HEAD M - MINISTRY OF FINANCE

Head M – Ministry of Finance

The Chairman: Head M – Ministry of Finance. Mr Inderjit Singh.

Reserves and Performance of GIC and Temasek

Mr Inderjit Singh (Ang Mo Kio): Sir, I beg to move,

That the total sum to be allocated for Head M of the Estimates be reduced by $100.

Sir, I want to make two points with regard to our reserves. The first concerns

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the role of our Sovereign Wealth Funds (SWFs), Temasek and GIC, and the impact this has on our reserves, while the second has to do with the impact of the financial crisis on the returns of our SWFs and, consequently, on our reserves.

Erosion of Our Reserves and Availability of F unds to F und Government through NIR

As I mentioned in my Budget debate speech, I am glad the Government had the foresight to change the way we can use our reserves by switching from the NII to the NIR computation. In effect, the Government is now able to draw more from the reserves, including using the increase in capital values of the reserves, which was not allowed in the past. This year, we will therefore be taking two bites at the reserves compared to the past, once through the NIR, and then through the $4.9 billion that was announced in the Budget. From the Budget Book, I notice that the amount available for the Government expenditure from the reserves has gone up from $3.7 billion in 2008, when we used NII, to $7.7 billion this year using the NIR formula. And I suspect this is still not 50% of NIR, which is the amount allowable after we changed the Constitution last year. However, it has recently emerged that both Temasek and GIC have suffered significant losses in the financial markets, which according to some reports I have seen, amounts to $50 billion collectively. This is significant. So the first question I have is – will the Government still be able to tap the reserve amount it needs in the coming years now that the base of the reserves has shrunk? Are we going to quickly deplete our reserves as a result?

On the NIR formula, I would like to ask the Minister how much money will be made available to the Government for the next few years. We understand what is available this year. What about the next

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few years? We should know this since the formula is based on long-term expected returns and not long-term actual returns. Also, can the Minister share with the House how the process has worked out in the first year with this new formula?

Second question I have is whether both GIC and Temasek have enough liquidity to contribute to the NIR that the Government needs for this year and the coming years. My worry is that the losses suffered by our two SWFs may be paper losses, and they might still be holding to these papers as liquidation will translate these to real losses. If they do not liquidate, will they still be able to return to the Government what is due and what the Government needs?

Sir, the NIR approach defines "returns", which the Government can tap as long term expected returns and is based on a 20-year horizon. For the last 20 years, GIC had returns better than its peers around the world – a return of 5.8% before and 4.5% after inflation. I am sure that the Minister would have used this number as a basis to compute how much he can draw as this 4.5% is the basis he would have used to compute the long-term expected returns. The question I have is whether our current reserves and our SWFs managing them are capable of returning such levels in the next 20 years after the whole global landscape has been reshaped. Have GIC and Temasek come back to the Minister to propose any changes to their long-term expected returns after what has happened? If next year GIC comes back and forecasts a drastic drop of its long-term expected returns, how will it affect the Government's ability to operate with lower level of revenues from the NIR? Will the Government have to redraw its long-term development plans again? And these development plans are important for our future. I hope that we do not have to do it.

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Sir, when I raised the question of supervision of the Sovereign Wealth Funds (SWFs) in Parliament last year, the Minister responded that MOF would not like to micromanage them. However, today, we have seen a large proportion of our reserves being eroded because of the severe drop in values of the investments made globally by both of our SWFs.

This warrants a review of how MOF mandates GIC and Temasek on their roles and a system of reporting and supervision by MOF. Central to this argument is that Temasek and GIC draw from our reserves to make their investments. Since it is effectively taxpayers' money that makes up our national reserves, increasingly the public is asking for greater Government involvement and oversight of the SWFs, especially in light of the spectacular losses we have seen in recent times.

I have a few questions for the Minister in this regard. Who decides on the level of risks both GIC and Temasek can take in managing their funds? Is there a mandate from the Minister for Finance on what their expected rate of return should be and the risk profile that their funds should be allowed to operate with?

Sir, I briefly studied the Annual Reports of both Temasek and GIC and cannot help but draw a conclusion that both, organisationally as well as operationally, GIC and Temasek are operating with different sets of culture. Temasek seems to have adopted the Wall Street model and hired many people with such expertise, while GIC seems to have not changed much compared to the day they started operating and depends largely on tested people and processes. I am not sure which model will work for us in the future and in the long term. But from what we have seen recently, the way investment decisions have been made,

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whether in Shin Corp or ABC, childcare operator, or in Merrill Lynch or UBS, Temasek seems to follow the Wall Street model of investment while GIC is far more conservative. Will the Minister be reviewing the approaches taken by both so that we can ensure that our reserves remain protected and are able to grow?

Sir, there has been a lot of talk at our coffee shops and also at the grassroots level and among our residents about this $50 billion loss, if the number is correct, it is huge. Compared to $300 billion reserves that has been reported in reports that I had seen, this $50 billion translates to about 17% erosion of our reserves and if you add the other assets that may have been eroded, that have not been computed, that is huge. So the question in the public's mind, would we have undone what our past generations built up for us? And will we be able to protect the interest of Singaporeans, moving forward? An important question is, can we remain confident that we have reserves to help us in the future?

GIC and Temasek

Ms Sylvia Lim: Sir, in this financial crisis, Singaporeans are naturally concerned about the health of our reserves managed by GIC and Temasek. According to reports, Temasek invested nearly US$6 billion in Merrill Lynch which is now worth about 20% of that. It has large paper losses in StanChart and Barclays. GIC's investment in Citibank of about US$7 billion may now worth also about less than 20%. Last October, the Finance Minister discussed the Government's stance on transparency of GIC and Temasek as follows: "Public disclosures had to be shaped by the SWF's characteristics as long-term investors, with the ability to ride out cycles. A short-term focus on financial disclosures would not shed light on the right areas." However, the Government is the legal trustee of the funds and the ultimate true

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owner is the people. They deserve to know how this turmoil has affected our national wealth. Can the Government tell us how much paper losses had been incurred? What is the Government's assessment of how this has affected the liquidity of the funds and their ability to take opportunities in a downturn? And, lastly, does the fact that both funds invested so heavily in the financial sector, at the same time, undermine the diversification objectives of our sovereign wealth?

Returns and Risk Taking by GIC and Temasek

Mr Liang Eng Hwa (Holland-Bukit Timah): Sir, the source of growth of our reserves has primarily come from the surpluses of our past Governments and the investment performances of our fund managers, GIC and Temasek.

Thanks to our fiscal prudence, we have been able to generate fiscal surpluses and add to the growing pool of reserves. However, given our competitive tax regime and the increasing recurrent and developmental expenditure, this contribution from Budget surpluses to our reserves would be less likely going forward.

We will now have to count more on our fund managers, primarily GIC and Temasek, to perform their task of not only generating the required returns but also to grow the reserves.

The returns from our reserves have increasingly become an important balancing item for our annual Budget. Without the investment returns from reserves, our fiscal spending would either have to be reduced or we have to raise more taxes.

In the last 20 years, the favourable economic condition has presented tremen-

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dous opportunities to long-term investors. Both GIC and Temasek have been able to very much capitalised on this bull run. And by most benchmarks, GIC and Temasek have delivered impressive returns for our reserves in the last 20 years.

However, the investment environment post-crisis is likely to be a very different one. The world economy is presently undergoing some major structural changes now. One thing that is clear post-crisis is that the new world order is likely to be a less leveraged one, financially. Gone are the days for easy credit. Here, I would like to ask the Minister how does the MOF see the long-term investment outlook and whether it is still realistic to expect similar investment opportunities and hence similar levels of returns we have seen in the next 20 years?

This has a direct bearing on our Net Investment Returns (NIR) and Net Investment Income (NII) and I would like to ask the Minister what does it mean to balancing of our future budgets.

Sir, while the Government should rightly not interfere or influence the investment decisions of GIC and Temasek, MOF should, however, review the risks we want our reserves to be subjected to vis-a-vis the pace we want to grow our reserves and use our returns.

The last thing we want to do is to go for return debt, we have been enjoying so far by taking one more risk. Going forward, should greater emphasis be placed on preserving the capital and its purchasing power, for example, instead of outperforming the indices benchmarks.

Related to this strategic view, can the Minister share some thoughts as to what the size of reserves should be, relative to our GDP and our other macro and social indicators? What would be the ideal size of our reserves that we should maintain

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minimally from a national security standpoint? I ask this question knowing that I may not get any numerical answers from the Minister. But I hope that the Minister can still share the Government's thinking and philosophy behind this approach.

Usage and Security of Our Reserves

Mdm Ho Geok Choo (West Coast): Mr Chairman, Sir, after a recent Constitutional amendment, the Government is able to draw upon our reserves in emergencies. This major recession is a national emergency and fully warrants the $4.9 billion drawdown.

I agree with Senior Minister Goh on the boundaries for its usage. But within these parameters, we must use it when necessary.

Sir, along the line of my former colleagues on the size of the reserves, while I understand the sensitivities of revealing the size of the reserves, I ask the Government to assist us to make an informed assessment on the risk of any further withdrawals, especially in light of the ongoing recession. We do not need the full disclosure, but we do need some directions.

Further directions would be the total percentage growth in our reserves over the past year to date, and the near term outlook for its growth.

Sir, news reports say that through its state-owned funds, Singapore has invested a total of about US$24 billion in Citi, Merrill Lynch and UBS over the past 14 months and S$2.6 billion in Barclays. What are the current values of these investments on an individual company basis from investment date to latest market closing date?

While GIC's investments in UBS and Citi were done through means of

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convertible securities that provided a guaranteed rate of return – thus providing some downside insurance – have we considered what if these companies eventually go bankrupt? Can we recoup our investments at cost?

I refer to a recent statement from MOF which mentioned that it had invested mainly in fixed income instruments before, but had now increased its asset allocation for higher risk and higher return investments like equities and alternative instruments.

Sir, why did the funds invest in riskier assets, even if they are within acceptable risk levels? Why are we doing it now when we had not done so before? And are our reserves ultimately safe with this higher Sovereign Wealth Fund exposure to riskier assets? Riskier assets are like strong sunshine, maybe we need more sun block?

Helping Businesses Weather the Storm

Mr Inderjit Singh: Sir, I would like to raise some points on how we have proposed to help businesses weather the current storm.

Sir, the Government has decided to cut the corporate income tax rate to 17% and I understand what this will do for our long-term competitiveness and it is a good preemptive move to prepare for the future.

However, we have many international enterprises operating in Singapore, and many of our local companies have overseas operations. Our Corporate Income Tax (CIT) rate move can inadvertently reinforce perception that Singapore is a tax haven and create difficulties for these companies. President Obama has in fact recently announced that he will take drastic measures against countries that fall in his tax haven list.

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This may put Singapore in a precarious position vis-a-vis the US. What is the Ministry's position on this?

Sir, I am happy that the Government is planning to shore up demand by spending more this year. I hope that the Government will divert as many purchases as possible to local enterprises. Changing the Government's procurement policies to help SMEs benefit more from Government spending will be critical for us to see the real impact to our economy. If we do not change, then I am afraid only a few large companies and many foreign ones will stand to gain from the increased Government spending. While we want to play within the rules of WTO, I am sure we can still tweak the procurement policies to find the right balance. Perhaps, the Minister can give a breakdown of how the estimated $11 billion of Government spending will be spread among the various sectors of the economy.

On the R&D and innovation initiatives rolled out in this Budget, I welcome them and I think that these will be useful for companies to restructure and strengthen themselves during this prolonged downturn. The main issue for such companies is going to be the general requirement of all Government grants for companies to spend the money upfront and then claim back from the Government later. Would the Minister consider upfront cash grants to encourage companies to do the necessary R&D or innovation work, rather than to put it off because they do not have the money upfront to do the work?

There may be some Government business opportunities which are suitable for our SMEs but they may not yet have the capabilities to take these jobs. Would the Minister consider implementing some focused initiatives where it plays a role in

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helping companies build up their capabilities and capacities to take on more projects that may be available from the Government? How can the Government help companies identify these opportunities and build their capabilities to handle them? I believe in the US, some of the government agencies are doing the same. They play a developmental role to help their enterprises gain some of these capabilities. While the workers have played their part by accepting the National Wages Council (NWC) recommendations for wage cuts, should the Government too not play its part by reducing and not just freezing Government charges?

Sir, I also welcome the move to get IRAS to review the annual values of properties based on the current market conditions. My question is, when will this be completed and implemented for the property tax changes? Can I also ask MOF to direct JTC, SLA and HDB to do the same reassessment on market rentals rather than to rely on old market data? This will go a long way in helping companies.

I brought this question up during the MTI COS but was not answered. Maybe I will bring it up to the Minister here about how some of the banks are abusing the Special Risk-Sharing Initiative (SRI) by converting their existing commercial loans to SRI loans and I think this will defeat the purpose of us in trying to create new loans for companies. Can we put in some control so that this is not over abused?

Translating Policy Changes into Action Effectively

Mr Gautam Banerjee (Nominated Member): Over the past 10 years, the tax system in Singapore has undergone a comprehensive overhaul. A key motivation has been to improve the tax system, as a means of implementing tax policy, by making it more responsive to changes in the global economy. These changes are

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reflected in a shift from direct taxation to indirect taxation together with a simplification of the basis of personal and corporate taxation.

To complement these changes, much has also been done to simplify the administration process such as enabling online filings and ease of payment. As a result, Singapore is ranked as one of the top locations in the world for the ease of doing business in a World Bank survey. We cannot afford to rest on our laurels. To maintain this position, it is critical to continue on the path of implementing tax policy changes but just as importantly, we must ensure that the policy changes are implemented in a simple, fair and effective manner.

Our economy is constantly evolving and our tax incentives must do likewise. We must stay a step ahead to ensure Singapore remains a competitive location from which to do business. This is particularly so as our corporate tax rates are reduced, we need to ensure we preserve the attractiveness of incentives for those areas we consider are critical to Singapore's future growth. With the reduction in tax rates by 1%, we must at the same time take care not to erode the impact of the tax incentives. Furthermore, it is important to ensure that other taxes, such as GST, do not deny potential investors from taking the full benefit of our incentives as was the case of the application of GST eroding the attractiveness of using the Singapore Resident Fund incentive. I would suggest that we need a regular review and monitoring process to ensure that tax incentives remain relevant and that we consider the interaction of other taxes to ensure that a new tax incentive does not cannibalise a previous incentive. The enhanced loss carryback relief potentially gives rise to this problem, as explained in my Budget speech.

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We are also perhaps not as effective as we could be in attracting R&D investment from abroad or in encouraging indigenous R&D activity. If we wish to achieve our stated objective of winning more global knowledge-based businesses, then a re-think on tax incentives is a must. Enhancements in this area should focus on a widening of the definition of R&D and the incentives offered. It does not always happen in a laboratory and it is therefore difficult to encompass all R&D activities that could bring benefit to Singapore. It is important that we continue to encourage more IP exploitation in Singapore, for example, taking incentives further down the value chain from the current regime, which is more focused on the creation or acquisition of IP in Singapore.

We should consider more incentives for revenue generated from IP management and liberalising our foreign tax credit regime, which is not particularly user-friendly for those seeking to use Singapore as a base to generate royalties from overseas.

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Finally, a prerequisite to effective tax policy is the need for an open and transparent tax administration. The revenue has made great strides in their approach to consultation with industry and professional bodies. However, it is hoped that the revenue could find some way to publish a ruling, so as to explain clearly their interpretation of a particular position based on facts. Whilst confidentiality needs to be maintained, it is important that the positions maintained by the revenue are transparent and made available to a wider population.

Whole of Government Approach

Ms Jessica Tan Soon Neo: Sir, in the focus on excellence, MOF has outlined as one of its strategic outcomes to be a high performance Government.

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Can the Minister share with the House the progress of the "whole of Government" approach, which MOF has set out with the objective to create a high-performing Government that utilises its resources efficiently and effectively? What are the current processes in place to ensure the ease of access to Government service? Is there a specific focus to drive more effective service delivery to citizens and organisations that interact with the various Government agencies? If so, what are the key areas that have benefited from this approach? What is also being done to enhance the processes and upgrade skills of staff for effective and quality of services provided by the Government for citizens and organisations that interact with the various entities and agencies? How does the Ministry measure the impact of the "whole of Government" approach? What has been the outcome? What role has the partnership between private and public sectors played so far to support the "whole of Government" approach?

With the current economic climate and the intense pressure that we face in keeping pace with the rapidly changing and competitive global market, the Government needs to go beyond efficiency and create value to remain relevant for the business and financial environment that we operate in today and for the future. In such uncertain times, a framework for clear strategic outcomes and responses and the ability to act with flexibility to nurture awareness and resilience will stand us in a better position to weather the storm and come out of this stronger.

Maintaining Fiscal Prudence

Mr Inderjit Singh: Sir, I would like to make a few points to emphasise prudence in the current fiscal year. As we embark upon an expansionary budget, we need to

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ask ourselves a few questions to maintain fiscal prudence and to ensure that the Government's well-intended measures are effective.

The first question is, if an expansionary budget will lead to overspending without adding much value to the "real" economy. While Governments around the world are announcing high spending stimulus packages to bail out their economies, we must be careful in not to rely on a "trickle-down economics" approach. Do not get me wrong. I am not saying that we should not spend, but we should spend it in a structured manner so that we create 'real' value in the economy. Given the current economic climate, what measures are in place to ensure that the Government spends prudently? The point I am trying to hit home here is that fiscal spending should strike a balance between the short-term needs for an expansionary budget and longer-term fiscal sustainability, while aiming to avoid any wastage in the short term.

Second question, as the Government spends more on many new initiatives, how do we ensure that a more holistic view is adopted in resource allocation across agencies, and that our spending goes towards achieving its desired targets? For example, does the Government plan to publish the Ministries' outcome indicators or the public sector's outcome indicators as a whole? It is very easy to spend money when you have it and $11 billion is a huge amount to spend in one year. Can I ask the Minister what processes he will use or has used to decide which projects get funded? Is there a minimum return-on-investment threshold which he used to decide who the resources will be allocated to? Which Ministry? Was there special effort put in to encourage inter-Ministry projects?

Third, we need to review the yardsticks used to measure the

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performance of Ministers and their Ministries, which should also lead to an assessment of their compensation. The current use of GDP to reward Ministers and Ministries with higher monetary rewards is insufficient and is comparable to using a share price in measuring the performance of CEOs in the private sector, which is not a good approach.

Fourth, as we head towards uncertain times, we need to ensure that we have enough ammunition in our arsenal to fight the long battle that we are about to go through. Fiscal prudence is a virtue that we should exercise so that we are able to survive this downturn and have enough resources to restructure our economy to remain competitive in the long term. I support the expansionary Budget this year, but can the Minister assure the House that we have enough resources to battle this for the long term and not deplete our resources too quickly?

Cut Costs

Mdm Halimah Yacob: Sir, the public service is the custodian of public funds. It has a responsibility to ensure a high degree of financial prudence and efficiency in the deployment of public resources to serve the public good.

In the current severe economic downturn, companies are aggressively reviewing their cost structure or scaling down on activities which do not directly contribute to the bottomline. Hence, the 2008 Auditor-General's Report highlights some disturbing instances of extravagance and waste, and also poor use of state land and buildings by some Ministries and statutory boards. To quote one example, the Singapore Tourism Board spent $1.5 million over seven years before deciding not to proceed with efforts to convert the Capitol Theatre into a performing arts venue. The Auditor-General had estimated the rental revenue foregone to exceed $280,000 a year. The Auditor-General had also observed

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instances of poor handling of reserves and cash grants in some Ministries and statutory boards.

If I could give another example based on my own observations, the annual reports of Ministries and statutory boards are now getting glossier and, certainly, looking more expensive. Our public agencies seem to be competing with each other to package the best looking annual report for public consumption. Annual reports should be concise, but highly informative to give the public a good sense of the work that the public agencies are doing in order to serve their interest. I would, therefore, like to ask the Minister what measures are in place to ensure that our public agencies exercise fiscal prudence, avoid extravagant expenditure and achieve greater efficiency? How does the Ministry ensure that there is effective and proper management of all lands and buildings?

Social Report Card

Mr Seah Kian Peng (Marine Parade): Many colleagues have raised issues related to financial resilience and financial indicators. I want to talk about the other half of the equation – social resilience and social indicators.

Sir, I would like to ask the Ministers to consider, jointly, producing a comprehensive annual social report card for the people on behalf of the whole Government. This is a quick way for Singaporeans to have a feel of how the Government is doing. This report can either state and grade all the key programmes and policies that have been implemented by various Ministries and the Government, or it can simply summarise, identify and review key efforts, policies, programmes and initiatives, assess its broad impacts and then define what challenges lie ahead. Also, for this social report card to gain more traction, I would like to propose that it can be opened to

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the public, to solicit feedback from those who have used the public services for their grading of the Government's performance. In other words, citizens can churn out their report card to grade the Ministries and the Government's performance.

Sir, this is not just a one-way communication from the Government to the people, but a form of public accountability tool, to draw public attention to the quality and impact of Government policies implemented by various Ministries. The NTUC has such a social report card. We found it to be useful to be accountable to our members, so I hope the Minister can give this some consideration.

CNG Green Vehicle Rebates

Er Edwin Khew Teck Fook (Nominated Member): Sir, the Singapore Government introduced a special tax exemption for Compressed Natural Gas (CNG) vehicles in 2001 to promote the use of green vehicles in Singapore, to improve our air quality, particularly, to reduce particulate matter (PM) 2.5. PM2.5 is a fine pollutant (2.5 microns in size), that is linked to asthma, bronchitis and other respiratory problems, including premature death in people with heart or lung diseases.

The average level of PM2.5 for Singapore was 19 μg/m 3 in 2003, and 21 μg/m 3 in 2005, exceeding the international accepted standard of 15 μg/m 3 set by the USEPA (US Environmental Pollution Agency). There have been no public figures released for PM2.5 after 2005. I can only assume that this has been increasing, from the 2003 to 2005 trends. 50% of this invisible pollutant is contributed by diesel vehicles. Petrol driven vehicles also contribute to PM2.5, but at lower levels. However, CNG cars emit negligible amounts of particulate

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matter. Because of the high cost of petrol and diesel in 2008, the LTA registered 2,196 private CNG cars and 757 CNG taxis. Two stations were opened, more are scheduled for 2009. However, in the last three months of 2008, because of the negative press coverage putting doubts whether the Government will extend the special tax incentives, the sales and conversion of CNG vehicles dropped, as there was no clarity from the Government.

Two other factors accelerated the process: (i) not enough CNG stations; and (ii) the smaller disparity between cost of petrol and CNG, because of the weakening of the oil prices. To date, this has caused the closure of more than 50% (10 out of 20), of the workshops converting petrol and diesel vehicles into CNG vehicles, and a loss of approximately 100 skilled jobs.

Sir, may I suggest, that if the main reason for promoting CNG vehicles is to protect the environment and our health, that the Minister consider: (i) extending the GVR from five to 10 years and to include these incentives to cover the conversion of petrol and diesel vehicles, bi-fuel vehicles and fleet owners of taxis, buses and trucks; (ii) to remove the tax levy on CNG up to 2015; and (iii) to provide special incentives for those who invest in more CNG stations, so as to encourage more of these stations to be built.

If we want a cleaner environment, better health and a general industry that will provide skilled jobs for Singaporeans, I would like to encourage the Minister to continue supporting this great initiative and to see it through as I think it would be difficult to value the cost of a healthier environment and the global image that will bring us to a more sustainable Singapore.

The Chairman: Mr Hri Kumar is not here. Miss Penny Low.

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A Compassionate Economy

Miss Penny Low (Pasir Ris-Punggol): I declare my interest. Sir, which is a better way to build resilience in our people? By giving handouts or giving handups? The answer is obvious. For too long, we have hard-coded businesses into for-profits and charity categories. Thereby, force fitting people into jobs and welfare. This is outdated. The hybrid models of double bottomline social enterprises (SEs) can enable marginalised communities to help themselves and find sustainable solutions from within their communities. SEs build compassion and resilience, and lower social burdens in the long term. To do so, a serious push requires fundamental incentives and paradigm shifts. For a start, why not incentivise investments in the social economy?

Currently, an investor in for-profit enterprises can obtain enterprise related grants, loans, investment schemes and tax breaks. Investors or philanthropists in charities are eligible for up to 250% tax relief in charities with an Institute of Public Character (IPC) status. So it baffles me as to why investors in social enterprises, which are enterprises that help build social capital, do not receive any tax breaks, loans or grants extensions, especially in these tumultuous times. In fact, offering the same tax incentives to investors in social enterprise is not asking for any special favours, it is just asking for a level playing field that will let social enterprises prove that they can deliver financial and social returns.

An example is UK's Community Investment Tax Relief scheme which is designed to stimulate private investments in marginalised communities by providing tax relief to individuals and companies that invest in not-for-profit and for-profit seeking enterprises in or serving those communities. A different legal structure in the form of UK's CIC and US' LCCC,

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both of which I mentioned last year, should also be explored. Can the Minister please give this suggestion some serious thought?

The Senior Minister of State for Finance (Mrs Lim Hwee Hua): Sir, let me first thank the hon. Members for their comments and suggestions, and given the constraint of time, I shall endeavour to elaborate on the policy intent and address as many specific comments as possible. The issues that Members have raised reflect the challenges we face in this unprecedented economic crisis and centre around three broad areas of concern:

(i) the impact of the crisis on our reserves and investment returns;

(ii) how the Government would maintain fiscal efficiency and measure the effectiveness of its programmes; and

(iii) suggestions on how we can enhance the competitiveness of our tax regime, and how we can leverage on it to achieve social and environmental policy objectives.

I will address each of these three areas, as well as related issues that several Members have raised during the Budget debate last week.

Firstly, the impact of the economic crisis on our reserves and investments. Mdm Ho Geok Choo asked about the size and sufficiency of our reserves. Likewise, Mr Inderjit Singh is concerned whether we are fast depleting our reserves and whether we would be able to tap the amounts needed under the new Net Investment Returns (or NIR) framework.

During his Budget Debate Round-up Speech, the Minister for Finance has assured the House that we have built up substantial financial reserves, with assets far in excess of our liabilities.

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Sir, as we have explained many times in this House, we do not disclose the size of our reserves. It is not in our national interest to do so. Market players have had their own various estimates, and they do not doubt that the Government has substantial resources.

Mr Liang Eng Hwa wanted to know if there is an ideal size of reserves we should build up. The approach we have taken is one of ensuring that our reserves continue to grow in line with the size of our economy, by tapping on the returns from the investments judiciously, exercising fiscal prudence and augmenting our reserves in good times. In this way, whatever the crisis – natural calamity, epidemic, war, or economic catastrophe – we would be better able to deal with the damage and recover more quickly to the situation before the crisis.

Mdm Ho asked why GIC had now increased its asset allocation for higher risk and higher return investments when it had not done so before. GIC’s asset allocation strategy has evolved gradually over the years as its asset base grew and GIC developed its capabilities. GIC started out with a high allocation towards the lower-risk fixed income instruments, but has, over time, diversified portfolio risk across a wider range of asset classes. This enables GIC to achieve higher sustainable long-term returns, while keeping to an acceptable risk level.

I would like to assure Mdm Ho that consideration of market conditions figures prominently in the actual execution of GIC’s investment strategy. In fact, in 2007, GIC’s concerns about the likelihood of market dislocations led it to decide to reduce its exposure to public equity markets in favour of cash. GIC closely monitors and analyses the global environment and capital market behaviour, and takes into consideration liquidity and

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capacity issues, as well as shocks and events that may impact the portfolio.

Sir, Mr Inderjit Singh asked whether there is a mandate from the Government on the expected return and risk profile of GIC and Temasek. Indeed so, the Government sets the overall returns objective and risk threshold for our reserves. For GIC, the Government sets the risk tolerance limits and gives it a mandate to invest to enhance the global purchasing power of the funds under its management. Temasek’s mission is to create and maximise shareholder long-term value.

Mr Liang asked whether MOF would review the overall portfolio risk that GIC and Temasek would be taking going forward. The Government reviews the risk limits from time to time. The current portfolio risk limits are not aggressive, and are consistent with our overall objectives of our reserves to provide a key defence in times of crisis and a continuous stream of income for the current and future generations.

But I would like for us to guard against knee-jerk reactions. We set the long-term risk and return objectives, and leave it to the investment professionals to do their job in this complex environment.

Dr Loo Choon Yong, however, made a valid point during the Budget Debate that a robust risk management framework is crucial to reducing or mitigating the possibility of unforeseen risk exposures. I would like to assure Dr Loo that proper and sound risk management and governance systems, structures and processes are well in place in both GIC and Temasek. Both GIC and Temasek have their own dedicated risk management teams that regularly monitor the risk exposure of investments. The Government conducts regular reviews with GIC and Temasek on the performance of their overall portfolios. The Boards of GIC and

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Temasek are ultimately responsible and accountable to the
Government for the investment oversight and management of risk.

Mr Inderjit Singh asked how the current financial crisis has affected the performance of our two Sovereign Wealth Funds and our reserves. Mdm Ho has also asked if the recent investments by GIC and Temasek in financial institutions are safe.

On Mdm Ho’s question, let me reiterate my reply to a Parliamentary Question filed earlier that it is not the Government’s practice to discuss the performance of individual investment deals. It is in the nature of investments that some will lose money while others will make money. The key is to weigh the risk of each investment against its potential return, and to balance it against other holdings, so that the portfolio will do well on an overall basis. This is how the Government assesses and holds the investment entities accountable for their performance.

With regard to how the portfolio as a whole has performed, like what I had mentioned in a reply to another Parliamentary Question last week, while GIC’s investments have diminished in value just like any other institutional investors’, it has fallen by much less than the decline in global equity markets indices of 42% for 2008.

As for Temasek, which has more than two-thirds of investments in Singapore and Asian countries, its net portfolio value at 30th November 2008 was S$127 billion, or a decline of about 31% from the value of S$185 billion as at 31st March 2008. This is less than the corresponding declines in the MSCI (Singapore) of 44% and the MSCI (Asia ex Japan) of 45%, both in Singapore dollar terms over the same period.

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Sir, let me now make two key points regarding the performance of GIC and Temasek: first, what the current downturn implies for GIC and Temasek as long-term investors; and, second, the impact of swings in the value of reserves on funds available for the Budget.

Temasek is a long-term equity investor and GIC is a long-term diversified investor. This is not the first major decline in markets that they have seen, and will certainly not be their last.

Sir, the last 20-year period to date has had its fair share of boom and bust. For example, in 1998 at the depth of the Asian Financial Crisis, the year-on-year decline in the STI index was at one point 56%. During the dot com bust of 2000/2001, the fall in MSCI (World) index was around 30% year-on-year. In all these situations, GIC and Temasek experienced significant reductions in asset values. In spite of these market gyrations including the current downturn, for the 20-year period to late 2008, Temasek had achieved annualised returns of about 13%. GIC, which has a diversified and more conservative portfolio, has also had creditable returns over the 20-year period. GIC would release its 20-year performance ending March each year. To recap, as at March 2008, the 20-year average return was 5.8% in nominal Singapore dollar terms. The figure for March 2009 would have fallen as a result of the decline in 2008, but will not be sharply down. Temasek and GIC are long-term investors, and should be evaluated as such.

GIC and Temasek have the ability and resources to weather the ups and downs, over multiple economic and market cycles. They do not have to sell in panic in a market downturn and are in fact in an advantageous position to invest in good quality assets at prices that are attractive from a long-term perspective during a downturn. The Government is confident

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that they will continue to deliver good long-term returns within the risk limits set.

Sir, now let me move on to the impact of changes in value of reserves on the Government budget. There is a common misconception that the diminution in value or capital losses on our reserves mean a similar depletion of funds for Government spending.

When the markets boom, and capital values rise, this does not lead to a surge in funds available for Government spending. Likewise, the drop in capital values owing to a market downturn does not mean a large decline in funds available for Government spending, as Mdm Ho, Mr Liang, Ms Sylvia Lim and Mr Inderjit Singh might have feared.

The amount which the Government may spend under the Net Investment Returns (or NIR) framework incorporates the expected annual returns over a 20-year horizon for assets invested by GIC and MAS, not the actual year-on-year returns. By design, this reduces the volatility introduced to the Government’s Budget from fluctuations in the NIR contribution although it does not eliminate it entirely. As a result of the downturn, the value of the asset base would invariably be smaller. However, it does not mean that NIR would fall by the same magnitude as the reduction in asset values. This is because the asset values are smoothed over the years, precisely so as to avoid volatility in NIR – in other words, to avoid a boom-bust pattern in Government spending as a result of swings in capital asset values and in the asset markets. This is similar to the methods employed by several other major endowments.

Sir, it is too premature to indicate the quantum of the investment returns that can be taken into the Budget for the next

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few years, taking into account the value of the asset base. As the Minister for Finance mentioned during the Budget Debate, the Government is confident that the prudent management of our reserves – as a long-term investor in the global markets – will continue to grow our reserves, and yield us a steady stream of Net Investment Returns Contribution over time.

On the issue of liquidity, I would like to assure Mr Inderjit Singh and Ms Sylvia Lim that the Government has studied the issue of liquidity before embarking on the NIR framework. Realised capital gains, dividends and interest payments from our investment entities are but one source of liquid funds for spending. Besides our usual revenue streams, our diversified portfolio of investments includes substantial holdings in cash and highly-liquid fixed income instruments, which we can tap on for our liquidity needs.

Mr Inderjit Singh has also asked how the long-term expected real rates of return have been worked out in the first year. Sir, the process has been thorough and rigorous. The Boards of MAS and GIC have certified to the Government the expected rates of return to be applied on their respective assets, based on established methodologies in the industry and taking into consideration the latest investment outlook. The Government has studied this carefully and agreed with the Boards’ recommendations, and has proposed these rates to the President. The President, after consulting the Council of Presidential Advisers (or the CPA), has concurred with the proposed rates.

Mr Inderjit Singh asked how the economic crisis has affected the funds managed by the Statutory Boards. Let me just clarify that the Government does not rely on returns from Statutory Boards for expenditure. However, Statutory Boards are allowed to accumulate surpluses from operational savings to serve as working

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capital as well as funds for capital expenditure. The bulk of these retained surpluses are placed as fixed deposits. And consistent with their cashflow needs, Statutory Boards have on average less than 10% of their exposure to equity markets.

Sir, let me now move on to the role of Temasek and GLCs. During the Budget Debate, Mr Zaqy Mohamad has suggested that the Government should have influence over the decisions of Government-linked companies that impact our social compact. Mr Inderjit Singh had also suggested that Temasek could be tasked to rescue local companies and re-focus on Singapore.

Sir, we have to maintain a clear and consistent mandate for Temasek. Temasek’s investments are made on a purely commercial basis. For the Government to micro-manage or direct Temasek or its investee companies to invest so as to fulfil some non-commercial objective would detract from the focus on maximising shareholder returns. This would also impose unfair obligations on the respective Boards of Directors, who have the fiduciary duty to act in the companies’ interest.

Mr Inderjit Singh suggested during the Budget Debate that Temasek could be tasked to rescue local companies and re-focus on Singapore. Members, including Mr Inderjit Singh himself, will remember that repeated calls have been made in the past that, as a matter of principle, Government should reduce its involvement in business and divest its stakes in local companies. We did not agree then.

It was our position then, and it remains so, that Temasek will continue to own shares or even increase its shareholding in local companies as long as it makes commercial sense, and to only divest those that are no longer relevant to its mission.

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2.30 pm

It is unwise for the Government to alter the philosophy regarding investments by Temasek and its investee companies simply in response to fluctuating market conditions or other temporary factors. As a long-term investor, Temasek would need the assurance in the constancy of policies which would impact its strategy as well as its credibility in the markets.

Temasek and its investee companies should therefore continue to operate commercially, without interference from the Government. If Temasek is asked to undertake a national agenda, it would, in fact, validate some of the concerns over Sovereign Wealth Funds having political objectives, and may ultimately impede Temasek's ability to participate in investments internationally. However, this does not preclude Temasek nor its companies from making their own decisions to increase their exposure locally where there are attractive opportunities. In fact, from time to time, Temasek has made new investments in Singapore.

Sir, let me now move on to the Whole-of-Government Performance. Even as the Government focuses on assuring funding from investment income, it is just as important for us to monitor the public sector's performance at the Whole-of-Government level for fiscal prudence over expenditure. At the same time, we need to take a proactive approach to enhancing our service delivery to citizens and businesses.

The performance of the public sector as a whole is becoming increasingly important as issues become more intertwined and complex. What one Ministry or agency does could enhance or negate what another does. It is in this context that I would like to address some Members' views concerning the performance of the public sector.

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Mr Inderjit Singh and Mr Seah Kian Peng have commented on the need to review the performance of Ministries. MOF has been working with Ministries to move towards reporting outcome-oriented indicators. This will enable MOF to see how well Ministries' key programmes are doing, and whether the identified objectives are aligned with national priorities.

MOF has been engaging Ministries to identify key strategic outcomes that the Government desires and which Ministries would share. These strategic outcomes have been set out clearly in a Whole-of-Government Strategy Map.

As a next step, we will work on how clusters of Ministries and agencies that contribute to or are influenced by the various strategic outcomes can better optimise their work on the Whole-of-Government basis.

Sir, MOF intends to introduce a Singapore Public Sector Annual Report (or SPAR) in 2010, which would provide an overview of how well the public sector would be moving towards the identified strategic outcomes across the key sectors to be shared and achieved by the different Ministries.

The strategic outcomes at the Whole-of-Government level to be tracked in this Annual Report would influence the key outcomes and objectives of all Ministries and departments. Hence, this Annual Report would encapsulate the basis for cascading the high-level outcomes and targets down to departmental, unit and individual levels. Such a report would also be useful to the identification of trends and issues that need focus or resolution vis-a-vis the strategic outcomes over time.

Sir, let me next move on to talk about how the Government will continue to

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ensure effective service delivery to the public and businesses, which is a key thrust. I thank Ms Jessica Tan for her comments on this.

One of the key delivery programmes is the iGov2010 Master Plan, which is a public sector wide effort spearheaded by MOF that enables us to harness innovation and technology to bring about an Integrated Government (or iGov) that better meets the needs of the public. Almost all Government services are now available online, 24/7, and are easy to use, responsive and integrated. Members would be familiar with the following examples:

(a) Taxpayers would have appreciated the ease at filing their tax returns, including the recently introduced No-Filing Service, and close to half a million taxpayers will benefit from this.

(b) CPF members can readily obtain their account balances, transaction and contribution history at the click of a mouse, using personalisation features at myCPF portal.

(c) Businesses can access Government services online through one-stop portals. For instance, ACRA's (Accounting and Corporate Regulatory Authority) BizFile system enables the public to register a new business or incorporate a company in 15 minutes.

(d) And, more recently, the Government has introduced the Unique Entity Numbers to standardise identification numbers used by some 52 Government agencies. Feedback has so far been positive.

That is not all. The Government will continue to leverage on technology to further enhance access to Government e-services in an integrated manner. For instance, Web-on-the-go will put some 40 Government e-services onto a one-stop

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menu on mobile phones; making it easy and convenient for transactions on-the-move. These include enquiry of Employment Pass and Work Permit status for businesses, JOBSlite portal for unemployed workers and information on weather and traffic for the general public.

The Government is mindful that a small segment of the society may be less Internet-savvy or may not have Internet access. Hence, we have also introduced CitizenConnect Centres to complement the online service channels. There are currently 28 such centres, conveniently located across the island, and serving more than 100,000 individuals each year.

Sir, MOF has a framework to identify key areas for integration and provides funding incentive to agencies to share facilities and processes for areas like HR and Finance systems for Government agencies. So far, 11 statutory boards have come together to share a system that will allow them to reap economies of scale through standardisation as well as a sharing of best practices. The Civil Service College also provides courses to equip public officers with the right skills and mindset to bring about inter-agency collaboration.

To do our jobs better, Government agencies also regularly obtain feedback on their service delivery, as suggested by Mr Seah Kian Peng. These agency-level channels include emails, direct correspondence, service counters and hotlines.

To measure the effectiveness of public service delivery, we conduct an annual customer satisfaction survey. In 2008, nine in 10 respondents were satisfied with the overall level of our e-services and would recommend others to transact with the Government through e-services. In terms of integration within Government, 16 multi-agency projects were implemented in FY2006-FY2007, with a total

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projected savings of $21 million. Several other new projects are in progress and will reap more savings when completed.

There are also more organised feedback platforms, such as:

Firstly, the Pro-Enterprise Panel which works closely with the business community to foster a conducive business environment. Secondly, there is REACH (Reaching Everyone for Active Citizenry@Home) which uses a broad array of both mainstream and new media channels to engage citizens from all walks of life.

Sir, our efforts at public service delivery have not gone unnoticed. Singapore was ranked the world leader in customer service maturity in the 2007 Accenture study on Leadership in Customer Service. Singapore was also ranked top in terms of ease of doing business in the World Bank 2009 report.

Sir, internally within Government, we need to continue maintaining fiscal prudence over expenditure even as we assist businesses during this downturn.

Our philosophy of fiscal prudence has enabled us to build up our reserves in years of feast so as to be able to respond speedily to any crisis, such as the one we are experiencing right now. We therefore agree very much with Mr Inderjit Singh that we need to be mindful not to overspend even as we have an expansionary budget. I would like to clarify that we have taken the opportunity offered by this downturn to bring forward worthy Government construction projects, and to advance our manpower hiring plans. The needs of these initiatives are clear and already planned for to build up our capacity and invest in new areas of need, and not to boost demand for its own sake, as that would be wasteful.

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The Government has in place a number of mechanisms to ensure it stays lean and efficient.

Firstly, there are budgetary mechanisms in place to ensure effective and efficient allocation of resources within Government. MOF scrutinises the project requirements of major capital projects to assess the worthiness of the projects and ensure that they adhere to appropriate cost norms. The cashflow for these projects are budgeted and planned for on a multi-year basis. Ministries decide on the phasing of projects based on the availability of budget and on the benefits and need for the projects. MOF monitors the progress of the ongoing projects annually. Value-for-money reviews are also carried out periodically.

Secondly, we will maintain the Manpower Management Framework to ensure that Government headcount does not grow faster than the growth in the resident labour force over the medium term. The advancing of hiring plans will not lead to long-term over-manning of public sector agencies as these are intended for projects that were held back due to insufficient manpower resources, as well as to, as I have said earlier, build up additional and new capabilities in areas such as healthcare and education.

During the Budget Debate, Dr Loo Choon Yong has suggested that these new jobs be outsourced. Under the bestsourcing framework, functions that are assessed to be strategic in nature will be performed within the Government agencies, while non-strategic functions would be market-tested, and outsourced to external service providers if doing so provides better value-for-money for Government.

As a consumer of goods and services, we agree with Mdm Halimah Yacob's

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view that the Government should always use its resources efficiently. Over the years, we have introduced initiatives to streamline Government processes and to minimise wastage across the public sector. Let me just recount a few. They include:

The Economy Drive and the Cut-Waste Panel. Since 2003, the Economy Drive has helped instil a mindset in public officers to use resources prudently while the Cut-Waste Panel has provided a channel for the public to give their feedback on Government spending. For example, as Mdm Halimah would be pleased to know, Government agencies were reminded in October 2008 to produce their annual reports in a cost-effective manner.

Next, land and building resources. All Ministries and agencies are responsible for the effective management of land and buildings allocated to them. MOF and MinLaw have put in place various measures to ensure this, such as the Office Space Management Framework.

And finally, Demand Aggregation (DA). This initiative pools together similar purchases across agencies for economies of scale, for example, in the supply of office furniture.

Mr Baey Yam Keng's suggestion of "pseudo dollars" during the Budget Debate is a noteworthy one. We have, in fact, instituted such a practice of encouraging agencies to share and optimise the use of their resources, for example, co-locating community centres and libraries. To facilitate this, we also allow Government agencies to retain the revenue for such transactions through an inter-department charging mechanism, and this impacts their budgets in real terms.

Sir, Mr Inderjit Singh asked whether Government could provide more business

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opportunities for local companies, especially the SMEs, through its procurement activities.

The Singapore Government procurement regime is an open one, based on the principles of fairness, transparency and value-for-money. Consistent with Singapore's commitment to the WTO rules, we do not discriminate nor favour any supplier. Tenders are therefore awarded on the basis of greatest benefits to cost.

To help local companies, the solution is not to tilt the playing field by diverting purchases to local enterprises as this may, in fact, stymie their growth over time.

To enable SMEs to participate easily in Government tenders, MOF removed the track record requirements for registration as a Government supplier in GeBIZ back in November 2004. Further, MOF has been providing the first GeBIZ account free-of-charge since 2005. To assist our local enterprises in this current downturn, Government is lowering business costs through the Jobs Credit and the enhanced access to bank lending with the Special Risk-Sharing Initiative.

In addition, the Government has also undertaken measures along two fronts.

First, by providing pipeline of public sector demand for goods and services and enabling companies to build capacity; and, second, by helping businesses with their cashflow.

2.45 pm

As announced, some $18 billion worth of construction contracts will be awarded this year. Some $1.3 billion worth of smaller construction contracts, each worth up to $50 million will be advanced.

Construction projects are, by nature, big ticket items. Nonetheless, public sector procurement of IT and other goods

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and services have also exceeded $3.5 billion annually since FY2006. And this trend will continue in FY2009, hence providing many business opportunities for the smaller companies.

The Public Service Innovation Framework has been in place since 2008 to provide seed funding for R&D in areas or with applications that could offer innovative solutions to the public sector. And we are also allocating $70 million to catalyse close collaboration with the private sector through the programme called "Call-For-Collaborations" on the development of new capabilities.

As I said, in addition to the several measures mentioned in the Budget to enhance business cashflow, Government, as a consumer of goods and services, is also doing its part to improve the suppliers' cashflow by making prompt and more frequent payments to suppliers, and by lowering the amount of security deposits for all tenders.

Mr Inderjit Singh also asked about the reassessment of property values and the review of rental rates for commercial and industrial properties, which will help to reduce business costs.

Sir, the Annual Value (or AV) of a property is assessed based on the prevailing market rentals for comparable properties. For 2009, IRAS will prioritise re-assessment of the properties that have seen the largest rental declines and where the market rentals have dropped below their AVs. More details will be given in due course.

As regards rental rates, as a policy, MOF requires all Government premises to be rented out at market rates. This is to avoid distorting the property market. Rentals are therefore set based on prevailing market rates assessed by qualified valuers engaged by the relevant Government agency at the grant of a new

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tenancy, renewal of a tenancy or at pre-determined points in a lease contract. MOF does not intervene in the setting of these market rates.

Sir, now let me move on to the role of our tax policies in enhancing our competitiveness. I welcome the suggestions from Members on how we can further enhance the competitiveness of our tax regime.

I will address the specific points made by Members.

Mr Inderjit Singh considers our corporate tax rate cut of 1% point from Year of Assessment 2010 a good move but is concerned that some countries may perceive Singapore as a tax haven.

Sir, Singapore is certainly not a tax haven. Singapore is a "low-tax" – rather than a "no-tax" – jurisdiction. At 17%, Singapore's corporate tax rate is competitive, but by no means among the lowest in the world. For the record, Bulgaria's tax rate is 10%; Ireland's, 12.5%; and Romania's, 16%.

Tax havens are typically dependent on "mail-box" companies. Singapore is, on the other hand, a substantive, knowledge-based economy in both manufacturing and services. Companies, both foreign and local, run real operations in Singapore that compete globally on the basis of value. Any objective observer knows that this is not a mail-box economy.

Singapore also enjoys a good reputation as a trusted business and financial hub, with a strong rule of law. We do not stand for abuse of our laws to shelter criminals, including those engaged in offshore tax offences.

Unlike tax havens, we have an extensive network of 60 Avoidance of

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Double-Taxation Agreements (or DTAs), and through this network, Singapore is able to provide assistance to foreign investigations of tax offences.

We regularly review our regime to ensure that Singapore remains a trusted financial centre and a responsible low-tax jurisdiction. One area currently being reviewed is the standard of the exchange of information for tax treaties.

The Organisation of Economic Cooperation and Development (or OECD) established a standard in 2005 for transparency and effective exchange of tax information. This standard has just been endorsed in October 2008, by the UN Committee of Experts on International Cooperation in Tax Matters.

Sir, Singapore agrees with the principles behind the OECD standard, which will serve to help governments address offshore tax offences in a globalised world. We will be engaging the OECD and the industry to study this OECD standard with a view to endorsing it.

Next, let me move on to Mr Gautam Banerjee's suggestions. We fully agree with Mr Banerjee on the need to continue to encourage more R&D activities in Singapore.

The Government has actually committed significant resources to R&D and innovation over the years. In Budget 2008, we introduced several new tax measures to incentivise companies to do more R&D in Singapore, including the 150% deduction for R&D expenditure and R&D tax allowance. All these contribute to making Singapore one of the most competitive tax jurisdictions for R&D.

We also revised the definition of R&D after careful study of major jurisdictions and several rounds of industry discussion and public consultation. In fact we have

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a lower bar for activities that qualify as R&D for tax purposes; for example, the UK and Australia require an advancement in the body of scientific or technological knowledge while we only require novelty or technical risk.

However, we should not set the threshold too low to include activities that businesses would ordinarily do to improve their products and processes. For example, if someone were to change the colour of ties that Mr Banerjee prefers, that process cannot be considered R&D, even if Mr Banerjee were to buy more ties. But if there is a novel way of producing coloured ties arising from systematic investigation and experimentation, that would be a different matter.

Nonetheless, these tax measures are new and we will monitor them and evaluate their effectiveness. We certainly welcome feedback and suggestions on how to improve the measures.

Sir, we also agree with Mr Banerjee that we should promote IP management. We currently provide incentives for IP management activities carried out as part of a company's manufacturing trade or HQ services under the Development and Expansion Incentive. In fact, our low corporate tax rate also makes it attractive for companies to operate here and earn locally sourced income, including royalties. We agree with his suggestion to negotiate lower withholding taxes on royalties in our tax treaties.

Liberalising the foreign tax credit regime may well enhance our attraction as a base to generate royalties from overseas. But we need to study this further to weigh the incremental benefits against a potential erosion of our tax base. And given that our corporate tax rate is more competitive than most places, most foreign-sourced royalties

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would suffer little or no further taxation here upon remittance.

He has also suggested that we publish advance rulings to make our tax administration more transparent. Many of our rulings are for transactions that are unique to circumstances and there are also confidentiality concerns. Hence, it would not be tenable for IRAS to publish the advance rulings. But having said that, where ruling requests have a wider tax impact, IRAS will publish tax guides on them to further improve the transparency of our tax administration.

Sir, finally, on the enhanced loss carry-back relief that he mentioned during the Budget Debate, this is a conscious policy decision because the Partial Tax Exemption is a final exemption to reduce the effective tax rate for smaller companies and is not a tax deduction.

Let me now move on quickly to Mr Edwin Khew's cut. Sir, we have a whole spectrum of measures relating to vehicles. We have a mixture of upfront ownership restraint and usage restraint measures to ensure free-flowing traffic and to support environmental outcomes.

Mr Edwin Khew has suggested that we should continue the CNG tax concessions till 2015. CNG vehicles, as the House may remember, have been exempted from special tax and been granted green vehicle rebates since their introduction in 2002, taking into account their cleaner PM2.5 emissions than diesel cars. And to develop the CNG refuelling infrastructure, Members will also remember that the Government has been co-funding the start-up costs of three refuelling stations.

These measures are, however, designed to help kick start the introduction of the then newer-type of vehicle and are not meant to be permanent. To date, we have more than 3,000 CNG vehicles on our roads and we

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are expecting another two refuelling stations by the end of the year. So going forward, we will gradually reduce their tax concessions to ensure that the adoption of CNG vehicles is sustainable on its own.

Fuel taxes serve, first and foremost, to price in vehicle usage. There is hence no reason to exempt CNG cars from fuel tax permanently. However, we have taken into account the difference between CNG cars and other cars with respect to the environment and therefore have introduced a rate that is at a steep discount to the equivalent rate. This rate is 20 cents as opposed to what would have been 53 cents.

Just to complete the point about giving CNG car owners sufficient notice, we have therefore extended the special tax exemption for a further two years before it is removed in 2012.

Finally on Miss Penny Low's cut on social enterprises, the divide is really profitability status and social enterprises are distinct from charities and must therefore be fully self-sufficient and profitable. They should not enjoy the benefits of tax exemption as charities, or be allowed to solicit tax deductible donations like IPCs. They should be subject to the same tax treatment as for-profit enterprises.

As regards new legal structures which have been introduced elsewhere, these key features are already accommodated within our spectrum of business vehicles right now, ranging from a CLG to a limited liability partnership.

So to conclude, Sir, we have been prudent in the management and utilisation of our resources. As a result, we have accumulated significant savings, despite the lack of natural advantages of bestowed natural resources and other

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conditions. We have managed these savings well, and grown this nest egg. It behooves us to continue with this discipline. We will also continue to improve in the efficiency and effectiveness of service delivery, tapping on both the private and people sector to do better. And finally, we have put in place a system to track how our public service is keeping pace with trends and meeting the desired strategic outcomes.

Mr Inderjit Singh: Sir, on the liquidity issue, I want to just ask: Given that both Temasek and GIC have got paper losses and we are expecting the returns on NIR based on expected return whereas their real return will be lower than that in the next few years as expected, will they have enough cash to return to the Government or will they be forced to liquidate assets to realise their losses? I understand that the Government has the money and I am glad that we have the money.

Sir, on the issue of role of Temasek to focus externally, I generally agree in the refocus of Charter of Temasek to invest externally. But with the benefit of experience in the last few years, we have generally been unsuccessful in many of our overseas investments, maybe in this environment it may be a good time to reassess this and bring them back into Singapore. But I can understand that we cannot direct Temasek to invest in companies, to rescue companies. Can I then ask if the Minister will be willing to set up another fund to help rescue companies, if not through Temasek, maybe set up a special fund to rescue companies?

3.00 pm

Mrs Lim Hwee Hua: Sir, as I was saying, when we were considering the whole NIR framework, we have actually considered the liquidity issues very carefully and taken stock of what we do

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have. As I said, we do have substantial holdings in cash and highly liquid

fixed income instruments. So to answer Mr Inderjit Singh's question, Temasek and GIC will not have to liquidate the investments, so as to provide the stream of income. And this is the nub of the whole basis for going on to an expected return versus the actual returns. As to whether there should be another fund to rescue companies, this is an assessment that the Government will have to make over time to see whether there is a need for, almost like, a third investment company. But there are currently schemes under the EDB like SEEDS, which cater specifically to smaller companies and these are actually better equipped and are in a better position to assess the possibilities for investments in such companies.

Miss Penny Low: Sir, I would like to clarify that social enterprises are called social enterprises because they are double bottomline. In other words, their profitability is measured on social and financial bottomline. So, in that light, they exist between a whole continuum from for-profits to not-for-profits. Is the Senior Minister of State aware that, currently, the problem with social enterprises is that if they are registered as not-for-profit, under the CLG, they are not availed to the schemes that are operated under SPRING. Therefore, in this time of demand and credit crunch, many of them would, in fact, face the same problem as SMEs, but without the help-lines that are currently offered to even SMEs.

Mrs Lim Hwee Hua: Sir, our current taxation system is really predicated on the divide of profits, as I have said, and that would remain so. But there is certainly scope if the Member were to evolve the social enterprise model, such that she can segregate the not-for-profit and the profitable parts of it, certainly, that is a conversation that can be taking place. As to whether the Government is sym-

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pathetic to the current problems that social enterprises or, for that matter, charities and VWOs might be having in this downturn, it is something that we are all aware of except that the Government cannot differentiate its treatment in terms of assistance to normal businesses and that to businesses which happen to be social enterprises. The treatment has to be consistent and the same.

Mr Seah Kian Peng: Sir, I am heartened to hear from the Senior Minister of State about the high 95% annual customer satisfaction survey conducted for the civil service. I would like to refer to the annual Mercer's Quality of Living survey. Last year, we were ranked 32nd out of all cities in the world. This is an improvement. We were in 34th position in 2007. So I would like to ask that the Minister set a target and adopt a Whole-of-Government approach in getting Singapore to be in the top 20 list of this Quality of Living survey – the most "livable" city – and that, obviously, I hope for it to be done as soon as possible.

On a lighter note, I am also very happy to hear from the Senior Minister of State that she has agreed to adopt my suggestion that, after this Budget debate, we can all go for "SPAR" (Singapore Public Sector Annual Report). I am not sure what the rest of Members are thinking of. [ Laughter. ] I would like to ask when we can look forward to this inaugural Singapore Public Sector Annual Report.

Mrs Lim Hwee Hua: Sir, I would like to assure Mr Seah that the public sector does not live by a survey alone. It constantly tracks all the different surveys, whether it is local or international, and always attempts to find out where the gaps are, with the view to fixing these gaps and better addressing the needs.

As to whether there should be a discrete or definite benchmark to achieve,

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it is a suggestion that I can bring back to the Ministry for consideration, but we generally would look at the whole spectrum of measures, rather than just one particular measure. As I mentioned, the first "SPAR" will appear in 2010.

Mr Liang Eng Hwa: Sir, while I agree with the Senior Minister of State that there is a long-term smoothing effect on the NIR, I would like to ask whether this expected long-term rate of return – which is determined by the boards of GIC and MAS, together with the MOF – would be lowered, going forward, given the long-term investment outlook. Indeed, that was the view publicly expressed by the leadership of GIC, where they said that the next 20 years are going to be more challenging than the last 20 years.

Also, I understand that the NII does not have a long-term smoothing effect. So I would like to ask the Senior Minister of State, together with this lower long-term expected rate of return and the likely lower NII, how does it impact the ability of the Government to balance its Budget? Also, will it affect some of these long-term programmes that we have?

Mrs Lim Hwee Hua: To answer the second question first, the new Budget has been drawn up with all those considerations that Mr Liang has raised, in terms of the impact of the markets on the NII, as well as taking into consideration the NIR that has been determined. As to whether the rates going forward, will be lower, I will say that the rates have taken into account the projections of the outlook going forward, as well as the current market conditions.

Er Edwin Khew Teck Fook: A point of clarification for the Senior Minister of State. How does MOF correlate between a healthy environment and taxation? We

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have, currently in Singapore, a situation of an unhealthy situation with regard to particulate matter. If we do not allow enough time to encourage the use of cleaner fuel to improve the situation, we will still continue to have the situation.

Mrs Lim Hwee Hua: Sir, the incentives, as we have been discussing, in a way reflect the attention that is paid to vehicles that are more environmentally friendly. But I would like to make a point about fuel taxes because I think that is an important point. It relates to usage, rather than the question of what technology and whether it is environmentally more friendly. If I may just repeat, fuel taxes serve, first and foremost, to price in vehicle usage. Therefore, there is no reason to exempt CNG cars from fuel tax permanently. Hence, the move to go forward with a rate, which some may mistake as a regressive step of imposing something for a "cleaner" vehicle. But that is really to harmonise the system back to the original intention of pricing in usage.

Ms Sylvia Lim: Sir, earlier the Senior Minister of State mentioned that the impact of the current turmoil was to reduce the overall portfolio value of Temasek by about 31%, if I heard her correctly. Can she also tell us by how much the GIC overall portfolio has been reduced in the percentage terms, because I did not quite hear that?

Mrs Lim Hwee Hua: Sir, I have given that reply to a previous parliamentary question, that GIC has actually registered a significantly lower reduction in value than the World Equity Index which I believe was 41% – let me just clarify that it is actually in the Hansard *.

*Vol. 85, 4th February 2009.

The Chairman: You want to clarify it some other time, Mrs Lim?

Mrs Lim Hwee Hua: Yes.

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The Chairman: Okay. Mr Singh?

Mr Inderjit Singh: Sir, on behalf of the GPC for Finance, Trade and Industry, I would like to thank the Senior Minister of State, Ms Lim Hwee Hua, for her comprehensive answers to our very difficult questions, especially those related to the reserves, GIC and Temasek. We thank you for all the answers.

I would also like to take the opportunity to congratulate the Minister for Finance on devising an innovative Resilience Package. The $20.5 billion Budget is indeed large, significant and wide-ranging. I am sure that we will see the benefits soon and we want to thank the Government for the Budget this year. I hope that we will really help the companies and the people as expected. Sir, with that, I beg leave to withdraw the amendment.

Amendment, by leave, withdrawn.

The sum of $570,816,400 for Head M ordered to stand part of the Main Estimates.

The sum of $278,692,900 for Head M ordered to stand part of the Development Estimates.

The Chairman: Order. I propose that we take the break now.

Thereupon Mr Speaker left the Chair of the Committee and took the Chair of the House.

Mr Speaker: Order. I suspend the Sitting and will take the Chair again at 3.35 pm.

Sitting accordingly suspended

at 3.12 pm until 3.35 pm.