authority, where the winning consortium, which included the Government of Singapore Investment Corporation, paid £10.3 billion ($30.6 billion) — and are having operational and funding problems, that's their problem.

So, sceptical of foreign investors in general, many people in these nationalistic countries are naturally concerned when a firm owned by a foreign government invests in their country.

They tend to project their personal and historical experiences and prejudices onto the investing firm — and that is their governments interfere in state-owned and private businesses.

For example, China, India and Indonesia have forced banks to lend liberally to state-owned companies; while the South Korean government once directed Korean banks to lend money to privately-owned conglomerates to help them expand overseas. Profits are secondary. National, political or strategic considerations are more important.

So, even though Brand Singapore has a reputation for straight-talking and honesty, a statement like, "all the companies in our portfolio are independently managed with responsibilities to their respective board and shareholders", would be met with a shrug or a wink — "they would say this, wouldn't they?" Anyway, governments and policies can change.

Next, good governance — political or corporate — is rare outside the developed world. We forget this at our peril.

Last week's Weekend Xtra on the Indosat/Telkomsel case describes the alleged skulduggery that seems to be going on in the background — of inconvenient evidence being ignored and of prejudgment of the case.

It doesn't reflect well on Indonesia's investment climate; but to be fair to Indonesia, there are countries where worse things are alleged to have happened.

Finally, don't expect gratitude, especially if one makes money. Temasek itself and its 56-per-cent owned subsidiary SingTel made major telecom investments in Indonesia when other investors didn't want to know about the country.

One could be forgiven for thinking that Indonesian nationalists should be grateful that firms from an Asean neighbour bought these assets, not some insensitive investor from a Western country with a history of exploiting the "natives".

Incidentally, Temasek's problems over Shin Corp and Indosat/Telkomsel reflect difficulties Asean could face in plans for an integrated economy.

If Thailand and Indonesia, two of the more developed Asean economies, have problems in accepting investments in their telco sectors from a fellow founding Asean neighbour, what chance of success in other areas like aviation, financial services and logistics?

Adrian Tan is a freelance financial writer.


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