CONSTITUTION OF THE REPUBLIC OF SINGAPORE (AMENDMENT) BILL

CONSTITUTION OF THE REPUBLIC OF SINGAPORE (AMENDMENT) BILL: Resumption of Debate on Question (20th October 2008), "That the Bill be now read a Second time." – [Minister for Finance].

Question again proposed.

Er Lee Bee Wah: Mr Speaker, Sir, I rise in support of the Bill.

The proposed amendments are indeed sound and would allow this Government to reap the maximum benefit from our returns from Net Investment Income and yet strike a balance to take into account the interest of our generations to come.

We have continuously been labelled by some quarters as a country that is rich but not its people. While it can be justified that when it comes to financial planning, it is wiser to err on the side of caution and not be too liberal in spending. Yet we need to strike a balance especially at a time when the population is facing hardship.

With the very volatile roller-coaster ride on the economic and financial fronts, it would be timely for us to have the financial resources at our disposal to reduce the impact that these events may have on our economy. Already we have to brace ourselves to the prospect of Singapore going into a technical recession, or already in technical recession, or a real recession in the months ahead. The clouds are already gathering – exports falling, even visitor arrivals are dipping, and we should all get our umbrellas ready.

Sir, I feel that it would be helpful if the Minister can share with the House what is the extra fund in real returns that we can expect to be at our disposal with the new computation. It will give us an idea of the magnitude of funding that we can expect should the need arise. Of course, it does not mean that we have to spend the entire amount available.

Secondly, can the Minister share with the House whether there are any specific plans on how these funds will be channelled, and how much will go into our social security system. On this note, I would like to urge the Government to look at spending more on our social security system, so that the man-in-the-street can stand to benefit more if any assistance is handed out. We are all aware of how embattled the lower and middle lower income are as they face wave after wave of rising costs, with the rise in electricity bills, the latest to slam into their earnings. Also, if I may propose that in exercising fiduciary responsibility on prospects of future earnings, we should take a prudent approach and exercise reasonable care. We should also not be ebullient when crystal-balling into future prospects and earnings. The collapse of several leading banks in the US is a timely reminder of how the impossible is possible indeed.

I hope, though the Government views its investments and the computation of returns to be based on expected long-term returns, this will not stop the Government from releasing annual statistics on the returns from our investments. In fact, a five to 10-yearly comparative figure would give everyone a good picture of where we got ourselves bumped on the head and where we enjoyed smooth rides.

Mr Liang Eng Hwa (Holland-Bukit Timah): Mr Speaker, Sir, let me begin by saying that this debate on the returns on our national reserves could not have come at a more opportune juncture in history. These are no ordinary times, and the turbulence that has engulfed global markets in the last few months has thrown up good reasons for us to re-examine the issue.

For one, there is no escaping that the value of our investments, like many other funds, would also be impacted significantly by the financial turmoil, which brings me to my first reason for supporting the Bill, that is, the new spending framework, which adopts a total return approach and safeguards the real value of past reserves, is a significant improvement from the NII framework.

The total return approach which marks the investments to current market value takes into consideration the appreciation and depreciation of the reserves invested. This approach, especially in light of the dramatic fall in asset values, is sound and would better reflect the returns of the portfolio in which the spending is based upon.

In contrast, the NII framework, though more conservative on the surface, could potentially skew investment policy towards having more high-dividend stocks and higher yield bonds in the portfolio. This would limit the growth opportunity of the investments as well as expose the reserves to higher inflation risk.

In theory, the NII approach could even lead to a situation where we may spend more then 50% of the returns. For example, the stocks and bonds that we invest in may have depreciated in value, but dividends and interest coupons would continue to be paid, as often is the case. Hence, we may well be in a situation where we continue to spend 50% of the dividends and interests that we received even though the investment values of our reserves may have shrunk. Put simply, we could be spending more than 50% of the returns if we take the reduced market investment values into consideration.

As our reserves are increasingly invested in higher returns emerging market economies, its investment risk will grow correspondingly. Therefore, pegging spending rules to total returns is both timely and necessary.

The new framework also preserves the real value of the reserves, with mechanisms in place to safeguard their purchasing power over the long term. Since spending out of the investment returns will be computed on a real returns basis, the Government can budget 50% of the investment returns for fiscal expenditure only after it has been adjusted for inflation. This institutionalises the necessary saving discipline and ensures that our reserves continue to grow adequately.

Secondly, the additional funds freed up under the new framework would primarily be spent on enhancing our economic capabilities and strengthening social cohesion.

At first glance, unlocking more investment returns for current fiscal expenditure could lead to a smaller kitty for future generations to dip into, and hence possibly deprive them of the opportunities we enjoyed. Surely, that is not the kind of “legacy” we would like the future sons and daughters of Singapore to remember us for.

Yet, if we carefully invest these additional funds to strengthen our global competitiveness in education or capacity building, for example, we will benefit not only the current generation, but lay the groundwork for a better and brighter Singapore for generations to come. The returns for such investments and spending on non-financial assets may not be that tangible, but I believe it will reap us good dividends over the long run.

Thirdly, the new framework would still facilitate the continued growth of the reserves for the benefit of current and future generations. Singapore’s national reserves, given our small, open economy and growing population, must continue to grow so as to adequately "capitalise" the country's balance sheet.

Again I have to refer to the recent financial turmoil, for we have seen how important it is for us to remain a bedrock of confidence in such chaotic times. For example, the Government’s recent move to guarantee all bank deposits would not have held much water if it was not backed up by the size of our reserves.

For a little red dot like us to remain a compelling destination for quality foreign investments, we need to maintain our AAA sovereign ratings as well as demonstrate our ability to manage a stable Singapore dollar exchange rate regime, in addition to the other economic and security prerequisites. Having a strong balance sheet will allow us to fulfil these objectives.

In this sense, I applaud the Government’s decision to retain the existing 50% spending cap on the expected long-term real return on assets invested by GIC and MAS as well as the NII on the remaining assets.

Indeed, there are no easy fixes to the question of “how much should we spend”. Even public listed companies often grapple with it as well. For example, a firm with a high-growth strategy would usually opt to retain the bulk of its earnings for re-investment. One with a more steady growth strategy, on the other hand, may prefer to distribute more dividends to maximise shareholders’ value.

On the whole, the 50-50 split is prudent and strikes a balance between allowing us to tap on the reserves for immediate use, while growing them over time for the benefit of future generations. I believe that most Singaporeans would find this an acceptable and equitable distribution of the country’s wealth.

However, I would also like to raise some points of concern.

Our national reserves play a critical role in safeguarding the economic and financial stability of the country. Hence, it is only befitting that we rigorously ascertain the motivation and rationale why the change is needed.

The Finance Minister, in his Second Reading speech, gave a good account on the areas of increased fiscal spending in the next 10-15 years, forecasted to cost an additional 3% of the GDP. Besides spending on building capabilities and strengthening competitiveness, there will be more social spending.

The natural public finance-related concern would be whether this change would set an unhealthy precedent where future governments will again dip into our reserves to balance the budget for increased expenditure.

Future governments, on their part, can always find equally compelling reasons to justify why it is “money no enough” for them, and hence withdraw even more from the kitty. Would our national reserves, our last line of defence in any crisis, become a readily available means to balance budget?

I would therefore like to ask the Finance Minister to address the basic principles in which the spending rules can be amended, so that the public understands the Government’s motivation for the change. Also, can the Minister provide some clarity on where the “no go” areas are, in terms of spending the investment returns?

Perhaps, what would be most difficult for the man in the street to grasp is this concept of "expected long-term real rate of return".

Those familiar with the endowment fund spending policy would know that such a spending approach involves basing fiscal expenditure on the long-term expected returns on investment, as opposed to actual returns earned year by year. The expected investment returns are then adjusted for inflation to preserve its purchasing power over the long term.

The merits of such a system are also well-documented. It smoothens out fluctuation by avoiding the market volatility inherent in year-by-year investment returns. This, in turn, ensures a more predictable stream of income for the endowment administrator, in this case the Government, to tap on for its fiscal budget.

The question is: how is the expected long-term real rate of return derived and what is this figure? Would the Government propose a bigger number if it foresees the need to spend more? Or would a far more conservative figure be used instead so that we do not run the risk of being over-exuberant in our projections?

The answers seem to lie in the hands of a list of who’s who running the framework. It is stated that the expected long-term real rate of return is determined by the Minister for Finance, in consultation with the board of GIC and MAS. The figure is then submitted to the President, who then decides whether to agree with the proposed rate after consulting the Council of Presidential Advisers.

Yet, while we can see that lengthy consideration and due process has been given to deriving the figure, we can expect more questions to surface: who comprises the board of directors of GIC and MAS, and how are they appointed? What is being done to ensure that the board, now also tasked to propose to the Minister for Finance the numbers pertaining to investment returns, is independent of the Government? Would there be a possible conflict of interest for the GIC board, which is also tasked to perform as a fund manager for the Government?

Mr Speaker, Sir, the expected long-term real rate of return is THE vital component of this new spending framework. It requires a leap of faith that the expected long-term real rate will indeed be representative of the investment returns over the long run. The expected long-term rate of return figure derived is in effect like a pin number to the ATM machine. I hence hope that the Finance Minister can have this figure and all information necessary for its computation made known in the interest of transparency. This is not a case of the "devil is in the details" but, with a spending principle of this importance, the "god is in the details".

The smoothing out of the asset base is also another critical component that needs to be further explained. The amount of capital gains that could be recognised hinges on the asset base in which the expected long-term real rate is applied upon. From the Minister’s Second Reading speech yesterday, I gathered that the asset base will be smoothed out over a period of time with higher weighting to the more recent years. In years of rising asset values, the smoothed out asset base value will be lower than the current value, hence enabling the capital gains to be recognised as NIR gradually over a period of time. This concept of smoothing is perhaps also the reason why the Finance Minister can be fairly confident that the new framework would contribute an additional amount equivalent to 2% of the GDP to the budget in the next five years.

Can the Minister shed further light if this is the correct understanding and would we still have contribution from NIR in a situation where asset base is declining but the long-term expected real rate of return is still positive?

I also note in the Minister's speech that he expects expenditure to move up slightly higher after five years, that is, more than the additional 3% of the GDP. How would the Government intend to fund this higher expenditure in five years' time?

At the end of the day, what matters is not just the nuts and bolts of the changes, but also what do they mean to the man in the street. In the US, this man in the street is now famously characterised by "Joe the Plumber". In our case, what does this change mean to the heartlanders, the workers, the professionals, the retirees, the stay-at-home motherss, NSmen, students, and so on?

On this issue of Net Investment Returns, we have to impress upon Singaporeans what the changes will mean to them, both in the short term – which essentially refers to what we spend – and long term – what we save.

Of course, with this change in spending rules coming amidst an economic downturn in the near term, Singaporeans will hope that the Government will do more to strengthen the social safety nets. Tax-paying Singaporeans will be interested to know whether higher contributions from NIR would lead to the possibility of lower income tax. Would the step up in spending, in areas of capacity-building and infrastructure, lead to more jobs being created in the near future?

Growing our reserves beyond the global inflation rate benefits the current generation as well. It helps secure high international credit ratings, which would trickle down to lower borrowing costs for companies in Singapore and promote economic activities. It strengthens our hand in managing the Singapore dollar exchange rate and renews confidence among foreign investors. Every extra dollar of reserve we save will give us another ounce of insurance that we will survive as a nation. Have you ever wondered if Singapore is able to withstand and recover from a catastrophic attack similar in scale to the 9-11 terrorist attack in New York?

At the end of the day, we must be able to say with responsibility to the man in the street that Singapore is built to last.

The Norwegian Government Pension Fund - Global, which is the equivalent of GIC, actually enshrined as one of its ethical obligations that a reasonable portion of the wealth accumulated must benefit future generations. I hope colleagues of this House would join me to reaffirm this obligation even as we debate on the merits of the changes.

Finally, as we debate over this happy dilemma as to how much we spend or save as well as how we should share our wealth between the current and future generations, let us not forget the past generations who have painstakingly built up this precious resource for us. Members of the House will agree with me that we owe it to our pioneering and past leaders for building up our reserves to its current healthy state. Let us not forget that without the vision and perseverance of men, like Lee Kuan Yew, Goh Keng Swee, Hon Sui Sen, we would not be in this privileged position of debating this topic in this House today.

Sir, with that, I support the Bill.

Dr Ong Seh Hong (Marine Parade): Sir, many of us have heard this story. If you put a frog in a pot of hot water, the frog will jump out immediately. If you put a frog in a pot of cold water, it will swim happily. If you then very slowly heat up the water, the frog will continue to swim comfortably on and on, and eventually it will die pain-free.

Mr Speaker, Sir, I have spoken in this House about my concern of the Government’s intent to widen the definition of NII (Net Investment Income) to include capital gains. I am afraid the Constitutional amendment before us to further change the shape to allow the Government to use the returns on our investment is another step to perdition. I am most concerned and worried this morning when I read the headline of TODAY – "Pain Free Spending". Sir, has our Government sent out the wrong message? Or is this what Singaporeans have come to expect of our Government’s budgetary positions and policies? Or is it the beginning of what the frog has suffered – a case of "pain-free dying"?

Sir, there is no such thing as easy money or pain-free spending. Just look at the two most recent financial crises. The 1997 Asian financial crisis had its root on easy credit on US Dollars, whereby Asian countries were borrowing easy credit on US Dollars to spend in their own currencies. The current sub-prime crisis was also caused by banks lending easy money to those people who could not otherwise afford the mortgage. And, Sir, we know, at the end of the day, we all have to pay for the real cost of these so called "easy money" or in the mouth of TODAY’ s reporter "Pain free spending". I therefore urge the Government to continue with its prudent and conservative approach when using returns from our reserves.

It was not too long ago that we shifted from the very prudently held stance of accumulating our reserves without spending much. Because of the efforts and prudence of our past Governments, we were able to accumulate and be in the strong position that we have today. Thus, I applauded Minister Mentor when he strongly objected to Dr Wang Kai Yuen’s "Three Buckets" approach. Since then, we have started using the returns on our reserves. We started with just the interest and dividend, and now with the present amendment, we will also include capital gains. Sir, where do we stop? I understand the current Government’s reasons for the need to tap more funds from the reserves and I believe that our present Government is responsible and will not mis-spend our reserves. What I fear, Sir, is that we may experience greater pressure to further expand the usage of our reserves. Can we ensure that future profligate governments will not attempt to change the Constitution to draw more from our reserves?

Sir, to safeguard our reserves against future wasteful and irresponsible government, we have institutionalised checks and balances in the form of the good office of the President, to hold an extra set of keys, for an added set of protection. Sir, in this regard, I would like to know if our President’s Office has the resources and means to check on the Government.

In 1996, the then Prime Minister, Mr Goh Chok Tong, in response to the late President Ong Teng Cheong, made a crystal clear view on the role and power of the President and the Prime Minister of Singapore. The President of Singapore is an elected position which does not enjoy executive power. The President is a custodial position. Only the Prime Minister has executive power. On paper and in principle, the difference between the two offices is clear. However, in reality, there might be ground for misunderstanding due to the difference in interpretations.

Sir, the incident of the late Mr Ong Teng Cheong’s misunderstanding with the CPF Board over the interpretation on the use of their reserves to fund budget deficit can provide some lessons. Let us briefly go back in time in 1995. Then, the CPF Board submitted a budget consisting of expenditure of $27 million and revenue of $23 million, thereby using their reserves to offset the deficit of $4 million. CPF Board’s reserves were on an "accrual" basis but the late President interpreted it as past reserves because there was an election that year leading to a change of Government. Back then, although the late Mr Ong held a different view from that of the Government, yet he still approved the CPF Board’s budget. Given the late President’s considerable standing in the eye of the community, what kind of storm and repercussion would have been created if Mr Ong had chosen not to approve the CPF Board’s budget then?

Sir, I am reminded of the stalemate in the United States’ Presidential Election of 2000, between Mr George Bush and Mr Al Gore, whereby the United States was left for a brief period, without a President pending the legal decision over who had won the Florida State electoral votes. Rubbish piled up and state employees were not paid during that period as a result. Singapore cannot afford to have that scene played out here.

Just before he left office, the late President Ong, in a press release, highlighted several pointers on his tenure. Amongst the more controversial one relates to his regrets on not being able to execute his duty due to a lack of support from the public officers. One example, Sir, was the incident when the late President requested for a list of the State’s assets and his subsequent interpretation of the reply from the Auditor-General that it would take "56 man years" to compile. That episode also highlighted another possible area for contention. The late President felt that to do his job, it was necessary for a compilation of all the State’s assets, including State land. The Attorney-General’s Office advised on the basis of the law that there was no need for the revaluation. This difference in opinion had led to the late President feeling that the public officers were not supporting his Office although it had not stopped him from doing his job to support the Government.

Sir, we cannot deny the possibility of a future President who interprets his role differently and chooses to exercise his influence differently from the late President Ong. I shudder to think what kind of problems the future President might present to future governments in the event of a difference in interpretation. Singapore cannot afford political stalemate like that of the United States in year 2000 just because of that.

Sir, I agree that our President's Office is a non-executive one. However, we must equip and prepare the Office so that it would be able to carry out its role as the safe-keeper of our second set of keys. This is not because our current Government is not good. But we need to prepare for the unforeseen circumstances in future, when an irresponsible government is voted in and wants to start to squander away our hard earned reserves. Therefore, I would like to call for more support for the Office of the President for him to carry out his functions effectively.

Sir, I would like to comment on the benchmark of the real growth that we are using under the new framework of NII. I think one of the inadequacies in this proposal is that it only takes into account the inflation rate. Using inflation as a benchmark only allows our reserves to stay as it is in today’s dollar terms but does not allow it to grow. So, in the scenario when the world and our competitors are all performing well above the inflation rate and we just manage to do better than the inflation rate, our competitive edge is actually weakened.

I propose that we should look beyond the inflation adjusted real returns. GIC and MAS hire many top brains from the financial sectors. It is therefore not unreasonable to expect that our reserves should outperform some international benchmarks on a long-term basis. These expected returns should be well above the inflation rate.

Sir, I therefore suggest using some suitable external benchmarks to measure the performance of our reserves. The future Government can only use the return if the rate of real return outperforms those benchmarks and in those instances anyway, only half of the out-performance should be used. If our real return is lower than what our reserves rightly deserve, the Government should not be allowed to use any of our returns.

Next, I would also like the Minister to consider adding another dimension of benchmarking our reserves by considering the population growth. Let me explain why. If a person leaves behind $4 million to his four children, each one of them would have $1 million. Assuming his asset is to pass on to the next generation of eight grandchildren, and assuming that the asset has grown according to the inflation rate, the next generation would have, in today’s dollar terms, been left with only $0.5 million each. Sir, what I am suggesting is that we should make sure that our reserves also grow in tandem with our population. As such, I propose that besides adjusting the returns according to the rate of inflation, we should also adjust it according to the rate of population growth.

For example, our population is about four million now. When it grows to six million, our reserves should grow by another 50% . If our reserves grows by less than 50%, effectively our per capita reserve would have shrunk. In that case, we should not then allow the future government to touch our reserves, no matter what the real returns might be.

With these comments, Sir, I support the amendment.

Mr Speaker: Order. I propose to take the break now. I suspend the Sitting and will take the Chair again at 3.50 pm.

Sitting accordingly suspended

at 3.30 pm until 3.50 pm.

Sitting resumed at 3.50 pm

[Mr Speaker in the Chair]:

CONSTITUTION OF THE REPUBLIC OF SINGAPORE (AMENDMENT) BILL: Debate resumed.

Dr Lim Wee Kiak (Sembawang): Mr Speaker, Sir, I believe everyone in this House has heard about the story of the goose that lays golden eggs during their childhood. In the fable, the poor goose was killed because the owners got greedy and could not wait for the golden eggs to be laid. Our national reserves is like the goose that lays golden eggs and we had many golden eggs from the goose. We are prudent that we did not consume the entire golden egg each year but we just used half of the shell of the golden egg. The other half of the shell and the entire egg is reinvested to fatten our goose and make it lay bigger eggs each year. This has played an important role in Singapore's growth story over the last few decades.

Singapore is at a turning point in our demographic profile. The ageing demographics will mean that the Government will need to spend more on social programmes and healthcare. The Government has made appropriate adjustments and introduced initiatives such as Workfare, ComCare and Medifund. All the initiatives are good but they will need more resources. As a small nation without any natural resources, we are only dependent on our people. We have limited options, in terms of gathering more resources for such initiatives. The Government has highlighted that the increase in GST and the revision of the Net Investment Income to Net Investment Return will provide additional resources to make such initiatives sustainable. The amendment of the Constitution of the Republic of Singapore will provide additional resources, but it simply means that we have to be prepared to accept a slower rate of growth of our national reserves. Instead of just taking half the shell, this amendment will allow the Government to use up to half of the entire egg, and the goose’s growth will decrease. The question is: how will this amendment affect our annualised inflation-adjusted rate of growth of our national reserves? I would like to ask the Minister what is our current annualised inflation-adjusted rate of return from our national reserves for the last 10 years. And, with this amendment, how will it affect this particular growth?

The additional resources derived from the Net Investment Return is the fruit of labour of all Singaporeans, especially the older generation who have contributed and sacrificed so much for this country. To them, I would say that they would not understand the building of a new school or conversion to a single session mean to them. I think our esteemed colleague over here, Mr Liang Eng Hwa, has alluded to Joe the Plumber, which was made famous by John McCain in the Presidential debates. I would like to quote Mr Tan, the retiree. To a typical Singaporean, Mr Tan, a 70-year old retiree, what does this Amendment Bill mean to him? What will the changes mean to him, in terms of building new schools, constructing new highways and expanding new MRT lines? What is the implication to Mr Tan? I would say that it is only right that additional resources should be used to support this group of Singaporeans who have sacrificed so much for this particular country. Can the Minister then make provisions to assure Singaporeans that more resources can be channelled into some of these programmes?

I have received many comments from the public on my Facebook entry on this topic, and many have expressed concern that our national reserves should never be drawn down unless in emergency. None has urged the spending of the national reserves. And I am glad that Singaporeans do understand the importance of our national reserves. It is the bedrock of Singapore's foundation. I hope the Minister can reassure this House and the people of Singapore that this amendment will bring no harm to the health of our goose.

I understand that to negate the market volatility and gyrations, the Government will be using long-term expected returns rather than actual returns to compute the Net Investment Return. I would like to know what would happen if this projection missed the target range for whatever reasons. If it is over projected, will it lead to an inadvertent draw down on our national reserves? If it is over projected, will this amendment allow for adjustment to increase the amount to be released to the Government later?

With the projected rate of return, will this translate into a key performance indicator or target for the GIC to achieve? If yes, will there be any risk of premature divestment of our long-term investments just to meet short-term targets? How can this be avoided? I do not want the GIC to kill the golden goose just to extract more eggs or to meet short-term targets.

And last of all, I would like to ask the Minister what does this amendment mean to Mr Tan, a 70-year-old retiree, to his son, a 40-year-old manager, as well as to his grandson, a NUS graduate at 20.

With that, Sir, I support the Bill.

3.53 pm

The Prime Minister (Mr Lee Hsien Loong): Mr Speaker, Sir, I rise to support this Bill.

Parliament is considering an important Constitutional amendment to our reserves framework. The immediate issue before us is just a formula change. How much income can the Government draw from the past reserves? We are changing the formula. The new formula will allow us to spend somewhat more. But the deeper significance of this amendment is to establish a more sustainable and equitable basis for spending out of the investment returns. Sustainable and equitable, so that we have resources which can benefit both the present generation and future generations. While we spend for our needs, we also put aside a solid buffer for contingencies, for the proverbial rainy day. That is the deeper meaning. But the most fundamental significance of this amendment is that it reaffirms the importance of protecting our reserves and of upholding the two-key system of our Presidential safeguards.

These reserves are a major resource for Singapore. We have no natural resources. All Members who enter this House memorise that as a catechism – no timber, no iron, no gas, no gold – just our wits and our strength and our financial reserves which we have built up. And these financial reserves give people, Singaporeans and investors alike, confidence that Singapore is sound, strong and able to cope with anything which may come its way. They are our nest egg and insurance for a rainy day. So that even during tumultuous times like now, nobody has any doubt that we can weather the crisis. Imagine that if we did not have these reserves, would anybody take us seriously if the Singapore Government issued a guarantee on all the bank deposits in Singapore – $700 billion of deposits – and we guarantee them? Guarantee them using what? Would we have accumulated $700 billion of deposits in Singapore if we did not have that kind of economy and that kind of strength and solidity? So people are prepared to bank here and to trust us.

It has taken us more than 30 years to build up the reserves to where we are today. We started accumulating them in the 1970s. It was a favourable external environment, which allowed Singapore to grow strongly year after year. We had a young population. We did not need high social spending. Healthcare was a very small proportion of our annual expenditure. The Government could adopt and did adopt prudent and conservative fiscal policies. And so we ran budget surpluses in good times, over many years and, in some years, huge budget surpluses. We were lucky, we were careful, we were successful. We collected the surpluses, we invested them carefully. They became our reserves.

At first, MAS managed them because MAS was the central bank. MAS had to have enough to meet the needs for balance of payments – so many months of imports – and to meet the needs of managing the exchange rate so that nobody would try and have a go at the Singapore Dollar. But when the reserves grew larger than what we needed for the Singapore Dollar and for our balance of payments, then Dr Goh Keng Swee decided to split off a separate organisation – GIC – from MAS, solely dedicated to managing the reserves for long-term returns. This is so that it has only one mission – to manage the money. It is not responsible for the financial system; it is not responsible for the exchange rate – just make this money grow.

GIC was the forerunner of today’s sovereign wealth funds, not quite the first in the world, but one of the first. It started with two employees initially, the Managing Director and his secretary, and now it has about 1,000 people working for it, from many nationalities, in offices here, London, New York and elsewhere.

Besides GIC, we also built up the Government-linked companies. We started them one by one – DBS, Sembawang, SIA, Keppel. And as they grew, we transferred them over to Temasek Holdings to be managed commercially. Because we decided the Ministers had better run Ministries, and Ministries should not be running companies. Let us put the companies under proper holdings and proper management. And so we have two professional investment organisations – GIC and Temasek – highly regarded around the world for their competence and integrity, and their track record. They hire management internationally. They are meritocratic. They go by results. They are focused on their commercial objectives and their Boards are competent and experienced. They pursued sustainable returns over the long-term, and avoided excessive risk-taking for short-term gains. In this way, we have achieved good returns through the ups and downs of the global economy and market cycles, not every year, but taking a long view, we have consistently done well.

As our reserves grew, we became conscious and concerned about the need to protect them,

because we had seen other countries which had strong fiscal positions, but had become bankrupt, because of corruption, incompetence or populist but unsustainable measures. We understood the nature of election politics. There are strong pressures to spend more, either for short-term benefits or for political advantage, and every election could become an auction of populist policies to spend the reserves.

For Singapore, the first generation of leaders and voters had gone through life and death political struggles and got Singapore out of poverty. We could rely on the fiscal prudence of the Government and the good judgment of the people to safeguard our reserves and to hold the line politically. To do the right thing and to convince people that this is the right thing and to stick by it – save, work, earn – not spend, relax, enjoy. But for the long term, we knew that we had to institutionalise safeguards in the system because otherwise we would be in trouble, whether it is a PAP Government or a non-PAP government in power. So we studied this carefully and took the first step in 1991, when we amended the Constitution to create the Elected President.

The Elected President has a number of functions but protecting the reserves was one of the most important of them. And our priority – the first big move we took – was to protect the principal sum of the reserves. We said, "past reserves, all those accumulated by previous governments, that is what should be locked up. Anything which the present Government accumulates, that is the right of the present Government to spend. You earn the money; you have the right to decide what to do with it." So we protected the principal sum of the past reserves, but we allowed the present Government to spend the income from those past reserves – which meant dividends and interests – on the argument that this is income which is accruing now and, therefore, it is income to the present Government.

It was a simple approach but not a perfect one. On the one hand, the Government could spend 100% of the income. So we were not putting aside part of the income to grow the nest egg for the future. But, on the other hand, when we said investment income, it was only interest and dividends. We did not count capital gains and we did not count capital losses, and both capital gains and losses can be significant in managing money. Also, we did not take inflation into account. So, if inflation is high, you may think you are earning money and drawing only on the income when, in fact, you are drawing down on the reserves.

But anyway, we had taken a first major step, to protect the principal sum of the past reserves. Now, we had time to refine the scheme further as we gained experience with the new system. We could sleep at night peacefully and think about how to improve the locks on the door, since the door had already been locked up.

After this new system came into effect, we debated for several years how to refine the balance between providing for present needs, and building up the nest egg for the future. This was the question in the 1990s which many Members would remember as the hotly debated “Net Investment Income (NII)”. The question is this. We are spending 100% of net investment income-interest and dividends. What proportion of this actually should be made available to the Government to spend? Should we lock up some proportion of the NII as past reserves? Because, although it accrues now when this Government is in office, in fact, the reason that it is coming now is because the principal sum was built up before this Government came into office. And if we are going to lock up some of it, how much would be reasonable? How much is neither too stringent nor too lax? How much is the right split between saving for the future and spending for now?

The then President, Mr Ong Teng Cheong, had been a part of these discussions in Cabinet. So when he became President, he was in favour of having the Government change the Constitution forthwith and lock up 50% of the NII. But the Government was cautious. We had already made one move earlier to lock up the principal sum. We did not want to make another precipitate move, which might turn out to be too stringent or ill-judged, so we wanted to take more time to study this carefully. We studied this for several years before eventually deciding that it was the right thing to do. We decided on a 50-50 split between the present and the future, and implemented the new rule in 2001. We could see the pressures were there. MPs naturally want more social spending, and these are pressures which are understandable and which we have to take precautions to protect ourselves against.

Why 50%? It is not an exact science why we came to this number, but I think 50% has a certain neatness and feels intuitively acceptable, because it underlines our commitment to continue growing our reserves, while allowing the Government to tap on part of the investment income for current spending. In a sense, we have put equal emphasis on both objectives – the present and the future.

Thus we went from 100% to 50% of NII, but we were not yet ready to change the interest and dividends framework. The other issues still remained – the question of capital gains and losses and the question of inflation. These had not been tackled.

We continued to study how we could improve our system. We looked at other governments, like Hong Kong and Norway. We studied some of the US Ivy League universities. The US Ivy League universities are the best, most established, and also the wealthiest. Some of them have built up huge endowments, and they have developed robust, sophisticated spending rules to preserve the value of their endowments, and generate a stable, sustainable income flow year after year. They face very similar challenges as we do, though a little simpler because it is only within the university context. They are only arguing with the professors how much money to spend, but the pressures are similar - how to grow it, how to have a stable flow, how to make sure that they do not overspend in good years and run out of money in bad years?

And the most interesting of the models is that of Yale University, which had studied this very carefully and worked out a very systematic framework and run it for many years. Fortunately, we had contacts with some of the people who operated the Yale endowments and we were able to pick their brains and understand how and why they did it this way. But we had to take these ideas and fit them into the Singapore context. There were three things we had to consider when we put them into the Singapore context.

Firstly, economically, we needed a sound formula which would overcome the inadequacies of the present system.

Secondly, politically, we needed a simple and fair system, which Singaporeans could understand and support and, most importantly, which can withstand political pressures to spend more. And these are very difficult. How to draw the line and stand firm, and not just say more is better? That is a big challenge.

Thirdly, constitutionally, we needed a scheme which would fit into our system of checks and balances, where the authority is split between Parliament which approves the money, the Government which decides what it wants to spend on, and the President who has custodial powers and can say no. We had, specifically, to take full advantage of the institution of the Elected President with custodial powers.

So, to take these theoretical ideas and fit them into our economic, political and constitutional requirements required many papers and a lot of work. We came up with proposals repeatedly, we discussed them amongst the Ministers, the President, and the CPA. We took in their views, and the matter went back and forth. Finally, after many iterations, the result is this Constitutional amendment, which has the President's support.

This amendment retains the principle of safeguarding 50% of our gains as past reserves, but it sets an important new basis for calculating the Net Investment Returns, and the key phrase is "long-term expected real returns" from our investments. Every word means something. "Long-term", because this set of rules looks beyond the current year, or even the next few years, because year-to-year or short-term conditions can be volatile and we want stability. We are talking about long-term, which is something around 20 years.

"Expected", because we are looking ahead, trying to judge prospects in a changing world rather than looking into the rear view mirror and going solely by past experience. The past is a guide to the future, but the future is often different from the past. If we look back over the last 20-30 years, those had been good years for markets, especially up till the dot-com boom. Interest rates came down, economies and companies prospered, share values went up, and everything went up. China was coming into the global economy, inflation stayed low, and it was a long boom. If we look forward, there are black, storm clouds right now, but even beyond the storm clouds, I think it would be foolhardy for anybody to project that the future will be the same as the last 20-30 years, and to expect the same returns as we have been getting over the last 20-30 years. So we have to look forward and decide what returns we can expect on a sustainable long-term basis.

"Real" returns, because we have to take account of inflation, not just the amount in nominal dollars, because every year prices go up. We have to account for inflation and subtract that out, and only deal with the real part of the returns.

Then, we are talking about "returns", meaning not just income and dividends, but total returns. Interest income, dividends, capital gains and losses – all forms of returns added together. Therefore, we are looking at long-term expected real returns. Memorise those words.

The net effect of this change is to allow us to draw somewhat more than under the old formula, but we need to be careful how we are going to spend it. Broadly, with this additional money, our priorities ought to be on investments in our future – as Mrs Josephine Teo suggested yesterday – on infrastructure, education and R&D, on increasing competitiveness and reducing direct taxes. These are indeed the Government's priority areas in the years to come. So this Constitutional amendment will enable us to fund these programmes.

It will also, most importantly, enable us to fund these programmes and investments on a long-term basis, and shield them from the vagaries of year to year economic and fiscal conditions. Because this is based on long-term returns, and we are also going to smooth out the capital sum on which we compute these returns. We are going to draw a steady amount – both in up years and down years. So that even in down years, long-term programmes can be assured of their funding and can continue. That is in fact a tremendous advantage to us. For example, R&D is inherently a multi-year programme. We put in the investments, build up the laboratories, scientists and the capabilities, and do the research. Maybe 10-20 years later, or maybe even longer we will see the full fruits.

In other countries where the funding comes out of the current budget, R&D and scientific work is very often whipsawed by short-term budget pressures. This year, in the US and Europe, they are under great pressure because budgets are tight. They have spent their money rescuing banks. How are they going to carry on doing R&D? So, it is very unsettling for the scientists. It is a tremendous advantage for us that we can say in Singapore, we are committed to long-term support for R&D and increasing the quality of education.

The additional money will enable us to invest in some very worthwhile things.

But I should caution that our reserves are not a limitless resource to pay for everything we want. And I am particularly grateful to Dr Ong Seh Hong, who read the TODAY newspaper, and, like me, had his eye caught by the headline which talked about "pain-free spending". This is precisely the wrong approach to this issue, because there is no free lunch. And if Members think that we are doing this because we just want more money, that is exactly what frightens us. That is the mindset against which this whole scheme is designed to protect, to prevent such casual wrong-headed squandering of hard-earned reserves – once gone, it is finished.

After making this rule change, we will still have to prioritise what we are going to spend on, which items we are going to spend on first. We will need to think carefully what we really need and how much we can afford. That is why when I proposed changing the NII formula two years ago, I also proposed raising the GST to 7%, to fund increased social expenditures – healthcare, Workfare, more Government help for the low-income and elderly. Because, in principle, social spending is something which is on-going, which if the Government needs to spend on, the people ought to pay for. But investments in the future, in principle, are about transforming the financial reserves into capabilities to generate new reserves. It is not a hard distinction, since money is fungible. But, in principle, I think those should be our mindsets. These two moves – the NII to NIR and the GST 5% to 7% – will put us in a sound fiscal position for the foreseeable future.

If the Government is prudent and manages to accumulate surpluses in good years, then it is fair to share some of these surpluses with Singaporeans, eg, through the Progress Package, Growth Dividends and so on. Those, naturally, come out of current reserves. But if we need to spend more than we have available, then the Government of the day has to raise revenue to do this, and has to justify to voters why it is necessary to tax people in order to spend on these good causes. Ms Sylvia Lim yesterday asked a question: will we need to burden the people further? I think she meant it as a rhetorical question but I can give her a serious answer: We cannot say. It depends on what programmes the Government decides to embark on. If we embark on an unconditional needs-based welfare system, such as the Workers' Party has proposed, then we will certainly add to the burdens of the people because then, the sky is the limit, and the money has to come from somewhere. But for this PAP Government, only in an exceptional situation, to meet extraordinary, non-routine spending, would we go to the President and the CPA and make a case why we should draw more from past reserves.

We have always to take a long-term view of these matters. Right now, the global financial system is under severe stress. Markets everywhere are in turmoil. America, Europe, Japan, all three economies are in recession or going into recession, and these problems will take more than a few months to clear; at least a year, quite possibly longer. Singapore cannot avoid the fallout. Our economy is competitive, our banks are sound, but we are linked to the world. As the Morgan Stanley economist Stephen Roach says, "You either believe in globalisation or you believe in decoupling. You cannot be globalised and decoupled at the same time." And Singapore is globalised, we are not decoupled. So we have to be prepared for a rough time. This year, we have cut our growth forecast to 3%. In fact, the last two quarters (quarter-on-quarter) have been negative. We cannot predict next year's growth yet, but we can be sure the next one or two years will be difficult. Meanwhile, we are monitoring the environment and our economy very closely. We are preparing measures to help businesses reduce costs, households, especially low-income households, to lighten their burdens, and workers to tide over the downturn. By Budget next year in February, the situation will be clearer, and then we can decide what we will do. We have the resources to do this, and we have the resilience to see ourselves through.

This is quite a different outlook from the one we had when we decided to make this Constitutional amendment in 2006, just two years ago. Growth in 2006 was more than 8%, the markets were booming, and our investments were doing brilliantly. The formula we have come up with has to work in both circumstances. Supposing we had spent all the investment income in a good year. Then what will happen in bad years, when returns may well be negative, but when we most need the money? Therefore, our spending rule will be based on long-term expected returns. In good years, spend less than what we actually earn, and put aside more for the future. In bad years, try to preserve the value of our investments, but draw on our accumulated surpluses at a prudent rate. In this way, we can stabilise ourselves against volatility year-to-year.

We did not time the Constitutional amendment to deal with this downturn. It was not designed for this downturn. But the amendment will put in place the right spending rule for this and future downturns as well as boom years.

There is one question which I am sure many Members would have asked: in this recession, will we need to go to the President to spend more from past reserves? My answer is this: In a recession, our fiscal stance will naturally have to suit the prevailing conditions. In other words, we naturally have to have looser budgets, the tax revenues will come down, the spending will go up, and we are likely to run a budget deficit. Whether we run a deficit or a surplus, our policy will be dictated by economic considerations. So if we can run a surplus, we will do so. If we have to run a deficit, we will do so. If as a result of having to run a deficit, we need to ask the President's permission to draw on past reserves, then we will seek the President's permission and justify why we need to do that. But, fortunately, we have built up a comfortable buffer of current reserves since the last general election, which we can draw on if we have to run deficits over the next one or two years. Hence, for now, I do not foresee the need to draw on past reserves to finance deficits in the ordinary course of the Government's business.

But for exceptional contingencies, we will rely on past reserves and we will seek the President's permission to do so. For example, the Government guarantee on bank deposits which we announced last week, which is backed by $150 billion of our reserves. Mr Lim Hng Kiang, who is Deputy Chairman in MAS, has explained why and how we did this. This is not a normal item; this is an exceptional item in an exceptional situation. It is not a routine contingent liability which can be funded from this year's budget or even from the current reserves of this Government because this guarantee depends on the strength of the accumulated reserves of the Government. We do not expect to use up $150 billion. If we are lucky, very little of it will be drawn upon. But everybody must be convinced that the $150 billion is real, that it is there, and should the guarantee ever be called upon, the guarantee will be good. Therefore, this $150 billion is backed by our reserves. In case there is a payout, the past reserves may be drawn upon. This $150 billion has not been drawn yet, so it is not yet a draw on past reserves, but it is a contingent liability. Depending on how things turn out, there could be a draw sometime down the road.

Therefore, we sought the President's concurrence and the President consulted the CPA. In fact, we briefed both the President and the CPA on what this was about, and they considered the matter and agreed that the Government could issue a guarantee. This is the first time that the President is exercising his custodial powers to approve a potential draw on reserves in the almost 18 years that we have had the elected President system.

This episode demonstrates three things. First, how careful the Government has been with money and with reserves; secondly, the importance of having reserves in a crisis; and, thirdly, how the President exercises his gatekeeper function.

The temptation to spend the money is always there, not just for Singapore but for other countries as well. I am gratified that many MPs have reminded us to be careful and not to go down the slippery path, but the path is slippery and we have to walk without slipping. Consider Norway – they discovered oil in the 1970s, and have become wealthy. They set up a Petroleum Fund in 1990 because they did not want to spend all the money and then be left with nothing when the oil was gone, like so many other oil producers. So they set up a Petroleum Fund in 1990 and put the proceeds from oil and gas sales into this fund to provide for the needs of the Norwegian population after the oil and gas reserves have run out. Today, the fund has accumulated about US$350 billion. But even in Norway, famously prudent, conservative, hardworking, frugal, Scandinavian people find it difficult to resist the populist push to spend just a little more. Originally, the money was to be totally locked up until the oil ran out. Then in 2001, they said no need to wait for the oil to run out. Every year we can spend a portion of the real earnings of the Petroleum Fund in the budget.

The Norwegian Parliament set this as 4% of the value of the Fund. In other words, they considered 4% being the expected long-term real returns. But once they had set the rule, they broke the rule. In 2002 to 2005, every year the Government exceeded 4% on the basis that the economy was not doing well and, therefore, it was necessary to be counter-cyclical and spend more. In 2005, they renamed the Petroleum Fund as the “Government Pension Fund – Global”. Actually, it is not a pension fund, but they call it the "Government Pension Fund – Global" to remind Norwegians that this is not money which is meant to be touched. In 2006 and 2007, they spent less than 4%, not because they had gotten more stringent but because the oil prices went through the roof, and the Fund ballooned, so less than 4% was a lot of money. But even then, some Norwegians still clamour for more. In 2006, there was an article in Newsweek , which some Members may remember because the title is striking. The title was "Trouble in Paradise", because this is a country which had everything – oil, gas, etc. It was a welfare state, with all provided for, womb to tomb. But still there was an opposition party arguing that you should pump more oil and make more profits, to improve services and lower taxes. There is no way you can avoid these pressures. Their elections are due next year, then we will see whether the majority of Norwegians continue to uphold the principle of saving for the future. That is Norway.

Australia provides another interesting example. In the recent two general elections in 2004 and 2007, the parties have competed to give away goodies to voters, almost like an auction. Australia also had a commodities boom because it has coal, iron ore, natural gas, uranium – the whole lot. So, in 2004 during the elections, John Howard's government promised to set up a Future Fund to put away part of the budget surpluses to pay for superannuation for retired public employees in the future. In other words, to pay for the future pension obligations of the government.

But, at the same time, John Howard also decided to roll out a package of goodies which eventually came to A$15 billion. Some Australian reports explained how this happened. His Treasurer, Peter Costello, had presented the Prime Minister with about 20 spending options for Howard to pick a few. He had these 20 possibilities and, according to the report, the Treasurer watched in awe as the PM seized them all. Costello said, "He ordered everything on the menu: the entree, the main course, the dessert, the vegetarian option."

In the most recent election in 2007, Howard announced a A$34 billion tax package on the first day of the campaign. The newspaper, Australian Financial Review noted, "Now that John Howard has put $34 billion on the election auction block, Kevin Rudd has little choice but to match him or even up the ante. It's just a matter of timing and presentation before Labor joins the bidding game." And sure enough, Labor responded with its own A$31 billion package a few days later. Major newspapers in Australia started to keep track of the cost of campaign promises. They called it a 'pork-o-meter'.

Eventually, John Howard's promises came up to A$65 billion, while Labor came to A$56 billion. But, finally, the election was not decided on the 'pork-o-meter'. Finally, in that case, the population just decided they wanted a change. They have had enough of the Liberal government and chose Kevin Rudd over John Howard.

I cite Norway and Australia not to criticise other countries. I am just citing them to show that such is in the nature of election politics. And to prove that, let me quote a passage by an American writer. Who exactly wrote this is uncertain, but Ronald Reagan quoted this twice many years ago and it reads:

"A democracy cannot exist as a permanent form of government. It can only exist until the voters discover that they can vote themselves largesse from the public treasury. From that moment on, the majority always votes for the candidates promising the most benefits from the public treasury with the result that a democracy always collapses over loose fiscal policy."

This is the United States, the champion of democracy, and this is one view of the limitation of their system. When John McCain talks about earmarks, he is really talking about pork.

Singapore is not immune to these pressures. We too face the reality of election politics. Opposition parties often demand that the Government spend more, particularly near election time. They never ask where the money will come from, least of all explain where the money for their programmes will come from at election time. Therefore, we have to take extra care to safeguard our reserves for the future, to frame the rules to prevent our elections from becoming auctions. Therefore, we need to put in place a system that will subject the government to tight fiscal discipline, regardless of which party is in power. A system which has the support of the population and which is firmly anchored in our Constitution and cannot easily be altered. And that is why we developed the system of a President who is directly elected to be the custodian of our reserves. The President has the legal power and moral authority to say no to the government, if he judges any government action to draw on reserves to be detrimental to the future of Singapore.

The Government does not have a free hand to spend the money, because the President holds the second key. This provision binds the PAP Government too, but we support it. In fact, we have imposed this discipline regime on ourselves when we could have chosen not to do so. Why did we do this? Because we believe that it is a vital safeguard for the future, and a responsible Government that adopts prudent budgeting practices will not be overly constrained by the system in its year-to-year operations.

The President's position is intended to be entrenched in the Constitution so that if the Government disagrees with the President's decision, we cannot just change the powers of the President. And the President's position is meant to be such that it cannot be altered by a routine Constitutional amendment – with a two-thirds vote in this House without the President's consent. However, we have not yet entrenched the Constitutional provisions, as Prof. Thio Li-ann pointed out yesterday. Prof. Thio also asked when we will do this, because it has been a long time since we created the system back in 1991.

The answer is this. Our clear and stated intention is to refine the scheme and to iron out the issues that can arise in the light of experience, before we bring the entrenchment provisions into operation and entrench the rules. Our experience since 1990 has shown that this is a wise approach.

While we have delayed entrenching the scheme, we have, over the years, made a practice of consulting the President on any amendment which affects his powers, and informing Parliament of the President's view in the Second Reading speech. With one exception, in practice, the President has supported all the amendments which affected his powers.

Over the last two decades, we have fine-tuned and improved the system of the Elected President in many ways. This present amendment on Net Investment Returns is a major refinement to the reserves protection framework. Prof. Thio said that this is a technical change. I think she is mistaken. This is a major, important amendment. After this amendment, we will operate the revised spending rule for a few years. If after five years, no further major changes are necessary, we will consider entrenching the provisions concerning the President's custodial powers.

It was significant that Ms Sylvia Lim, speaking yesterday on behalf of the Workers' Party, had supported this amendment. It is a responsible approach; we applaud this. It will help us to establish an important rule which both Government and Opposition will accept and uphold.

We hope that the Workers' Party now accepts the wisdom of having an Elected President with custodial powers, because that is at the core of this Amendment and is what this whole structure depends upon, and will no longer campaign to abolish the Elected President as it did in the 2006 elections.

Once all the parties accept that the reserves are not to be raided, we can avoid elections becoming auctions, paid for by mortgaging our children's future.

We have a duty not just to govern Singapore properly today, but to do our best to safeguard the future of Singapore. Our reserves are our nest egg. It is not inherited by luck, but by hard work, prudent fiscal policies and sound investments over 30 years. If we had to start from zero today, it would take us far longer to build up the reserves, if at all it were possible.

The population is ageing, our spending needs are increasing and the economy is no longer growing at 8%-10% per year. Furthermore, the global environment is uncertain. It is unlikely that any global investor can repeat what we have achieved over the last 30 years.

So, this proposed Constitutional change is a workable approach that strikes the right balance between present needs and the interests of future generations. It will enable Singaporeans to benefit from our reserves, and yet conserve the value of what we have built, and continue to grow it over time as the economy itself grows. And this way, we can hand over to our children more than what we inherited from our forefathers.

Sir, I therefore support the amendment.

Miss Penny Low (Pasir Ris-Punggol): Mr Speaker, Sir, thank you for allowing me to join in this debate. I have the unenviable task of speaking after the Prime Minister. But as these concerns are reflective of my residents and all, please allow me to go through them. I will try to keep them short.

First, on timing. The timing of this change, although coincidental, could not have come at a better time to boost confidence and reassure both investors and citizens of a proactive Government that thrives on long termism as opposed to short termism. And, in fact, short termism is a fault that most corporate and some governments are guilty of. Of course, with this change, in the short term, the new framework for spending investment returns would, hopefully, translate into an expansionary fiscal policy, which will be most helpful especially during a period of global economic downturn, which we expect in the next 12 months. The real gain, however, is in the long-term funding of the three focus areas of spending, which is growing our economy, creating a top quality home and upgrading our socio-economic infrastructures to cater to an ageing society and rising gini coefficient.

Second, transparency. A total returns approach increases transparency as it takes into consideration both income and capital gains which I think better reflects the success or failure, our shortcomings, of our investments of our reserves.

Third, it is also a congruence with nation building objectives. Using a long-term expected returns approach instead of actual returns earned from year to year makes much better sense, as it is much more congruent with our socio-economic policies, which, I believe, are built on long-term national objectives and projections, rather than dependent on short-term fluctuations. In fact, one of the biggest problems of the financial institutions and its woes is that it has been pandering to short-termism – looking at quarterly or yearly shareholder value returns, rather than building longer-term fundamentals and infrastructures that will ultimately contribute to a stronger institution and fund performance. Hence, planning and aligning spendings with long-term national objectives in mind will certainly help to focus the Ministry of Finance and Singapore on the right issues.

Fourth, reduce uncertainties. Using a long-term expected returns approach will also help us to even out the volatility of the market place, which in the fast pace flat world today, will witness shorter periods of booms and busts, and add uncertainties to economic development. This approach also has a side effect. It is common knowledge that in business, the number one enemy is uncertainties. Hence, if uncertainties of the market place cannot be helped, reducing the uncertainties of government expenses, or at least the direction of government expenses, will help businesses do their sums, and make Singapore a more attractive place for businesses. This applies, in particular, to economic driver sectors like construction. Perhaps to reduce the uncertainty further, could the Minister give more clarity to what is meant by the terminology 'long term' in today's context? In the fast pace flat world, the notion of time has shrunk, and the term 'long term' is also shrinking. Hence, is the basis of three investment cycles or 20 years an adequate guide for long-term projections, even with periodic reviews?

Fifth, the expected returns methodology. The Minister mentioned that the historical return may not be reflective of future actual gains. I agree with him. However, would the Minister also agree that projected future rates of return may also not reflect actual future rates of return? In other words, all projections of expected returns, historical or future, carry an inherent risk of not getting it right. The Minister explained that as investment returns depend on asset allocation mix, which can change from time to time, historical rates of return will not be accurate for long-term projection. Perhaps, MOF can use the new asset allocation portfolio and do a regression analysis (or any other statistical methodologies) of the investment portfolio based on historical data, and use this as a reference for projecting 'expected returns'. This will help give a projected range of expected returns based on actual historical data and projected future experience.

Sixth, on the spending benchmark. The Minister mentioned that the new framework for spending investment returns, together with the increase in GST, will add 3% of GDP to our yearly expenditure plans. Can the Minister also enlighten us on what is then the total projected spending as a percentage of GDP? Would it be 18%? And how does that then compares with other developed economies? I understand that at 15%, which is the current spending, it is lower than other developed economies. In addition, how much of that increase will go into creating social infrastructures? And who do we benchmark against?

On the spending cap of 50%, the Prime Minister has explained that it is an equitable, sustainable and intuitively acceptable number. So I guess I have to accept that explanation too.

On excluding Temasek Holdings, although the nature of Temasek Holdings' investment strategy involves higher risks and is still evolving, I trust that the fund managers are still subjected to a projected return regime. There is also a spending cap of 50% which can be called upon to lower or increase the spending funds and, as such, there appears little need to exclude Temasek Holdings from the new regime. But if indeed it is prudent to allow Temasek Holdings to evolve its investment strategy, then could the Minister confirm if a timeline has been set for Temasek's inclusion?

Impact on Singapore dollar and reputation. With a higher withdrawal amount and a slower rate of increase on our reserves, may I ask what is the implication on our reputation as a financial hub as well as the impact on the strength of the Singapore dollar? Does it have any repercussions?

On strengthening our society, I am particularly heartened by the emphasis on spending on social infrastructure to strengthen our society. This, however, has to be done with a huge degree of sophistication, emphasising on the need to adopt a whole of Government approach in tackling social concerns. Singapore is built on the ethos of hard work, integrity and diligence of its people. From a swamp with civil strife, its people worked hard and united under the able leadership of the PAP to arrive at a developed nation status. The next lap will see challenges of a more affluent generation and an ageing society, where traditional work ethics and definitions of "success" and "life" will be challenged. In fact, traditional values are already being tested as we speak and top of the news today is the headline "Pain Free Spending". We have to guard against a complacent society, and one that relies on the Government to be the provider and advisor from cradle to grave – when to get married or give birth, what jobs and education training are needed, what to invest in, is there a bailout, to retirement planning and maybe even death planning. We need to build a society that is resilient and self-reliant. I remember many years ago in a Budget debate, the Prime Minister, who was also the Minister for Finance, mentioned that the Government could not be the last resort of anything at all. It is therefore critical that Government spending on strengthening our society should emphasise on building capacity within the people for a self-reliant society, rather than provide end products, that cultivates dependency which will erode the ethos of hard work, diligence and self-help. In short, the Government spending on social infrastructure especially should be outcome-based, rather than output-based.

A prudent strategy would be to spend on building an ecosystem for a social economy. According to the Human Resource and Social Development Canada, I quote, "The social economy is a grassroots entrepreneurial, not-for-profit sector, based on democratic values that seeks to enhance the social, economic and environmental conditions of communities, often with a focus on their disadvantaged members." The social economy is built on a caring and sharing society, it is an economy that solutions from within the community. Typically, social economy enterprises are a result of broad-based community development strategies involving the 3Ps – the people, public and private sectors – the media, academia and other partners. Social enterprises and cooperatives are examples and integral parts of the social economy which emphasise on giving communities the hand-up, and not just hand-outs. It reinforces dignity and pride even amongst the once down and out, and propels creativity and innovation to problem solving, and creates collective wealth through the production of goods and services. I hope the increased spending would be generously directed to strengthen existing gaps in the social economy; the chief being capacity building, access to finance and research. It is far better to enable the "many helping hands" than to become the only hand. Only then, can we strengthen our society.

Sir, this is a very important Constitutional change which impacts Singapore and Singaporeans. With this amendment, I urge financial prudence on the part of the MOF in the budgeting process. I also urge the strengthening of hands and legs, integrity and mettle, sharpening of eyes and ears on the part of the Presidential key. Sir, I also urge clear, simple communication of these and future Constitutional amendments to all Singaporeans because they are stakeholders of this land and, of course, guardians of our reserves. After all, it is the duty of the people to tell the Government what to do and not for the Government to tell the individuals what they should do with their lives.

With that, Sir, I support the Bill.

4.51 pm

Mr Wee Siew Kim (Ang Mo Kio): Mr Speaker, Sir, I stand in support of the Constitution of the Republic of Singapore (Amendment) Bill. The financial turmoil that engulfed the world would certainly set the tone as we debate this amendment.

Many a layman would call this the perfect storm. And they are probably right as so many small investors are affected. From the profile of people residing in Ang Mo Kio who had spoken to me and their entreaties, I sensed that many have not bargained for their savings to be almost wiped out. And many, totally ignorant till September of what a derivative is, would not have consciously traded a promised 5% annual return in exchange for a downside of total capital destruction, if they had understood the risks or the intricacies of the instruments they have put their money in. Many pleaded for intervention as they are retirees and would not have the economic headroom and lifeline for revival.

And why is this relevant in this debate? It is relevant because this Government and the previous terms of Government had approached our financial policies with spade loads of conservatism and prudence. It aggressively admonished anyone who pushed for wider leeway in the use of the returns from our reserves. And this resolute stand in the face of pressure to spend more has stood us well in this current climate. Without the bedrock of reserves, how else would the Government be able to guarantee the deposits in Singapore banks? In the days to come, as the crisis unfolds, there would surely be more demands, the likes of which we have not contemplated before. Only the wealth we are sitting on gives the confidence that we would emerge, not only just fine but even stronger. For Singapore has prudently kept its financial firepower dry and would be among the few that can take advantage of investments opportunities that would present themselves in time to come.

Hence, in the context of this amendment, I believe that two key principles must be religiously upheld. First, the continual squirreling away of our gains must be the order of the day. Having a Gibraltar rock of reserves is the only way to ensure that the ability of future generations of Singaporeans to react with confidence in crises of the future is not impaired. The outcome of the debate today would set the stage of what Singapore would be like in years to come, the Singapore of our children’s generation. The wealth, the international stature that we enjoy, and being able to punch way above our weight in regional politics and international finance, came about as a result of long-term, forward-looking, steadfast and resolute policies. By extension, the second principle must be to maintain a long-term perspective of our challenges and the strategies we have in place to come up on top.

These past two years, we have confronted the issues of an ageing population, hence, CPF LIFE; the increasing need to tackle the financial needs of a group of Singaporeans who would be unable to keep up as the income gap grows and inflation persists, hence, Workfare and ComCare; and the burgeoning healthcare costs. We also confronted the need to be an attractive place for global talents to set up home and businesses here by reducing tax rates; and the pressure of continuous investment in the infrastructure prerequisite of a future city that has its appeals for both work and play. Certainly not an easy equation to balance – rising expenditure while reducing tax rates and at the same time balancing the budget. It would be to our peril if we rely solely on further near term GST increases as a source of additional funding. Or to pray for future GDP growth to fund these growing needs. Pray we should. The Gods may smile on us, but we are better off putting in place the initiatives that would enhance the probabilities that we stay ahead of the game. In the throes of our emergence as a nation some 40-plus years ago, at a time when we had meager resources, it had not stopped us from investing in infrastructure – Paya Lebar Airport and then Changi, the massive Port of Singapore, Jurong Industrial Park, to name a few. It has not stopped us from investing in education, and it has not stopped us from investing in defence, as we have confidence that we have something to defend for. Now that we have more, we should plant more seeds for the future.

Hence, I support the need to give the Government the flexibility to plan long term in the light of the challenges with this requested ability to dip into the total returns from our reserves. The flexibility to have more resources to deploy to combat our challenges will certainly increase our chance of thriving. We should be less enamoured by the maintenance of the status quo , but more driven by the pursuit of a better life, a sustainable future for our children, be it investment in infrastructure, investment in education of our people, investment in societal fabric, investment in key growth industrial sectors. We need to ensure that we maintain the ability to tackle our social issues on a long-term basis and also continue to invest in what would position us to be a global metropolis - be it in infrastructure, research or staying Green. While it is not a given that the more we spend the better off we would be, I believe that we would enhance our chances. On this belief, I am behind the concept of a long-term expected real rate of returns as the sensible approach in estimating the funds available for current and future needs. At the very least, the Government spending would not need to be held ransom to the vagaries of the market. However, I hope that calculation of this long-term expected real rate of returns will be made entirely transparent and that governance will be set in place, and the resources made available to ensure that the process withstands scrutiny.

While we strive to divorce ourselves from the volatility that prevailing market conditions would have on the ability of the Government to commit to long-term spending, it is extremely important that we also do not fall into the trap of overspending future income. As such, an explanation from the Minister on why 50% of the NIR is a prudent number is sought. Just two months ago, it may have passed muster. Today, when many have seen their portfolios decimated over a short period of time, it is important that the rationale for this 50% split between now and future be clearly articulated. Further, maybe as a guide to the prudence of the proposed change, can the Minister inform the House what would have been the total funds available to the Government if we had not gone 50% NII in 2001 but gone 100% NII instead, and compared for that same period if we had gone 50% NIR, ie,100% NII compared to 50% NIR in the period 2002 to 2008?

Additionally, as we all know, there is a crucial difference between realised and unrealised capital gains. What would feed social needs and investment needs is cash. With so much of Singaporeans' assets tied up in real estate on the island, the strength of the Singapore currency is of paramount importance to all of us. As a result, as we generate the cash to pay for the big bills, we continue to keep a close eye on the strength of our currency.

Another point I hope to get assurance is the continuous emphasis on maintaining a lean Government. It is a slippery road downhill towards a fat government, especially if there is money. This debate would have brought home to many Singaporeans that even as we husband our reserves over the years, they could only have grown, be it compounded at 5%, 8% or 15%, with the skills of the people who have their hands on the throttles in GIC, MAS and Temasek. To expect that we continue to enjoy long-term growth in our reserves depend so critically in the talents that we have. We must continue to lay our hands on the best financial talents and, at the same time, nurture a local crop of expertise so that we can continue to be assured that the investment of our reserves is in competent and loyal hands.

Many have likened Singapore as one large corporation. It is true from the perspective that without a sound economy, there would not be a Singapore. However, what keeps businesses, tourists and foreign investments coming back to Singapore is the confidence they have in us. And this confidence is buttressed by sound transparent policies, supported to a large measure by a broad spectrum of Singaporeans. This can only be possible if we also continue to invest in matters of societal stability. As the Government has more means, today, the call is even more strident.

Let me close by recounting the story of this 60-year old woman who came to MPS. $50,000 was all she had to her name and which she faithfully placed in fixed deposits. Last year, she was convinced that 6% was better than 1% by switching out of the fixed deposits. Today it is $32,000. She panicked and pulled out realising the loss. This is a woman who barely spoke Mandarin, much less being able to understand the legalese of financial documents that she signed. As we debate to release more resources, I hope that we also slay another sacred cow by rebuilding the safety net for Singaporeans of this age group that had been handed the short end of the stick in this current financial climate. Hence, I end by asking the Minister to assure us that enough of the additional funds released through this proposed amendment be put aside for needy Singaporeans who have, for one reason or another, end up in poor conditions.

Sir, I support the Bill.

5.00 pm

Mr Low Thia Khiang (Hougang): Sir, whilst the Workers' Party supports the principle of Government spending on the reserves (the 50% basis), that does not mean that the Workers' Party is prepared to review our position on the Elected President.

We have viewed the Elected President as something which has some political implication, not only on the political system but also on future non-PAP government. Just take the example of the $150 billion guarantee provided for the bank. What will happen if the Elected President takes an adverse approach? Then, the Government can be crippled, in a sense. So, we are of the view that, perhaps, the office of the Elected President has fundamentally changed our parliamentary democracy system, where the Executive is supposed to be the supreme power elected and trusted by the people. We believe that we can use other alternatives or mechanism to preserve and safeguard our reserves.

Sir, on the other hand, we are also of the view that the Office of the Elected President could potentially serve to cripple a non-PAP government, given the fact that a lot of important appointments require the Elected President's approval. Given the criteria for the office of the Elected President as it is now – as to who qualifies to participate as candidate for Elected President – it is likely that he may come from the establishment or he may be a PAP Minister. So, with the political motive at the back, a non-PAP government being elected could be crippled by the Elected President. With all these reasons and thinking behind, I do not think we are currently prepared to review our position.

The Minister for Finance (Mr Tharman Shanmugaratnam): Mr Speaker, Sir, I would first like to thank Members for their very good contributions to the debate and their support for the Bill. I will be addressing the main issues that Members have raised yesterday and today in this round-up speech.

The Bill introduces a new framework for spending the investment returns of the assets managed by the MAS and the GIC. The Government will be spending on the basis of total real returns, which include capital gains and losses. But it will do so by applying a forward-looking assessment of the long-term expected rate of return on these assets, rather than go by actual returns earned year by year. I have explained the reasons for this framework yesterday. There are two outcomes coming out of this new framework.

First, we expect to have available additional resources estimated at slightly over 2% of GDP for spending. If you add that to what we currently already derive from Net Investment Income (NII) in the current framework, that will give a total of about 3% - 3.5% of GDP.

The second outcome is that we do expect that, with the new framework, our reserves will continue to grow minimally at the rate of inflation. But under most likely circumstances, there will be real growth of our reserves – real growth that should keep pace with the growth of our economy over the long term.

Together with the GST revenue which amounts to about 0.8% of GDP, the additional revenues that we are getting through the new NIR framework of slightly over 2% will give us an additional 3% of GDP, which should be sufficient for the Government to fund its additional expenditure plans. Hence, we do not expect to raise additional revenue in order to implement our plans. We aim to spend, but spend judiciously, to build up capabilities for the future and strengthen our society.

Members have generally agreed that the new spending formula is fair and equitable. We have also agreed that it is a sustainable formula, one that will not lead to the reserves being drawn down, and one that ensures that we continue to generate a future stream of income that will be stable across generations. The questions that have been raised, which are important ones, are largely to do with ensuring that this new framework is implemented prudently and that what we derive in revenues will be spent wisely.

Long-term expected returns

Let me first turn to the broad theme that cuts across many of the comments raised by Members, which is: how do we derive long-term expected real returns? Many Members have raised this – Dr Ong Seh Hong, Mr Inderjit Singh, Mr Seng Han Thong, Mrs Josephine Teo, Mr Gautam Banerjee and Ms Jessica Tan. How do we derive long-term expected real returns? And what happens when actual performance, over a number of years, does not match what we expected? This is a valid concern, and I am glad that the whole tone of Members' comments was to underline the importance of not overspending on the basis of expected returns, rather than a desire to want us to spend more, even when actual returns are not sufficient. I think that is the right tone for our debate. Let me explain how we go about this.

But before I do, I want to first address a point that both Mr Christopher de Souza and Prof. Thio Li-ann raised, which is about the lack of precise definition of certain terms in the Constitution – terms such as "long-term", "expected rates of return" or the inflation indices that we will use in deriving real rates of return.

It is a valid question and we did think hard about what we put into the Constitution or, instead, leave out of the Constitution and put into a White Paper which will be tabled to Parliament after the Bill is passed and gazetted. We have decided to put the technical procedures and operational definitions into the White Paper so that they can be reviewed after some years of experience, rather than hard-wire such details in the Constitution. The details are really quite technical: the exact time horizon that we will use in determining long-term returns, the specific definition of global inflation – whether it is G3, G7 or some other global index – or, even more technical, the exponential weighting system by which we smooth our asset base.

If we put all these things into the Constitution, the Constitution will be even more detailed than the Financial Procedures Act. So, we put it in the White Paper, and let us review it from time to time as we gain experience with the system. In that way, we can make changes from time to time and incorporate them in the way we work the system.

Governance and transparency

Let me, therefore, move to the broader issue that was raised with respect to the governance of this process of determining long-term expected returns and transparency. First, let me say that there are basically two approaches to how we can go about this. Two fundamentally different approaches to how we can go about determining long-term expected returns for spending on the Government budget.

The first approach is to be fully transparent and have Parliament evaluate whether the expected rates of return are appropriate. I am glad Mr Siew Kum Hong raised this because it is an approach that a few other places practise.

The second approach, which is the one that we have adopted, is not to go for full transparency but to insulate this process of determining long-term expected rates from political pressures or the mood of the day. This second approach relies on us having the right people in charge. It relies on us having robust checks and balances within the system. It is also an approach which says that if, even with the right people and robust checks and balances, we cannot come to an agreement on the long-term expected returns, then let us have a pragmatic dispute resolution mechanism. And we are opting now for a dispute resolution rule that says we fall back on the last 20 years of historical returns – neutral, factual and objective.

PM has spoken about what happens under the first approach. There are live examples of this. PM spoke about Norway and Australia. There are other examples like Chile. And it is almost in the natural workings of society and parliaments that, over time, full transparency and leaving things to the market of political opinion lead to a desire to spend more, conserve less and leave less for future generations. There is an upward bias that is inherent in the spending rules in these countries. At the very least, I would say the jury is out on the model of full transparency in Norway, although I think a sensible person looking at what is happening will want to be very cautious about even trying it out.

Our approach is a different model, which we believe over time, faces less danger of bias in favour of overspending and not conserving our reserves. We insulate the process of determining long-term expected rates from political pressure. We derive the rates of return on the basis of the best professional inputs and advice, so that we get the most realistic assessment of what is likely in the future. But we also set a spending cap in the Constitution, based on the expected real rates of return, a spending cap that is not open to fiscal discretion, no matter what majority the Government has. It is written into the Constitution - 50% – in addition to writing in sufficient checks and balances in the system between the Government and the President as advised by the CPA.

It is an imperfect system. The approach that we have adopted is an imperfect system - it relies on judgment, it is not about perfectly objective data and, more importantly, it relies on having the right people in the right places. That is the pre-condition for this approach to work well. If we do not have the right people in place, it will be a highly imperfect system. But if we do have the right people in place, it is a system which is likely to be superior to the alternative system of complete transparency, in the faith that this market of political opinion will somehow or other conserve resources, spend wisely and prudently. That is our belief, and it is also a belief that has been evidenced by what we can see around the world.

Process for determining the long-term expected rate of return

So that is the governance part of it. Next, how do we actually go about the process of determining the long-term expected rates of return? It is not a mechanical process, it is not a purely technical process, but neither is it pure judgment.

It is not putting a finger in the wind. It is a combination of objective analysis, hard data, professional inputs, but it also relies on seasoned judgment by people who have been in the business for a long time and who are cautious about short-term cycles determining their long-term views of the world.

Each year, the estimated rates of return will be reviewed by the Boards of MAS and GIC, and the Government. Each year, the Boards will take a fresh look at the long-term expected return over the next 20 years on a rolling basis, so that they can take all new information into account. The Boards will certify to the Government what they believe to be the most realistic view of the next 20 years. The Government considers this and then provides its proposals to the President. The President consults the CPA and then decides whether to concur with the expected rates of return proposed by the Government each year. And if there is no agreement between the President and the Government, then we fall back on the dispute resolution mechanism, uncontentious and simple.

I do not want to get into great detail on how the Boards of MAS and GIC will, in fact, determine this. Let me just assure Members that there are established methodologies used by well-run endowment funds. And indeed these are methodologies that have been practised for some time for the Boards’ own purposes in the MAS and GIC. Starting with individual asset classes, for instance, looking at government bonds across various countries, looking at the inflation and growth outlook, and determining the expected rates of return for that asset class – government bonds. Next, looking at corporate bonds, applying a credit risk premium on top of what we derive for government bonds, and looking at listed equities applying an equity premium, and so on. So, they do it for each of the asset classes. And for each of those asset classes, they also look at historical returns, not just over the last five or 10 years but over decades. And then, finally, adding up the asset classes together, aggregating it into an expected return for the overall portfolio based on the asset allocation strategy of the Board.

These are robust methods established internationally, which are constantly refined. They are not perfect and they are not purely technical exercises as judgment is involved, but they are robust methods that we can draw on and we constantly share amongst comparable organisations internationally. I would emphasise, once again, that the Boards will take reference from the historical performance of each asset class over varying periods of time. But seasoned investment professionals and the boards of MAS and GIC do also know that historical returns do not always repeat themselves. And, in fact, the historical rate of return that has been earned in the past 20 years is very unlikely to repeat itself in the next 20 years.

There was not much discussion on this five years ago. But now with the crisis that we are in, there is a sobering up and there are some very good articles on this. I just read one recently in the latest issue of the Economist , either last week or this week, a very useful article pointing out that bear phases and bull phases in the stock market do not just last for five or six years; they last for 17 or 18 years. In fact, if we look at the last two decades, it comprised a 17-year bull run, from 1983 to 2000. Then it collapsed with the tech bubble bursting in 2001. But then there was another bull run from 2003 to October last year. So, despite the tech bubble crash, if we take the 20 years leading up to October 2007, with all the ups and downs, the Dow Jones Industrial Average had an average annual return of 10.2%. And MSCI World global-listed equities averaged 7.4% – a remarkable performance over a long period of time despite cycles in between. So, that is what is called a "secular period" in the investment world – not a cycle, but something that stretches across cycles. It is a secular phase which seasoned investment professionals do not believe will be repeated in the next secular phase.

So, that is worth bearing in mind, that the Boards will look very carefully and rigorously with the advice of their teams of investment professionals at what has happened historically, but they are not simply going to project the future based on what happened in the past. Judgment is involved.

The Boards will then provide the Government with what they believe to be the most realistic projections, completely uninfluenced by the spending rules that the Government has employed. The Government then has to decide whether to accept the Board's judgments on the expected rates of return. I would say, in particular, that where there is significant uncertainty over the outlook, the Government will want to err on the conservative side in deciding on whether to take the Board's projections as they are, or whether to moderate it. Where there is uncertainty, as a Government, we will want to err on the conservative side.

So I quite agree with the MPs – Ms Lee Bee Wah and Mr Liang Eng Hwa who spoke this afternoon, and several others – who cautioned against over-exuberance in projecting expected rates of return, and emphasised the need to be prudent in our projections.

Next, the Government provides its proposal to the President, who will seek the advice of the CPA. We do not simply provide the President with a figure. He is not opening an envelope and taking out a piece of paper and the figure is written on it. He will be provided with a full basis from which we have derived the figures. And this means a fair bit of information and analysis – the historical rates of return for each asset class, why the Government or the Boards believe that those rates of return will or will not be repeated in the future, how we add it all up to derive finally a long-term expected real rate of return. And we will not just provide the President with a 20-year expectation but also with a five- to 10-year expectation of the investment outlook, so the President knows how it compares to our long-term view. It is not blind to what we expect over the next five to 10 years. So full information will be provided to the President, so that he, together with the CPA, would be able to form a judgment as to whether this is a well reasoned assessment.

The CPA is a highly competent group of people – experienced, seasoned professionals and business persons who know something about markets. And, more importantly, although they are not investment experts they know how to assess an argument and the information that is put before them. The current Chairman of the CPA, Mr J Y Pillay, was the former Managing Director of MAS and GIC, and is currently Chairman of the SGX; Mr Yong Pung How was the first Managing Director of GIC, and also a former Managing Director of MAS; Mr Dhanabalan is currently Chairman of Temasek, which is not part of this framework for now; Mr Lim Chee Onn is Chairman of Keppel Corporation, and the others, such as Mr Stephen Lee, who all know their stuff.

Going forward, the President will always want to ensure that the CPA continues to comprise people who have experience and a proven track record of good judgment. Ms Jessica Tan, in particular, and several other MPs have asked whether the President would also be able to get independent advice and assistance from other competent persons. Certainly. First, I should emphasise, of course, that the CPA is an independent panel. These are not Government representatives. All the members are appointed by the President. But the Government will certainly be very happy to facilitate the President getting advice on the investment environment from other experts, investment consultants or anyone that the President would like to get a view from. Ms Jessica Tan had also asked about whether the scheme allows for constructive dialogue, so that it is not a binary system where the President either agrees or disagrees, and if he disagrees, it falls back to the 20-year historical rule. That is the way it should work in practice – constructive dialogue – where the President will ask questions and ask for further clarifications. And that dialogue will, I think, facilitate agreement in most circumstances on the long-term expected real rate of return to be adopted. So the dispute resolution mechanism is not the first recourse, but the last recourse.

Other clarifications

Prof. Thio Li-ann had also asked a question, which is how the President is going to carry out his constitutional duties without the necessary and complete information. The President has full and accurate information on MAS and GIC, for that matter, Temasek. He can ask for all information that he deems necessary to perform his Constitutional functions. And there has never been any doubt about the President having full and accurate information on these relevant assets – MAS and GIC. I think Prof. Thio was a little confused by what happened in the previous episode when former President Ong Teng Cheong had asked some questions that had to do with compiling an inventory of the Government's physical assets. The matter was resolved but it had never anything to do with the investment assets managed by the GIC and MAS, which have always been fully transparent to the President.

So, there is no issue of the President not knowing what it is that we are trying to preserve, and not knowing what it is that we are projecting expected rates of return on. The process which I have laid out to the House will be sufficient for the President to perform his custodial role. It is a custodial role, it is not a role which involves the President counter-proposing estimates of his own based on advice from the CPA, but it is a role which requires the President, advised by the CPA, to assess whether the Government's proposal is reasonable and well founded.

Ultimately – to go back to my earlier point about having the right people in charge – the President would be able to trust in the collective judgment of MAS and GIC's boards. The Board members are people of high standing, integrity and competence. And in response to Mr Liang Eng Hwa's query, each appointment has to be made with the approval of the President based on the President's evaluation of the integrity and ability of each member, whether it is a Minister, someone else in the Government, or someone in the private sector. And the Boards are supported by a whole cast of professionals, some of whom have been in this business and the organisation for a long time, who have been through the market cycles, who know their technical stuff but also come with judgment of their own as to how the markets work. These are well-oiled professional organisations, always improving, and I can tell Members that they are held in rather high regard internationally.

Determining the long-term expected real rates of return is not a process which is completely untransparent. I was comparing the two approaches earlier; one, full transparency, let Parliament or the people decide; the other which depends on the right people being in charge and ensuring robust checks and balances within the system, and then a dispute resolution mechanism if you cannot agree. But the second approach which we have taken is not completely untransparent.

Mr Siew Kum Hong had thought that people do not know the size of Temasek's assets or returns. Temasek publishes an annual report every year – size of assets, and, in fact, different ways of computing annual returns, both on market value and shareholder funds. GIC has now published an annual report – and it will be published every year – which also provides its average rate of return over the long term, updated each year, and people will be able to see the trend very clearly. Indeed, if you look at GIC's report, you can already see a trend in the rates of return because of changing market circumstances. And we will also publish the dollar amount of NIR in our Budget, just like we currently publish the dollar amount of NII. So, if there is a sudden spike or dip, questions can be asked. So, this is not an untransparent system. Ultimately, it is a system that relies on robust governance. It sets in place in the Constitution checks and balances, and the Government believes this system will work more objectively than alternative systems and better ensure that we preserve our reserves, and that we spend prudently and wisely.

Risks of actual returns deviating from expected returns

There is a risk that actual returns will deviate from expected returns. Several MPs have pointed it out, the last was Ms Penny Low. Actual returns may well deviate from expected returns. The markets are uncertain and no one can forecast with precise accuracy.

Mrs Josephine Teo had asked what if we find that over the first five years, actual returns are significantly different, for instance, significantly lower than expected returns. It is the right question to ask. How have we addressed it in this framework? First, as Mr Gautam Banerjee has pointed out, the risk is mitigated somewhat by that fact that we are only spending 50%. Although expected returns may be higher than actual returns, we are only spending 50%. That is the first mitigant.

But most important is the second factor, which is that we will review the expected rate of return annually, afresh, taking all prevailing information into consideration. And it will not be possible to ignore performance over a five-year period in determining what the most realistic forecast is for the next 20. It will not be possible for the Boards to ignore that. They will not ignore actual performance, but they will ask themselves: is this a cycle which is likely to rebound after a few years or is it a secular change in the investment environment that is likely to persist for many years – in which case, better to adjust the long-term forecast?

My first point is the 50% rule, as a mitigant; second point is that there is an annual review and that is the most important point. Thirdly, there is the check provided by the President each year as well, advised by the CPA, who will question the Government on its assumptions. And if the President feels that the last several years are cause for concern because actual performance has been less than expected performance, he will ask the Government some fairly searching questions. And the Boards will have to justify why they have adopted what they proposed for the long-term expected returns.

I should finally mention as a fourth factor, somewhat technical, that there is a self-correcting mechanism in this as well, because if indeed we have persistently lower actual returns, it will reduce the asset base upon which the rate of return is computed. Even with the smoothing mechanism we are adopting, there is greater weight given to recent years. So if we have persistent underperformance, it will reduce the asset base and the Government would have less to spend. So, there is some element of self-correction in the system.

But I should also caution, lest we get too caught up with this idea of paying close attention to actual performance in the bad years, that the whole basis for this framework is to derive a stable stream of revenues for Government based not on one cycle, but the long-term expected performance. We want to avoid being caught up by short-term developments. This is why the task requires considerable judgment on the part of the Boards, the Government, the CPA and the President. When times are exuberant, we have got to avoid being too caught up by it and raising our long term forecast. When we are down in the bear market, we should also avoid being too caught up by it. Make the most realistic and objective judgment of the future investment environment. That is the task.

Should Temasek be included in the framework?

If I can now turn to the question of Temasek. Several MPs had raised that issue which I had explained in my Second Reading speech as to why we have chosen not to include Temasek Holdings in the framework. Mr Inderjit Singh, Mr Siew Kum Hong and others had asked about this.

I had basically highlighted the main difference between Temasek and traditional international portfolio managers, like the GIC. Temasek's investment strategy involves taking concentrated stakes, both in the public markets, the listed equity markets, as well as in the private markets, direct investment, concentrated stakes. And this means two things. First, they expect to make higher returns, because they are taking higher risks, and indeed they have achieved higher returns. Second, with this strategy, it is inherently more difficult to project well into the future, what your expected returns are. This is common internationally, eg, amongst the major private equity players. If you talk to the major players who have been in this business for a long time and ask them what their expected return is, they will tell you they have a hurdle rate, not an expected return. I have a hurdle rate for any investment I make. That hurdle rate depends on my cost of capital or weighted average cost of capital. And I try and exceed it as much as I can to serve my clients. But they do not come out with an expected rate of return, quite unlike the GICs of the world, for whom there are established methodologies, there are market comparators and benchmarks, which go through constant refining, but there are ways of projecting, five, 10, 20 years into the future.

Mr Inderjit Singh had also asked if the reason why we did not include Temasek was because "it needs time to digest its recent investments that had come unstuck". The exclusion of Temasek has got absolutely nothing to do with its recent performance or what we expect over the next few years. I have given the reason why Temasek is excluded. But if the Member is curious, Temasek publishes its results every year. It published its results a couple of months ago. People know what they are – 7% return market value over the last year, rather difficult year. And next year, I do not have any update on this, but if we have to go by global market conditions, it will be a rough year. They will be publishing their results once again. And you can scrutinise it, evaluate it and make your own judgment about Temasek. So Temasek is transparent in its returns and the Government is not hiding anything in leaving Temasek out of its framework. It will continue to be transparent.

Mr Inderjit Singh has a good point. We do want to make sure that we continue, with this new framework, to coordinate Government's overall investments, overall allocation of funds between the MAS, GIC and Temasek. And this new framework will not impair that internal coordination that we do. These are different approaches: MAS – conservative, somewhat more liquid; GIC – higher risk than MAS, very broadly diversified across asset classes; Temasek – heavily focused on equities and taking concentrated stakes as well, the high risk end of the spectrum. What the Government does continually and will be doing going forward, is deciding on how much money to put in each of these bodies. That is why last year, we put an extra $10 billion into Temasek, which is published and known.

Mr Siew Kum Hong asked a specific question which I thought is important for me to address, about the new framework, where we are shifting GIC onto the NIR framework, where we spend 50% including capital gains, and Temasek being left on the NII framework, where we spend 50% of NII which is based on dividends – which reflect capital gains as well, but not to quite the same extent. His question is whether that framework will incentivise Government to shift funds from Temasek to GIC, in order to get more out and spend now. I think it is a valid question. In theory, it can. It will not happen, certainly, under this Government, because our concern in deciding how much money to put in MAS, GIC and Temasek, is to maximise the value of our overall assets. That is our mission – maximise the value of our overall assets and ensure that we diversify and allocate funds to achieve that objective, subject to the risk thresholds. We have no incentive to shift funds between agencies in order to spend now. But, in theory, it can happen and that is an imperfection in the system. And I think it is better that we live with that imperfection, rather than try to overcome the imperfection by taking Temasek and putting it now in the NIR framework and facing the problems I spoke about yesterday, which is the difficulty of making the projections and the high degree of uncertainty that we will have in our Budget if we do that. The deviations between actual and expected returns will widen in either direction, with either actual being significantly more than expected or significantly less than expected.

So, I think this is the best approach. We are not casting this in stone for all time. I mentioned yesterday that after some years, we will look at Temasek again once it has settled its diversification strategy, to see whether we want to include it. In the meantime, we continue to spend on the basis of dividends paid by Temasek, which does reflect some of its realised capital gains. That is the prudent approach, in my opinion.

Liquidity issues

Mr Gautam Banerjee and Dr Lim Wee Kiak had asked questions which pertained to liquidity and this is an important issue. Because, as they pointed out, we are spending now on the basis of long term expected returns, which include both realised and unrealised gains because the distinction does not arise when we look at the long-term value of our assets. So, if we are spending on that basis, how do we make sure that we have enough inflow of funds based on actual dividends and interest and realised capital gains – because the monies we get from the agencies are based on the actual investment performance, not their expected investment performance. So, how do we make sure we have a liquid flow of funds?

First, just to repeat very quickly a point I made yesterday, by including both realised and unrealised gains in the framework, we avoid a bias in our investments of wanting to sell assets now in order to realise capital gains so that the Government can spend it. This way, we are neutral. We include both the realised and unrealised gains, so that when we sell our assets is of no influence at all. But the question is valid – do we have enough liquid flow of funds at all times to meet the needs of the Budget without GIC or MAS having to inopportunely sell and liquidate in order to provide the Government with the money?

We have studied a range of scenarios and it will be highly improbable that we will end up with this problem. We have asked ourselves the question and studied it, and we will not have that problem. There is a net inflow of funds that the Government gets each year from a variety of other sources. Singapore Government Securities (SGS) issuance alone is quite sizable – it is about 4% of GDP annually. That alone in almost all market circumstances gives us the fresh liquid flow. Plus there are other sources of liquid funds that we will have at our disposal in other areas, like land sales. We convert land and put it into the reserves, but, in the first instance, you are getting financial assets and if need be, we can use the fund flows for the Budget immediately.

So, this is a problem that we can tolerate because we do not envisage scenarios where we will really face a shortage of liquid funds.

Borrowing for expenditure

Mrs Josephine Teo had asked another important question – are there alternative sources of funding instead of drawing on reserves to meet these important expenditure needs? For instance, can we borrow? And as she put it, currently, Government is, in fact, able to borrow quite cheaply because of our very good credit rating, while we are earning more from investing our reserves, at least historically. Instead of drawing from our reserves and losing the opportunity reward of what we earn on our reserves, why not we just borrow?

First, our statutory boards borrow. LTA is going to borrow a significant amount for our transport plans. HDB already borrows very substantially. They issue bonds. And the Government is borrowing through the Singapore Government Securities market, quite a large sum, not for spending, but the funds are invested. The Government borrows in order to develop the financial market and create a risk free yield curve, but we do not spend the money. It is all invested. But there is a limit to how much the Government or the statutory boards can borrow, because credit rating agencies study this very carefully. I think it is absolutely critical that we keep our sovereign credit rating unimpaired through rough times especially, and across the cycles. So, we have got to be very cautious about borrowing more.

But, more fundamentally, I would say, let us not get into the game of exploiting spreads, exploiting situations where your borrowing cost is lower than what you hope to earn in your returns, and, therefore, find complex strategies to exploit that spread. We have seen how some countries have gone completely awry that way. We have seen how AIG went completely awry that way. AIG had a strong credit rating, borrowed cheaply and invested in high risk complex instruments and did very well for a long time, until the spreads changed. I do not need to elaborate on what happened to AIG, but AIG had problems. So, avoid this problem. There is a good reason why the Constitution has written in safeguards against borrowing in order to fund spending and deficits. This is a sound rule, and there are enough examples of how things have gone wrong otherwise.

What NIR will be spent on

Finally, let me come to the question on what we will spend our money on. This additional 2% of GDP, or slightly more, that we will get through the new NIR framework, when added to the revenue of 0.8% of GDP that we obtain from the GST increase, gives an overall revenue of about 3% of GDP. There was a range of views amongst MPs. Several wanted more social spending, to meet a variety of social challenges. Ms Sylvia Lim had emphasised that. Mr Lim Biow Chuan and several others also felt that there was a need to engage in more social spending.

But I have to say that our bias and view is squarely in favour of what Mr Christopher de Souza, Mrs Josephine Teo, Mr Seng Han Thong, Mr Liang Eng Hwa and others have said. We have to focus on building up capabilities and productive infrastructure to generate future growth. I will explain why. It is not an irrational bias. We have to bear in mind that NIR, under the new framework, is going to be quite a significant percentage of our total revenues. At 3%-3.5%, say, 3.5% of GDP, the total NIR revenue, if you include the NII already allowed, will be about one-fifth of our total revenues (20%). If we then use that money to invest in social expenditures or consumption of one form or another, that keeps us happy for the moment but it does not generate future growth and future revenues. So, over time, what you find, when you are not generating future growth and future revenues, is that the NIR, as a percentage of total revenues, keeps going up and as a nation we get to be increasingly dependent on this new form of oil. We should avoid being dependent on this new form of oil, but keep to the principle, as PM says, of "Save, Work, Earn" as the basis of our society. And avoid pain-free spending. If you want to spend more, let us get revenues for it. If you do not have revenues for it, do not spend more. I think that is the right approach.

I have to emphasise once again what I said yesterday, because we are quite serious about this, that is, whatever we are spending, we have got to keep a very close watch on avoiding wastage and unnecessary expenditures and frills, which Mdm Ho Geok Choo and others have pointed out. There is a lot of work going on in Government which does not create headlines but which really leads to savings. Quite recently, we put in place a whole set of smart procurement practices where we procure in bulk across Government agencies, and share services across our statutory boards and Government Ministries, which have reduced transaction costs significantly. We have put in place a capital charge framework so that our agencies will maximise their returns on the resources that are made available to them. And we recently put in place value-for-money reviews where we go in to have a look at how the funds have been used after a project has been implemented, whether the goals have been achieved and whether the funds were used wisely. With all these processes, we will keep disseminating best practices within and across the system. This is continuous work, making sure that we keep a culture of efficiency, economy and stewardship in the use of public funds.

Growing our reserves

Finally, let me take from where I started off. This is not just a framework about deriving more money for spending, but a framework for ensuring that we continue to conserve our resources for the future and that our reserves will continue to grow in line with our economy. To answer Dr Ong Seh Hong's question, which also includes our population size, because if you have a growing population, you have a growing economy, you do want your reserves to be able to cover that. This formula will assure us that our reserves will not decline over the long term in relation to the size of our economy. The ratio of reserves to GDP will not decline over the long term. There will be cycles, but there will be no long-term trend of decline.

Mr Lim Biow Chuan had in fact asked whether we had a fixed target for our reserves. What size do we aim for? We look at this from time to time and we get teams of economists to try and study the optimal size of reserves. In fact, in my earlier days as an economist at the MAS, I tried this myself. There is frankly no answer to that question. We do not know what crisis will hit us. We do not know what natural calamity, what war, what economic crisis will hit us and what the scale of the damage will be. The more important point is that we must ensure that the reserves continue to grow in line with the size of the economy, and that is what I can assure Members this formula will be able to do.

The current crisis that we are going through internationally is throwing up very interesting lessons about the dangers of not storing up enough in reserves, and living for today. Iceland is the latest example – it is being played out this week itself, day by day. The Icelanders are very tough, hardy people because of the extreme climate and the way they have had to survive beside large neighbours over the course of their history. They were regarded as a self-reliant people – and until very recently, Iceland was regarded as the "darling of the Nordic model". In fact, their per capita GDP is double that of Singapore's. Iceland is now technically bankrupt. Its reserves are 25% of GDP, but its borrowings, largely by its banks, are seven times its GDP. So its system has collapsed. Foreign banks are no longer willing to accept its currency even for trade payments. So trade has come to a standstill, supermarket shelves are empty, and the government is restricting the use of foreign currency to food, oil and medicine. And, yesterday, they decided to accept a $6 billion loan from the IMF. Strong people, bright people, capable, and they used to be self-reliant, but a huge error over a relatively short space of time – over exuberance, over leverage, and not realising the importance of erring on the safe side.

As Mr Arthur Fong said, "if you save, you will be safe", and it is as simple as that. I think we can be confident. We have got strong reserves. It keeps our credit rating strong, good not just for government but, more importantly, for our businesses and banks, lowers the cost of borrowing. And in that way too, our reserves generate sustained income over the long term which will benefit both current and future generations.

Ensure that when we spend more, we spend on the basis of what we can afford and we keep that spirit of self-reliance and living by our wits, which Josephine and many others spoke about. That way, we make sure that Singapore continues to be built to search for excellence, and built to last. [ Applause ].

Mr Speaker:

Mr Speaker: The Question is, "That the Bill be now read a Second time."

A Division will be taken to ascertain that the Second Reading of the Bill is supported by the votes of not less than two-thirds of the total number of elected Members of Parliament, which is 56 Members, pursuant to Article 5(2) of the Constitution. Serjeant, ring the Division Bells.

After two minutes –

Before I proceed to start the electronic voting, Members are advised to read the instructions for voting which have been placed on their seats. We will take a Division. Members may now begin to vote.

Question put, "That the Bill be now read a Second time."

Division taken: Ayes, 75; No, Nil; Abstention, Nil.

Ayes

|

Ayes (cont.)

---|---

Abdullah Tarmugi

Ahmad Mohd Magad

Ang Mong Seng

Baey Yam Keng

Chan Soo Sen

Chiam See Tong

Christopher de Souza

Fatimah Lateef

Fong, Arthur

Foo Chee Keng, Cedric

Fu Hai Yien, Grace

Gan Kim Yong

Goh Chok Tong

Halimah Yacob

Hawazi Daipi

Heng Chee How

Ho Geok Choo

Ho Peng Kee

Hri Kumar Nair

Inderjit Singh

Indranee Rajah

Iswaran, S.

Jayakumar, S

Khaw Boon Wan

Khor Lean Suan, Amy

Koo Tsai Kee

Lam Pin Min

Lee Bee Wah

Lee Boon Yang

Lee, Ellen

Lee Hsien Loong

Lee Kuan Yew

Lee Yi Shyan

Liang Eng Hwa

Lim Biow Chuan

Lim Boon Heng

Lim Hng Kiang

Lim Hwee Hua

Lim Siang Keat, Raymond

Lim Swee Say

Lim Wee Kiak

Low, Penny

|

Low Thia Khiang

Mah Bow Tan

Masagos Zulkifli B M M

Mohd Maliki Bin Osman

Muhammad Faishal Ibrahim

Neo, Lily

Ng Eng Hen

Ng Phek Hoong, Irene

Ong Ah Heng

Ong Kian Min

Ong Seh Hong

Palmer, Michael

Phua, Cynthia

Phua Lay Peng, Denise

Seng Han Thong

Sin Boon Ann

Tan Chin Siong, Sam

Tan Soon Neo, Jessica

Teo Chee Hean

Teo Ho Pin

Teo, Josephine

Teo Ser Luck

Tharman Shanmugaratnam

Vivian Balakrishnan

Wee Siew Kim

Wong Kan Seng

Yaacob Ibrahim

Yao Chih, Matthias

Yeo Cheow Tong

Yeo Guat Kwang

Yeo, George Yong-Boon

Zainudin Nordin

Zaqy Mohamad

No

Nil

Abstention

Nil

Mr Speaker: The Second Reading of the Bill has been carried by the votes of not less than two-thirds of the total number of elected Members of Parliament.

Bill accordingly read a Second time and committed to a Committee of the whole House.

The House immediately resolved itself into a Committee on the Bill. – [Mr Tharman Shanmugaratnam].

Bill considered in Committee; reported without amendment.

Third Reading:

Mr Speaker: Third Reading, what day?

Mr Tharman Shanmugaratnam: Now, Sir. I beg to move, "That the Bill be now read a Third time."

Mr Speaker:

Mr Speaker: The Question is, "That the Bill be now read a Third time."

A Division will be taken to ascertain that the Third Reading of the Bill is supported by the votes of not less than two-thirds of the total number of elected Members of Parliament, which is 56 Members, pursuant to Article 5(2) of the Constitution. Ring the Division Bells.

After one minute –

We will now take a Division. May I remind hon. Members to press the button marked 'Present' on the electronic voting unit before indicating their vote. Members may now begin to vote.

Question put, "That the Bill be now read a Third time."

Division taken: Ayes, 75; No, Nil; Abstention, Nil.

Ayes

|

Ayes (cont.)

---|---

Abdullah Tarmugi

Ahmad Mohd Magad

Ang Mong Seng

Baey Yam Keng

Chan Soo Sen

Chiam See Tong

Christopher de Souza

Fatimah Lateef

Fong, Arthur

Foo Chee Keng, Cedric

Fu Hai Yien, Grace

Gan Kim Yong

Goh Chok Tong

Halimah Yacob

Hawazi Daipi

Heng Chee How

Ho Geok Choo

Ho Peng Kee

Hri Kumar Nair

Inderjit Singh

Indranee Rajah

Iswaran, S.

Jayakumar, S

Khaw Boon Wan

Khor Lean Suan, Amy

Koo Tsai Kee

Lam Pin Min

Lee Bee Wah

Lee Boon Yang

Lee, Ellen

Lee Hsien Loong

Lee Kuan Yew

Lee Yi Shyan

Liang Eng Hwa

Lim Biow Chuan

Lim Boon Heng

Lim Hng Kiang

Lim Hwee Hua

Lim Siang Keat, Raymond

Lim Swee Say

Lim Wee Kiak

Low, Penny

|

Low Thia Khiang

Mah Bow Tan

Masagos Zulkifli B M M

Mohd Maliki Bin Osman

Muhammad Faishal Ibrahim

Neo, Lily

Ng Eng Hen

Ng Phek Hoong, Irene

Ong Ah Heng

Ong Kian Min

Ong Seh Hong

Palmer, Michael

Phua, Cynthia

Phua Lay Peng, Denise

Seng Han Thong

Sin Boon Ann

Tan Chin Siong, Sam

Tan Soon Neo, Jessica

Teo Chee Hean

Teo Ho Pin

Teo, Josephine

Teo Ser Luck

Tharman Shanmugaratnam

Vivian Balakrishnan

Wee Siew Kim

Wong Kan Seng

Yaacob Ibrahim

Yao Chih, Matthias

Yeo Cheow Tong

Yeo Guat Kwang

Yeo, George Yong-Boon

Zainudin Nordin

Zaqy Mohamad

No

Nil

Abstention

Nil

Mr Speaker: The Third Reading of the Bill has been carried by the votes of not less than two-thirds of the total number of elected Members of Parliament.

Bill accordingly read a Third time and passed.

Column No : 608