CONSTITUTION OF THE REPUBLIC OF SINGAPORE (AMENDMENT) BILL

CONSTITUTION OF THE REPUBLIC OF SINGAPORE (AMENDMENT) BILL: Order for Second Reading read.

The Minister for Finance (Mr Tharman Shanmugaratnam): Mr Speaker, Sir, I beg to move, "That the Bill be now read a Second time."

The Constitution Amendment Bill before the House seeks to revise the framework by which the Government is allowed to draw from investment returns on our reserves for spending each year.

A key asset for Singapore

This framework is important to Singapore because it governs how our reserves should be conserved, and the returns equitably shared between current and future generations of Singaporeans. A country’s reserves are a key asset in a globalised and uncertain world. But they

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are especially valuable for a country completely lacking in natural resources, extremely open to the world, and very small in size in a region of large players. Our reserves are our only resource besides our people, and a major strategic advantage for Singapore.

We started off without this advantage. When Singapore became independent, we had very little in reserves. It is only through hard work, consistently prudent fiscal policies, and successive strategies that grew the economy over the years, that we have arrived at where we are today. We lived within our means, and painstakingly built up the country’s reserves. Even so, although our reserves are now a sizeable asset for Singapore, they remain smaller in value than what many other countries have in financial reserves and natural resources combined.

As a strategic asset, our reserves serve two purposes. First, they provide a key defence for Singapore at times of crisis. We cannot know in advance what crises will hit us, whether caused by economic happenings in the world, natural calamities, pandemics or events that impact our security. But they are not hypothetical rainy day scenarios, as we can see in today’s global financial crisis. The use of our reserves to back the Government guarantee on deposits that we issued last week underscores how important the reserves are in responding credibly and confidently during a crisis. Our reserves provide confidence in Singapore, contribute to a stable Singapore dollar and keep our economy resilient at times of difficulty.

The second purpose our reserves serve is to provide for a continual stream of income that can be spent or invested for the benefit of current as well as future generations. The Government is allowed to spend part of the investment returns on our reserves.

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Conserving our reserves

For both of these purposes – to ensure that we will have ample reserves to deal with major crises, and to provide a stream of income that lasts across generations – it is essential that we have a sound framework of governance and policies for the management and use of the reserves. That is the only way we can keep and enhance the value of this strategic asset over the long term. There are a few pillars to this governance framework:

First, Singapore's Constitution was amended in 1991 to provide for an Elected President to safeguard the reserves and prevent a profligate government from squandering them. Specifically, the President has the right to veto the Government Budget if it is likely to draw on past reserves. The President's concurrence is also necessary for the appointment of the Board members and CEOs of MAS, GIC and Temasek, to ensure that these are persons of ability and integrity.

Second, also within these Constitutional provisions, the Government can spend only from the investment returns on our reserves and not the principal sum. Further, the spending rule is designed to allow only part of the investment returns (50% of Net Investment Income, or NII) to be tapped for the Budget, thereby providing for the remaining part to augment the reserves so that its value grows over time.

Third, Singapore's financial reserves are managed by professional investment teams, who aim to deliver sustainable returns over the long term. GIC and Temasek are both well-respected internationally for their strong, proven track records. They are rigorous in their allocation of assets and in managing risks, and have achieved consistently creditable

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returns. The MAS has also managed our official foreign reserves prudently, while fulfilling its other central bank functions of promoting monetary and financial stability.

However, this framework for conserving and growing our reserves cannot stand on its own, without being matched by the principles that underpin our budgetary policies. We spend prudently and live within the constraints of the revenues that we are able to raise, so as to avoid running persistent budget deficits. This is why our total Government spending is only 15% of GDP currently, much lower than most other countries. It is this approach of fiscal prudence that has allowed us to keep the Government lean and our taxes low, so that both individuals and enterprises have incentives to work hard, grow their incomes and strengthen our economy.

Preparing for future spending needs

We must keep to these fundamental principles as we introduce new rules to allow the Government to draw on more of the investment returns from our reserves for spending.

In the past, the Government has only been allowed to spend from the interest and dividend income, and not the capital gains. This was conservative, but it has served our fiscal needs adequately while allowing us to build up our reserves. In the 1990s, after the Constitutional amendments were passed in 1991, the economy was growing rapidly, we were running large surpluses, and the investment income comprising only interest and dividends was more than adequate to meet fiscal needs. The Government moved to lock up 50% of the NII in 2001 to ensure that we continue to grow our reserves and not spend all the income on current fiscal needs. By this judicious use of NII to supplement the

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Budget, and prioritising between competing budgetary needs, our budget has stayed neutral on average, with surpluses and deficits balancing out over the years that followed the 2001 amendment.

But the current NII spending rule will not be adequate as we go forward, as we expect our expenditures to increase, even over the next five years. Over the long term, Government spending will need to rise significantly. We have to find new revenue sources, and the spending rule, if revised judiciously, can provide more to help meet these demands.

There are three main reasons for this increase in budgetary needs. I will spell them out, as they are the essential reasons why we are amending the Constitutional framework now to draw on more investment returns.

The first is that we must do more to invest in capabilities and stay competitive, so that we grow our economy. We want to invest in the best quality education for our young and continual learning for all Singaporean adults. That is why we are moving towards more single-session primary schools and improving pupil-teacher ratios across the school system. We are also increasing university participation rates for Singaporeans and building two more ITE colleges similar to the ITE College East at Simei, which is already regarded as best-in-class internationally.

We are also substantially scaling up our investments in training and continuous learning, to retain the competitiveness of our workforce. MOM and WDA have embarked on the National Continuing Education and Training (CET) 10-year Masterplan this year, which will significantly increase the annual CET institutional capacity from 50,000 training

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places today to 250,000 training places in three to five years’ time.

We need to invest in R&D, to build new capabilities that will drive our future growth. Singapore is already emerging as a key R&D player in areas linked to industries with high growth potential globally, such as the biomedical sciences, interactive and digital media, and environmental and water technologies. We have also deepened our incentives for making innovation pervasive across the economy, among both big and small enterprises.

Together, these increased investments in our human capital, knowledge and innovation will benefit all Singaporeans. They will sharpen our capabilities, enabling us to move up the value chain and keep our relevance in a much more competitive global economy.

Taxes are the other key consideration in competitiveness. At the same time that we invest more, we have to maintain a competitive tax environment for both companies and individuals. With tax rates coming down internationally, we have to be ready to make further cuts in direct taxes, where required, to maintain Singapore’s attractiveness as a key business hub in Asia.

The second reason why our budgetary needs will grow is that we are doing more to make Singapore a top quality home. In the years to come, we will enhance almost every facet of the city, both in the city centre and across our neighbourhoods, to make this a highly liveable and inclusive home.

We are transforming Marina Bay into a place with something to appeal to everyone – business, entertainment, the arts, unique gardens, the F1 at night and even the peace of a reservoir – all rolled into one. We are also enhancing our green lungs and blue waterways across the

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island. And we are rejuvenating our housing estates, to create a first-class and inclusive living environment that enhances the assets of Singaporeans.

We are investing in new commercial and lifestyle hubs outside the city centre, such as the Jurong Lake District, Kallang Riverside and Paya Lebar Central, which will spread out the economic activity around the island and bring jobs and attractions closer to homes.

Transport alone will be a substantial expense, in fact, the largest increase in our Budget. To achieve our vision of a people-centred land transport system, we will have to ramp up our spending on land transport over the next 10 to 15 years. In fact, transport spending will rise from 0.8% of GDP last year to about 2.9% of GDP in five years’ time and stay at that level over the next five years. 0.8% of GDP going up to 2.9% of GDP – an increase of more than two percentage points of GDP. And this is even with significant borrowings by LTA to smooth out expenditures over the long term. These investments would allow us by 2020 to double our rail network, increasing both capacity and coverage, expand our network of expressways, and achieve better integration between road and rail to improve both public and private transport.

The third reason why we will have to spend more in the future is the need for higher social expenditures in an ageing society and one facing growing income gaps. Our population is getting older, and this will create new demands on resources to look after our elderly. We will have to spend more on healthcare, both in the Government’s budget and nationally, including private expenditures. Health Minister Khaw Boon Wan has highlighted the challenge on several occasions. We are already spending an additional $2.4 billion over the next five years to recruit and train manpower, build new hospital

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capacity and upgrade existing facilities, and enhance the capabilities of community hospitals and nursing homes. These are new expenditures. We will also invest more in preventive care. Altogether, in constant dollar terms, we expect to more than double the Government’s healthcare expenditures over the next decade. But we must be careful in how we design the framework for financing healthcare to keep us from going the way of countries that have seen their budgets balloon uncontrollably, placing increasing burden on taxpayers.

On top of healthcare, we will introduce new measures to push ahead on the ‘active ageing’ agenda, and will continue retrofitting parts of Singapore such as providing more barrier-free access for elderly pedestrians and bus and train commuters.

A further social challenge is the widening income gap that is being seen in every city plugged into the global economy. This is a challenge that will be with us for some years to come. We have already embarked on major new programmes to help lower-income Singaporeans and strengthen our social compact. We have implemented the Workfare Income Supplement Scheme, and the Government and NTUC are both expanding schemes to help low-income workers upgrade their skills. We have also augmented a broad range of social assistance and community support programmes to help the most vulnerable members of our society, including developing capabilities to help dysfunctional families and ensure that their children are not disadvantaged.

We are also redoubling our efforts to counter low fertility rates, through the recently introduced Marriage and Parenthood package. In addition to increasing the financial and workplace support for parents, improvements in the quality of kindergartens and childcare will

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help to give every child a head start towards fulfilling his or her potential.

For all these reasons that I have mentioned – the increased investments needed to keep Singapore competitive and a highly liveable city, the need to keep taxes competitive, as well as the need to cater to an older population and to keep our social compact intact – we need additional resources. We expect a significant increase in our expenditures amounting to about 3% of GDP each year in five years’ time (FY2012), and moving slightly higher thereafter. This is on top of the 15% of GDP that we are currently spending. So we expect to get to about 18% of GDP in five years' time. These are large increases, although our total expenditures would still remain amongst the lowest internationally (as a percentage of GDP).

These are key programmes for expenditures that we are able to anticipate and prepare for. But besides these programmes, we must always provide a buffer in our fiscal planning to deal with unexpected adverse events or downturns, and give the Government the flexibility to implement countercyclical measures when necessary. This year, for example, we are spending $3.3 billion on measures that are helping low-income and other Singaporeans cope with the increased cost of living. With the likelihood of a weaker economy next year, we will also consider how we can help Singaporeans and our businesses through these difficult times and position the economy for a robust recovery.

The new fiscal framework

The Government therefore needs a larger budget in the future, but we will retain our basic principles of sound fiscal management. We have a systematic

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framework in place to ensure prudent spending amongst all agencies, and we will keep improving it. Under the block budgeting framework, Ministries have to ensure that their budgets do not grow faster than our resources can support, and must prioritise and reallocate funds so that they live within their means. New requests for funding are prioritised and evaluated by the Ministry of Finance, and all major development projects have to be approved by the Developmental Planning Committee. We also conduct reviews during and after each project to ensure that the outcomes are met, and that taxpayer monies are spent effectively and efficiently.

However, even with tight budgetary practices in place, we face the fundamental need of having to spend and invest more in the future. We will need more revenues to meet this need. This is why PM stated in 2006, during the Debate on the President’s Address, that we had to make two key revisions to the structure of our fiscal revenues. The first was the GST increase of 2% which we made in 2007. This contributes about 0.8% of GDP per year to our revenues, and has allowed us to proceed with important initiatives such as Workfare, as well as to begin ramping up our expenditures on healthcare and continuous education and training. The second revision that PM indicated the Government would have to make was a new framework for spending the investment returns from our reserves that should take into account capital gains, thereby enabling us to tap on more of the returns to finance our growing spending needs.

Both these changes, the GST increase and the revisions to the rules for spending investment returns, are necessary parts of our new fiscal structure. They will allow us to meet Singapore’s future needs with confidence.

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New framework for spending from investment returns

This Bill therefore seeks to revise the rules for spending from investment returns to allow us to tap on more of these returns for the Budget but on a basis that is sustainable over the long term. The new framework retains the 50% cap on spending from investment returns. But the spending rules will be based on a new and broader definition of investment returns, with the following key features: (1) total returns, including capital gains; (2) long-term expected returns, instead of year-to-year actual returns; and (3) real returns, rather than nominal returns, so that we preserve the purchasing power of our reserves. I will set out each of the changes in turn.

Total returns

Capital gains and losses are part and parcel of investment outcomes. This is true not just for investments in equities, but for interest-yielding bond instruments where the value of the investment goes up and down as interest rates move. In changing the definition of investment income to include capital gains, and not just interest and dividend income, we are adopting the right basis for determining how our reserves have grown.

Furthermore, a Government spending rule based only on interest and dividends could lead to bias toward investments that generate income rather than capital gains. This will be inconsistent with our objective of maintaining a diversified investment portfolio aimed at achieving long-term returns. GIC, for example, has in fact substantially diversified its investments over the last 30 years, and even over the last five years, with significant allocations to various asset classes such as public equity, private equity and real estate. The new rules will be consistent with a strategy of asset allocation that is focused on maximising

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total returns, including capital gains, over the long term.

Expected long-term returns

The second change is to move towards the concept of expected long-term returns. As we have discussed in this House before, capital gains are inherently volatile. Take a look, for instance, at the MSCI World Index over the last 10 years, from 1998 to 2007, which captures the market value of global equities and hence includes capital gains and losses. If annual returns were computed based on the MSCI World index, they would have been negative in three of those years and above 20% in another three. And in 2008 so far, we have seen a 40% drop in the MSCI World Index.

If we had to spend based on actual total returns each year, the volatility would severely constrain how we plan the Government Budget and commit ahead for future expenditures. Furthermore, it would be imprudent for the Government to overspend in a bull market, and end up finding itself short of resources in a bear market. Therefore, in studying how to tap on capital gains for the Budget, our key consideration was to determine a smooth stream of returns that can be taken in for spending on a year-to-year basis. We considered two alternatives to achieve this smoothing effect.

The first way is to rely on a historical rate of return, based on a suitably long period into the past to smooth out the volatility in returns. This is doable, it is practical, but it is not satisfactory, because past performance in global markets may not be representative of likely future outcomes. Markets can and have gone through extended bullish or bearish periods of as long as 10-15 years, before eventually changing course. Consider if we were standing in 1997, for instance. In the 10 years before 1997, the average annual nominal return for the

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MSCI World Index was 9% – a strong and positive result. But in the 10 years following 1997, the figure fell to 5%. So even if we take historical averages over a relatively long period, 10 years, you still find significant changes in course from one phase to another, and lasting over more than one market cycle.

A further problem with using historical returns, computed over a long period, is that it does not take into account the fact that returns from our investments depend on the asset allocation mix, which can change over time. Historical returns can therefore provide a useful reference for future returns, but are often not the same as future returns. They are useful reference, but they are not appropriate as a predictor of future returns.

The second approach to smoothing out the volatility of returns is to look at the long-term expected returns on an investment portfolio. This is a forward-looking assessment of the overall returns that we expect over the long term. Actual returns will of course vary from these expected returns each year, sometimes very significantly. This year, for instance, should be a very bad year for most international investors, who would have found it difficult to achieve investment returns that meet their long-term profile of expected returns. But in making projections of expected returns, we are estimating what actual returns in the years ahead will look like when averaged out over the long term.

In deciding on our framework, we have studied and adapted from good practices in various international funds with endowment characteristics, which are invested for the long term just like our reserves are. The expected returns concept has been practised for several years amongst several endowment funds. For instance, since 2001, the Norwegian

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Government has adopted fiscal guidelines to spend the expected real return on its Government Pension Fund – Global, a fund that holds its petroleum revenues and fiscal surpluses.

Similarly, Yale has a spending framework based on long-term expected returns, which it has been running successfully for many years.

While each of these endowments has its own unique characteristics and spending rules, the principles are essentially similar. All of them seek to achieve some budgeting stability, while seeking to achieve inter-generational equity – in other words, to balance the spending needs of current and future generations, whether of citizens or student cohorts as in the case of university endowments. This is similar to what we are trying to achieve with our spending rules.

We have decided to adopt the second approach for estimating total returns without being saddled with volatility - which is to determine the returns for spending based on long-term expected returns on the reserves.

The expected returns will be based on an investment horizon of 20 years, which is roughly equal to three investment cycles in global markets. This is consistent with the investment strategies that our investment companies have adopted, which is to invest for the long term and ride out the market cycles. This ability to ride out the cycles is a key advantage that well-run endowment funds have in their investments, which sets them apart from many other financial investors.

However, an assessment of expected returns cannot be made in one year and then left unchanged for 20 years. If we do that, chances will increase that the actual returns will deviate from the estimate of expected returns, even when the actual returns are averaged over the

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20 years. Much in the world can change in between, which could mean a very different outlook for the years ahead. This is why we have to keep refreshing our estimates of long-term expected returns, taking in all the information and assessments available at the time, including the actual historical performance of the markets. As I will explain later, we will do this annually - so that we make a thorough assessment each year of the long-term expected returns on our investments.

I should clarify that in looking at long-term expected returns, the distinction between realised and unrealised capital gains and losses does not arise. The long-term expected return depends on how the market value of our reserves will grow over the specified time horizon. This does not depend on when the assets are sold, in other words, when the gains and losses are realised. The distinction between realised and unrealised capital gains would be relevant only if we were spending based on actual returns each year rather than long-term expected returns. As I have explained earlier, however, spending on the basis of actual returns would subject the Budget to too much volatility. Furthermore, if the spending rule was based only on realised capital gains, there could be incentive to sell assets to make capital gains available for spending, even if it means doing so at an inopportune time. We should therefore keep our investments focused on maximising long-term value, and spend on the basis of total returns expected over the investment horizon.

There are further technical rules that we will apply to avoid volatility of returns available for spending. The market value of the asset base itself goes up and down depending on the state of the market (the asset base as distinct from the expected returns that we hope to earn on our reserves). The estimated rate of returns is applied on the asset base in order to

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derive the sum of money that we call Net Investment Returns. But this asset base itself moves up and down in line with the market. So we have to smooth that as well. We have to ensure that the asset base, which is what the long-term expected rate of return would be applied to in order to derive the investment returns for spending, is also smoothed and not heavily influenced by market cycles. This too will ensure that governments do not overspend during boom years and underspend when the markets are down. We will follow established methodologies. Yale University, for example, applies its expected rate of return to a smoothed asset base, which takes into account past market values of the asset base but gives greater emphasis to those in more recent years. The Government will adopt this concept of smoothing, the details of which will be agreed with the President.

Real returns

The third key feature of the framework is that we will spend based on real returns. This is unlike the current framework, where spending is based on nominal dividend and interest income. Our spending rules must ensure that we continue to maintain the international purchasing power of our reserves. Otherwise, in a scenario of sustained high inflation globally, even if we were to earn decent investment returns, our past reserves would be gradually eroded in real terms. From 1998 to 2007, for instance, the MSCI World Index returned an average nominal return of 5.4%. Over the same period, global inflation in US dollar terms was about 4%, and would have wiped off almost 75% of these returns. This is before taking into account the large negative real returns on the MSCI Index in 2008 thus far.

The new framework will therefore allow the Government to spend only out of real returns, that is, returns adjusted

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for the effects of global inflation. This means that, at minimum, past reserves will continue to grow at the same rate as global inflation.

Applying new framework to MAS and GIC

The new framework will be applied to reserves invested by MAS and GIC. The Bill refers to these as "relevant assets", which are also net of the liabilities defined in the Constitution. By netting off these liabilities, such as Government Securities, Treasury Bills and Social Endowment Funds, we are in effect setting aside returns to cover the costs of servicing the liabilities.

We are not applying the new framework of spending on the basis of long-term expected returns to Temasek Holdings. We have studied this carefully, and the Government’s assessment is that it is prudent to retain Temasek Holdings on the existing framework. We have decided to do so for two reasons. The first reflects the nature of Temasek's investment strategy, which involves taking concentrated stakes in companies, including direct investments. Like other such investors, this strategy entails higher risks, with the expectation of higher returns - and it has indeed yielded higher returns historically for Temasek than seen for traditional global portfolio investors. However, this approach makes it more difficult for us to project a long-term expected rate of return on Temasek's portfolio to a reasonable degree of certainty. It is unlike the case for global portfolios like that of GIC's, which are spread widely across the public markets, and for which there are established methodologies for projecting expected returns. There are benchmarks, there are peers and there are ways of projecting expected returns with reasonable confidence.

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The second reason is that Temasek's investment strategy is still evolving, having begun a major effort to diversify its investments geographically as well as sectorally in 2002. Temasek today operates very differently from the way it was operating six years ago, and its strategy will continue to evolve in response to the investment climate.

It will therefore be prudent to leave Temasek out of the new framework, although we will review this again after some years, once Temasek's diversification strategy is more settled. However, we will continue to draw on Temasek's actual investment returns each year in the meantime, as the Government is already allowed under the current NII framework to tap on 50% of the dividends from Temasek. In so doing, we already tap on part of Temasek's capital gains for spending under the existing framework, because Temasek declares dividends based on its net profit, which takes into account the realised capital gains and losses from its investments. This will remain the case.

Summary: Government to spend up to 50% of Net Investment Returns

As I mentioned earlier, we will retain the 50% cap on the amount of returns that can be taken out for spending. This is in addition to setting aside the full inflation component of our returns in past reserves. In this way, the real returns on investments will be shared between the current Budget and past reserves. This allows the past reserves to grow in real terms, and thereby provide for a growing economy in the years to come.

To summarise, the Government will spend up to 50% of our Net Investment Returns (NIR). NIR is the sum of: (1) the long-term expected real rate of return on the reserves invested by GIC and MAS, and (2) the NII on the remaining assets, comprising primarily Temasek for which there will be no change.

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This framework strikes the right balance between the needs of current and future generations of Singaporeans. It would allow us to take in more for spending, but not so much as to prevent our reserves from growing in line with the economy and providing for future generations.

Presidential safeguards

Let me finally return to the issue of governance procedures. The new framework will require an important change to the budgeting process each year, so as to operationalise the concept of long-term expected returns and ensure that the Presidential safeguards on our reserves are maintained.

The projection of the expected long-term real rates of return is not a mechanical process, but one that involves both professional expertise on the part of our investment agencies and sound judgment. We have therefore designed a systematic and robust process by which the Government determines the NIR each year for spending, and by which the Elected President can perform his role as custodian of our reserves. I will bring the House briefly through the sequence of events that will take place each year.

Before the start of each financial year, the Government will propose the expected long-term real rates of returns for GIC and MAS for the President's agreement. In order to do so, the Government will ask the Boards of the GIC and MAS to provide and certify estimates of the long-term expected rates of return on the assets they manage. These Boards would evaluate the future outlook on their portfolios, taking all factors into consideration – including the overall investment environment, bottom-up assessments for each asset class and peer comparisons of expected returns. They

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would take into account historical rates of return, which provide a useful check for what is realistic going forward. Although the measure of expected returns is fundamentally forward-looking, the projections cannot completely ignore historical performance.

The Government will propose the long-term expected real rates of return to the President, taking reference from the rates certified by the respective Boards. The President will consult with the Council of Presidential Advisers (CPA) before deciding on whether to agree with the Government's proposal. If the President disagrees with the proposal, the average historical real rate of return over the previous 20 years would be used. I have explained earlier why it is not ideal to use historical rates in the first instance. However, the 20-year historical rate of return provides a neutral and pragmatic basis for resolving any dispute between the President and the Government, and avoids paralysing the government of the day.

Once the President has agreed with the Government on the expected long-term real rates of return that are to be applied, the subsequent processes are fundamentally similar to the current approach. After the close of the financial year, the Minister for Finance will still certify to the President the amount of NIR that the Government has actually taken into the Budget, within the caps specified in the Constitution.

The dispute resolution mechanism that I spoke about – the 20-year historical rule – as well as other details and working arrangements to implement the new framework, will be stated in a set of Principles to be agreed upon by the Government and the President. The Principles will be tabled to Parliament for information after the Bill is passed and gazetted.

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The President and the Council of Presidential Advisers have been briefed on the framework proposed by this Constitution Amendment Bill, and have deliberated the issues. The President is satisfied that the new framework is a sustainable one that will continue to preserve and grow the past reserves, and will be in Singapore's interests.

Deletion of reference to EDB Act in Article 144(3)

Mr Speaker, Sir, allow me to present a further amendment to the Constitution, which is not related to the proposal to implement the new NIR framework that I have just described. Article 144(3), which governs guarantees and loans raised by the Government, currently makes reference to the EDB Act. This House had earlier updated the EDB Act to remove the provisions for Government guarantee on EDB's bonds and debentures. Consequent to that amendment, the reference to the EDB Act in Article 144(3) will be deleted.

Mr Speaker, Sir, the changes we are putting into place in the new NIR framework will not deviate from the fundamental principles that we have adopted towards our reserves. We will maintain and grow our reserves, so that they serve both as a strategic buffer to tide us through unforeseen crises or emergencies, and generate returns for spending on a sustainable basis. The new rules are a fair and equitable basis for sharing the benefits of the reserves between present and future generations.

The new NIR framework will contribute to strengthening the Government's revenues so that we can position Singapore to meet the challenges of the future with confidence. The GST increase in 2007, which contributes an additional 0.8% of GDP each year, together with the additional revenues made available from

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NIR which we currently expect to be slightly above 2% of GDP each year, will allow us to press ahead with our expenditure plans, which should require additional resources of 3% of GDP within the next five years. If I may repeat this, the GST increase has yielded 0.8% of GDP extra. The NIR amendments today are expected to yield slightly more than 2% of GDP extra and this will help us to fund our growing expenditures which we estimate at about 3% of GDP extra within five years. They will allow us to upgrade our economy, strengthen our society, and make Singapore amongst the most vibrant and liveable cities in Asia.

The funds made available through the revised rules for spending from investment returns will be channelled mainly towards building up Singapore's capabilities and infrastructure through education and R&D, and the major programmes to expand our transport infrastructure and rejuvenate our city. These investments will position Singapore for the next stage of growth, and ensure that we continue to attract investors, create jobs and open up opportunities. We will emerge from this crisis with confidence and can look forward to more years of good growth that will be for the better of all Singaporeans, now and in the future.

Sir, I beg to move.

Question proposed.

4.33 pm

Mr Inderjit Singh: Mr Speaker, Sir, I support the Bill.

Sir, the Minister mentioned in his speech that the Prime Minister, for the first time in a long time in 2006, spoke of the need to finance increasing spending by tapping on to the reserves. We never talked about this in the past. During the 2007 Budget debate, we had a debate

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about using more of our reserves to fund Government spending and not burden Singaporeans with higher and higher GST to fund high Government spending. In 2007, the Minister for Finance agreed to look at different models, including the way universities endowment funds in the US were tapped to fund expenditures. And, of course, finally, we are seeing the constitutional amendment today. I am very happy to see that we have finally decided to make this change. And I am also happy that we did not pull this amendment out, despite the problems that we are seeing in the financial market – the tough time and the uncertain investment environment ahead – we are moving ahead confidently with these changes.

I have some comments on the amendment process which should, in theory, will allow the Government of the day to unlock a larger portion of the reserves for future budgets, than it is presently allowed to do so under the current definition of Net Investment Income (NII).

As the Minister highlighted in his speech, in the years ahead, major investments will be needed in various areas of infrastructure, capabilities and greater social needs like funding retirement, Workfare Income Supplements, baby bonuses and many more. It is therefore unrealistic, as the Minister mentioned, to depend on the NII alone as this would mean that we sacrifice some of the much needed investments and expenditures. Or worse still, the Government would have to tax Singaporeans higher and also implement high GST in the coming years to all of these things.

Many of these investments need to be planned and built, taking a long-term view of the economy, irrespective of whether the economy is in a period of a slowdown or a period of expansion. Up to now, the

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amount available from out of the national reserves for such spending was largely dependent on the performance of the economy in the previous year. While this provided a useful way to keep spending within our means, it had its disadvantages, as the Minister has mentioned.

For one, in years of slowdown, the available funds shrink, and may therefore lead to the Government not spending on much needed projects and social spending. While in strong years of growth, spending on added available funds leads to an overheating of the economy, as we have discussed during the Budget debate this year. This deepens the troughs and exaggerates the peaks of the economy and is not desirable.

Another disadvantage that the Minister has pointed out is that it may encourage the Government to take on greater financial risk for short-term investments just to reap higher returns so that the government of the day can meet higher spending needs. So the investment patterns may change just to suit the short-term needs.

Finally, spending on social and welfare needs should in fact increase in periods of economic hardship. In the past, this spending was dependent on the performance of the economy and if we do that, the spending actually decreases when actually we should be increasing spending in difficult times.

I note that the Government's willingness to undertake this amendment comes after many years of an almost allergic reaction to any suggestion made to touch the reserves for any Government spendings. And I still remember, in this House, how Dr Wang Kai Yuen made a suggestion and was told that this is not meant for the past, not meant for the present, but is meant only for the future.

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With Singaporeans increasingly facing the cost crunch of the global downturn, and the need to invest in structural improvements in Singapore and its economy, this expansion of the Government's ability to tap on the reserves is, therefore, timely to help us align the economy to meet the needs of the future and to convince the present generation of Singaporeans that some part of what we have prudently accumulated will be used for their benefit, as opposed to just being stored for the benefit of some unspecified future generation.

The Government's current proposal based on the long-term expected total returns, including capital gains, in principle, would allow long-term planning of spending and avoid knee-jerk reactions. It would also give the government of the day confidence that its plans for capacity building can be funded, even in periods of slowdown. So this is a very good move.

As a general guide, one indication of whether this Bill meets its objective is to see whether, in any given year, and irrespective of the performance of the economy, it would increase the absolute amount that the Government is able to draw from the reserves when compared to the amount the Government is able to draw using the present formula for the Net Investment Income. If it does that, then this Bill will have achieved the flexibility we wanted to give the Government by this amendment. I therefore ask the Minister if he can confirm that this is the case if he applies the Net Investment Returns formula for past performance of the reserves as opposed to the NII. Had we done that, would we have more money to spend?

I would like to turn now to some queries that I have on the mechanics of the proposed amendment.

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The Bill makes amendments to Article 142 of the Constitution. Broadly speaking, Article 142 allows Net Investment Income to be pushed into the past reserves, except for the portions certified by the Minister. Hence, only the portion that is carved out in this manner would be available for current spending. The amendments also tweak the formula for what is carved out in Article 142(1A) and it sets out a formula of the long-term real returns of NIR, as we have heard.

My first query is on the term "long term". Can the Minister please tell us what it means in the context of the amendment? We hear about a 20-year horizon – is there a consensus on this? Can the Minister clarify on the process of aggregating the long-term expected returns? He mentioned that boards of GIC and MAS will determine the number and that the Minister will present this to the President. Will the Minister be aggregating this before presenting to the President? Can the Minister share with the House the consultation process that was undertaken to determine what "long term" means and who was consulted in this process?

My second query relates to the ability of the President's office to assess the advice of the Minister, as required under Article 142(1A)(a), on the long-term real rates of return expected to be earned on the assets that are being measured. This, of course, is a very serious duty as it concerns the amount that is being carved out from the past reserves; what we wanted to protect for a very long time. Can the Minister please elaborate what measures are in place to assist the President's office to evaluate this, including the information that will be supplied to the President for this? In particular, is the President able to call on relevant expertise to assist him, and do we also need to provide a budget for the President's office to put in place the required expertise to make the assessment? Will the President have to rely on

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the Government's experts for assistance in this? If so, how will we ensure that the President gets advice and assistance that is independent as well as competent?

Sir, the third question is on dealing with a deadlock. Can the Minister elaborate on how a deadlock or disagreement between the President and the Government about what the long term real rate of return is expected on the assets that are being measured will be handled? How will this be resolved? Will there be a structured process – the Minister briefly mentioned there will be – or will we see a prolonged disagreement period that could stifle Government spending? So a fast structured process will help us avoid such a deadlock.

A concern I have is that long-term forecasts can be generally positive, and hence the amount carved out from the reserves for present consumption can be optimistically high, even in periods of a few years of negative growth. The problem that I foresee is that it may be some years before the government of the day is forced to recognise its optimistic forecast that may be unwarranted. By that time, we could have significantly overspent beyond our means. Is there a trigger point where the Minister must go back to the President with a revised set of numbers, say, when the projected long-term real rate of return changes significantly over a short period of time?

Alternatively, can the President ask for such a review once the numbers have been submitted? The last thing we would want is for the future government to hide behind a long-term forecast in the face of an economic slowdown, especially when poor economic performance is due to structural problems in the economy that may impede the achievement of the long-term rates. So if we have many years of slowdown and we still expect to achieve a long-term rate, that may be not realistic in the long term.

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A related point is that we must remember that the forecasts which are carved out are notional amounts. When we value the appreciation of assets, for example, the assets are not liquidated to give us funds to spend. Instead, the amendment will allow the Government to spend a certain amount based on the underlying value of the reserves. A major problem can arise when the assets are suddenly devalued, for example, in situations like what we are facing today. Is there a trigger for a review in such a situation of what the underlying base value of the reserve will be? The most important thing in determining the long-term return rate is going to be what is that base value. So what is the process to trigger a review of this, in case there is a major change?

The fifth question I have is on why Temasek Holdings is excluded from the amendments? Is this delay in including Temasek in this pool because it needs time to digest the recent investments that have come unstuck? If the reason is bad or underperforming investments, should we not at a global level include Temasek so that we have a handle on how prudent we then need to be to make up for the losses in the other areas?

A related point is that the Ministry should be looking at Temasek, GIC and MAS together and then assign them their respective roles, which I am sure the Goverment is doing but it is not so clear. MAS, for example, is probably the entity to perform currency stabilisation and the most liquid GIC could take a long term, slightly more conservative view in its investments, while Temasek shoulders more of the risk. At least that way, with a coordinated strategy, we do not risk overexposure in any one sector of the economy. With Temasek excluded from this amendment, will MOF still retain the oversight needed to coordinate the investments of our national reserves so that there is no over investment by any

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one entity if they are not coordinated? Will the Minister please tell us when does he expect Temasek to be included into the competition of the NIR?

As a final comment, I wish to highlight the difference between using a nominal rate of return and a long-term real rate of return. In the latter, which is the proposal, inflation would be factored in to give us what is projected as the real available amount. This may even lead to a lower figure than the nominal one which may not be adjusted for inflation. Hence, it will be a more accurate view of what is actually available for us to spend. I think, on the balance, this is a more prudent approach than in the past where inflation was not factored when we used the NII. Can the Minister comment on what the short-term impact will be on the returns available for the Government for spending as a result of the current era of high inflation rates? Will we actually see lower amounts available in the next few years?

Sir, on balance, the proposed changes on how our reserves can be tapped for Government spending are necessary and timely. And I look forward to the quick implementation of these changes after the Bill is passed, as I am quite sure we will need to spend more to help Singaporeans as we go through a prolonged period of tough times ahead as a result of the global financial crisis that we are seeing today.

Sir, I support the Bill.

4.45 pm

Mr Christopher de Souza (Holland-Bukit Timah): Mr Speaker, Sir, thank you for allowing me the opportunity to speak on the Bill. I fully agree with the position of the Minister in his Second Reading speech that "A country's reserves are a key asset in a globalised and uncertain world." The

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idea of redefining our NII was first raised and mooted by our PM in 2006 to include realised capital gains, well before the global financial crisis we see today. While certainly not a knee-jerk reaction to or a spontaneous remedy for the global financial crisis, it certainly gives comfort to Singaporeans and my residents that the Government has a slew of initiatives and a multi-pronged strategy to keep our economy competitive and our infrastructures modern. Who would have thought that an initiative mooted in 2006 would have been so welcome at its time of launch in 2008?

I wish to raise four points, Sir.

The first point relates to the proposed Article 142(1A)(a) of the Constitution which states that "before the start of any financial year, the President acting in his discretion, concurs with the advice of the Minister responsible for finance on the long-term real rates of return which are e xpected to be earned ...".

However, I searched through the amendments and was unable to find a definition for "long-term" or "expected". I did find a definition for "real rate of return", which refers to adjustment for inflation, deflation, and deduction of expenses in relation to managing the assets. However, this does not give us a definition of "long-term" or "expected".

Hence, my question to the Minister is, and to echo Mr Singh, how does the Ministry for Finance define "long-term" and "expected"? I know the Minister has said "we are estimating what actual returns in the years ahead will look like when averaged out over the long term." And it seems "long term" is over 20 years, a 20-year horizon, and three business cycles. But I ask for a better definition of "expected" and "long term" because the past 11 years have seen unprecedented upheavals in the global economy, starting with the Asian

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economic crisis in 1997; September 11; SARS in 2003, and now the world economic crisis in 2008. With this in mind, I ask the Minister for his clarification on how the projection of "long-term" and "expected" is calculated. And if there is a formula for projection, would the Minister consider adding this in the amendments for the sake of certainty and predictability?

My second point is in relation to the proposed Article 142(1A)(b) of the Constitution which states that the Minister will certify "under his hand to the President the spending limit for that financial year, specifying an amount which shall not be more or shall not exceed 50% ...". My question is: how will the Minister calculate what the amount shall be within the cap of 50%? There is a vast difference – and I think Members of the House will appreciate – between, say, 10% and 45%. Hence, I wish to enquire on the considerations the Minister will bear in mind when deciding which percentage to use up to the maximum of 50%.

The third point is a clarificatory point. I wish to ask: once the President has assented to $X money being spent, has the Minister the discretion or ability to decide how much of that $X will actually be spent in the year, or must he spend the full amount? The reason I ask is the economic outlook could change dramatically in the space of a few months, and I think this point was touched on very eloquently by Mr Singh. Will the Minister be bound to spend the full $X, or can he spend less than the full amount if the global outlook has changed within that year? Must he wait till the following year before he can ask the President for a different, for example, lower amount of money?

My fourth point, Sir, relates to what this additional money should be used for. There seems to have been a lot of

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discussion and excitement over the use of this money for social infrastructure. While I am fully in favour of improving our social infrastructure in these capricious times, through worthy programmes like Workfare Improvement Scheme and ComCare, I would urge the Government and the House to remember other areas of infrastructure that are in need of funds. For example, although I notice the Minister for Health has just left the Chamber, healthcare is screaming for funds with our ageing population. There is also the need to invest in R&D and our education infrastructure, so that we can educate our young. Not to mention the need for job retraining and investment in our physical infrastructure.

Hence, my last point is to emphasise that it is not only for our social infrastructure that injection of funds is needed. There is also a need to invest in long-term infrastructure development in other areas of this nation.

With that, I support the Bill principally because it displays how the Government has a multi-pronged strategy to keep our economy competitive and our infrastructure modern.

4.51 pm

Mr Arthur Fong (West Coast): Mr Speaker, Sir, thank you for allowing me to join the debate on the Constitutional amendment. The late British Prime Minister, Sir Winston Churchill described a pessimist as someone who sees difficulty in every opportunity, and an optimist as someone who sees opportunity in every difficulty. In the financial world, it is indeed during the times of upheavals that there are plenty of opportunities for the bold and the daring. But regardless whether one is a pessimist or an optimist, there is no denying that we are entering an unchartered territory in the road ahead of us; one filled with lots of uneven and rocky path. How long, how difficult and

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the type of difficulties that we are going to face, no one really knows. I term these as the "unknown unknowns". We are veering towards the abyss with the financial markets around the world setting lower lows on the indices. For sure, lower lows on the indices and stock prices will be the order of the day for some time yet as the US takes some time to deleverage. For the past few weeks, we have seen unprecedented falls in the stock markets unseen since the Great Depression of 1930s. If I may add, with the exception of Minister Mentor, none in this House have actual memories of the Great Depression except those confined to history books.

Our latest memory of anything financial and economic hardship as earth shaking as today may be the 10-year old Asian Financial Crisis. We rode out of that crisis well, a little shaken but relatively unscathed for most and grew stronger. Sir, I might add that many too shared my belief that Singapore is likely to chart through this unprecedented global financial turmoil. It will take time but we will recover from the pain and bane of this confidence crisis.

I was at first hesitant to the idea of using more of our returns on our investments. I always believe in the mantra that you need to save, to be safe financially. For a country, I believe even more that it is necessary to accumulate reserves than to spend. This is especially so for an island city-state like Singapore with no natural resources. Our prudent investments and financial discipline put us where we are today in terms of the amount of reserves we have accumulated. The minor scuffle with hedge funds during the Asian Financial Crisis illustrates most succinctly the need to have strong reserves. The reserves give our financial system the stability in the current financial turmoil.

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The financial turmoil that is gripping the world is still unfolding. There are, I believe, still a few unknown unknowns in the horizon. The challenge it poses is confounding even the brightest mind in the world. The global financial crisis is adding more complications to Singapore's own problems.

As I reflect on the problems facing Singapore and the future challenges brought on by globalisation and interconnected financial markets and economies, I have a change of mind on the need to amend our Constitution to allow a greater use of the returns on our reserves.

Sir, this is how I see it.

The problem that falling fertility rate could cause Singapore is already quite well discussed and debated. With an ageing population, Government spending on these areas is likely to increase, if not, in some instances, it already has. For example, our Government had set aside about $8.3 billion since 2006 to strengthen social security. But what is not well debated is that with falling birth rate and an ageing population, our Government's revenue is likely to fall while spending increases.

It is very clear what is before us. With spending escalating and revenue falling, no Government in the world can go on indefinitely. The Government would at some point have to try new ways and means to increase revenue to balance the budget. The struggle before us is whether we allow a greater use of the returns on our investment or the dreaded solution of taxing more from the people.

While we have reduced personal taxes and corporate taxes, lost some tax revenue flows from the abolishment of estate duties, facing the challenges of a greying population, combined with an

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increasing mobile workforce, there will come a time when we need other revenue streams and "lifelines" for the government of the day.

This kind of crisis or other will be sure to visit us again. The curve ball will be thrown at us again for sure. Happening at a time when all the scenarios I mentioned before will severely reduce our options and our ability to see through strategies that will be vital for Singapore's continued growth. We need the financial resources to fuel us in seeing around the curve! The new framework will address the year-to-year market and return volatilities. This smoothening will lend the Government a steady hand steering towards our long-term objectives.

Nobody likes taxes, not especially when the country is holding large amount of reserves. With the passage of the Amendment, hopefully, Sir, our Government may, at the very least, not have to contemplate raising the Goods and Services Tax as often. For this reason, the choice is clear and obvious. And for this reason, I am convinced and I support the move to amend our Constitution to allow greater use of the returns on our investment.

Sir, a second factor that made me change my mind is our re-distribution of wealth. So far, for many years, our Government has been re-distributing our accumulation of wealth back to the people in the many "ang pows" that we give out annually. So much so, many foreigners see us as a benevolent paternal Government and our own people have grown to expect the handout. In a good year, we give out "ang pows". In a bad year, it comes in the form of "packages". Sir, to this end, it is therefore important that our Government be given the margin to tap on to ensure adequate social spending on our people.

Sir, let me change the tune to one of cautioning possible further use of the

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reserves down the road. It took us many years to invest wisely and saving, calling on our citizens to live on less and having Singaporeans rising to the occasion. For instance, in the past, HDB flats were providing basic lodging with clean water and electricity. We have moved on and spend more to enhance the living standards of our people including nicer landscaping, covered walkways and colourful facades of our flats. Today, we have what my residents call the HDB macam CONDOs! We have the "ang pows" and packages, but be that as it may, let us not abandon our primary policy of enhancing our reserves. Let us keep in place stringent measures to prevent easy passage of future profligate government from Constitutional Amendments that would kill our golden goose. Whether the future government is PAP or otherwise, there is no guarantee that the government of the day would not opt for the soft option of using our reserves rather than to try to accumulate more reserves. I share Mr Inderjit Singh's concerns as to how we can give the President more structured measures and controls to scrutinise the government of the day. We are but trustees of the future generation.

With this, Sir, I support the Amendment.

4.59 pm

Ms Sylvia Lim (Non-Constituency Member): Sir, the Workers' Party supports this Amendment. We believe that it is justified to broaden the definition of Net Investment Income to include realised capital gains from the relevant assets. Social spending must go up as our population ages. More social safety nets are required to address wage stagnation for lower-income earners and the higher cost of essentials such as food and electricity. The Bill provides for a cap of 50% of realised capital gains which can

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be used for current spending. This means that at least 50% will still accrete to the reserves and form part of national savings. We are thus not squandering our reserves. How much more will this additional revenue stream yield? The Minister, in his Second Reading speech, mentioned that it is expected to yield the equivalent of about 2% of GDP expenditure, which together with the 0.8% GDP yielded by the GST hike recently should be sufficient to fund the additional expenditure required. Going forward then, will the Minister confirm that there would be little justification for the Government to go back to the people to raise more revenue by further hiking GST or raising Government fees and charges? Will he confirm that the people are already doing their part and there will be no need to burden them further?

Ms Sylvia Lim (Non-Constituency Member): 5.00 pm

Prof. Thio Li-ann (Nominated Member): Mr Deputy Speaker, Sir, this latest Constitutional Amendment Bill presented in the 43rd year of our nationhood is the 38th since Singapore attained Independence. It relates to the returns derived from the investment of our national reserves. In essence, it seeks to enable the Government to spend more in each year’s Budget on its various programmes. It does so by providing that the Government may spend a certain percentage of the total returns from "relevant assets" managed by the Government of Singapore Investment Corporation (GIC) and those assets owned by the Monetary Authority of Singapore (MAS), minus certain liabilities.

This alters the formula currently set out under Article 142 of the Constitution, which relates to "Net Investment Income" or NII. Under the current legal framework

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established by Article 142(3), the Government is limited to spending only up to a ceiling of 50% of the NII of each financial year derived from the "past reserves" of Government. The current NII rule affects Government spending by placing a ceiling on what the Government may spend on two components of total investment returns on past reserves, namely, the investment income derived from interest and dividends paid out every year. It does not include other components like capital gains, for example. This Government expenditure limiting rule does not apply to "current reserves" of Government; neither does it extend to the past reserves of statutory boards or Government companies (SBGCs) listed in the Fifth Schedule of the Constitution such as the HDB and Temasek Holdings – their NII goes to their "current reserves" and may be freely spent.

"Past reserves" are defined under Article 142(4) as those reserves which the Government does not accumulate during its current term of office. A minimum floor of 50% of the NII of each financial year derived from past government reserves will be ploughed back into the past reserves. This 'grows' or enlarges the past reserves, which are not static in size. This is a 'savings' rule which feeds the national piggy bank, kitty or nest-egg.

Sir, the amendment before us relates to the Financial Provisions in Part XI, specifically Articles 142 and 144. In interpreting this section, one is not engaging in mere constitutional niceties but wading into constitutional complexities where constitutional lawyers fear to tread. Accountants and economists are more literate in adding up the numbers and making financial projections, and far better equipped to traverse this particular terrain.

Nevertheless, this Amendment Bill does affect the Elected President’s

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constitutional duty to protect "past reserves" against wasteful fiscal expenditure. It will affect the rate at which past reserves will grow. I wish to raise a few concerns and points for clarifications in this respect.

Sir, to set things in context, it is instructive to recall that prior to the introduction of the NII rule in 2001, there was no limit on what the Government could spend, in relation to investment income; it had a free hand in spending total investment returns both from past and current reserves.

The NII rule was a rule of fiscal prudence or budgetary restraint, restraining the free hand of the Government in relation to investment income derived from past reserves. It effectively binds the Government’s hand through a system of mandated prudence and enforced savings; it restrains a profligate government while allowing a responsible one sufficient operational flexibility.

I understand that over the past five years, an average of $2.8 billion from the NII was taken into the budget. Without this, the Government would have run a deficit.

During the debate over the President’s Address in November 2006, the Prime Minister expressed the germ of the thinking behind this current Amendment to relax this rule of fiscal prudence. He highlighted that in years to come, there was a need to spend more to bolster the social safety net, while avoiding a dependent 'welfare state' mentality; this would address the growing income divide and the needs of a greying population. To ensure competitiveness and economic survivability, infrastructure investments needed to be funded. The public spending bill is going up and someone has to pay the piper.

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The NII rule sought to strike a balance between the legitimate claims of today’s generation with the need to steward resources for tomorrow’s generation of the unborn. The rule seeks to reconcile the exigencies of the current with the legacy, including the blessings of financial security, we hope to bestow upon future Singaporeans long after our earthly tenure. Fifty percent of NII is locked up to grow the past reserves for future benefit, while the Government may draw from the income stream of up to the other 50% of NII to fund contemporary needs.

This current Amendment will not change this formula but it does redefine how to calculate the amount of investment returns which must be saved. It will not eat into the existing store of past Government reserves, but will affect the rate of how these past reserves will grow by determining the accretions to be added to the national kitty.

The last Constitutional Amendment which affected our "past reserves" was adopted in 2004. This related to Articles 22B, 22D and 148I which effectively removed presidential oversight in relation to transfers from the Government or Fifth Schedule SBGCs to each other, which draw down on past reserves.

Previously, the Elected President could withhold his assent or, to put it colloquially, "veto" these transactions. This power was removed, reducing the scope of presidential powers to safeguard past reserves. In 1994, a Constitutional Amendment also truncated the scope of presidential oversight over spending on defence and security measures which drew down on past reserves, under Article 151A.

In relation to the 2004 amendments to Articles 22B, 22D and 148I, the presidential oversight was replaced by an alternative 'check'. For example, if a transferor statutory board proposes to

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transfer reserves to the Government or a government company, which draws down on its past reserves, the relevant Minister or Board of Directors must undertake in writing or by resolution not to spend this transfer; instead, they must add it to the past reserves of the Government or the transferee company. In this way, the past reserves of transferee Fifth Schedule SBGCs may be augmented by such transfers. Of course, the investment returns from the "past reserves" of Fifth Schedule SBGCs are not subject to the NII rule which only applies to the Government – these returns may be freely spent, subject only to the limits of prudence.

The rationale for creating the elected presidency was to provide a check against the untrammelled powers of cabinet government in a dominant party state. The Constitution was amended in 1991 to confer novel reactionary custodial powers of the executive genre upon the President to discharge a watchdog function over financial reserves. This pre-emptive strike sought to place shackles on a rogue government seeking short-term political gain by squandering the national coffers through giving vote-buying subsidies, precipitating financial ruination.

The extremely onerous qualifications which presidential candidates must satisfy was meant to ensure that a President possesses both the competence and moral stature to oppose the Prime Minister’s decision in relation to transactions affecting past reserves. The removal of the President’s watchdog role over transactions described in Articles 22B, 22D and 148I was thus a fundamental change in the mechanisms of accountability; instead of the presidential checking function, transfers involving past reserves were to be protected by requiring the recipient body to give undertakings not to spend the transfers but to sequester this into its own pool of past

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reserves. Augmented past reserves could translate into augmented investment returns from past reserves which, in the case of SBGCs, would not be subject to the 50% cap on spending under the NII rule. This is quite a substantive change; I was surprised in studying Hansard to find that the 2004 Constitutional Amendments were not roundly debated.

However, the Constitutional Amendment before us today is not a fundamental change to the constitutional rules regulating public spending. It does not entail the re-aligning of institutional checks. It seeks to refine or fine-tune existing provisions. While the 2004 amendment related more to the shifting of money between the Government and SBGCs, today’s amendment relates more to the counting of money, the computation of what must be saved, and what may be spent, to avoid over-spending and over-saving.

Currently, our past reserves can be increased under the NII rule. In terms of the components of investment returns, today’s amendment provides a formula which casts a bigger net by providing three ways to increase past reserves: first, drew up to 50% of the long-term rates of return on investment of relevant assets; second, Net Investment Income and realised capital gains, directly attributable to relevant assets and received by the Government; and, third, a revised NII rule which excludes relevant assets in its computation.

Including realised capital gains and real rates of return should increase what is available for spending on average, except for the years where there may be capital losses or large liabilities. However, the task of quantifying such terms is rendered more difficult by today’s unstable financial markets. For example, the real rate of return is difficult to predict, given the inherent volatility of price shifts due to inflation or deflation.

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To perform these calculations, one must presumably be able to precisely identify the value or amount of past reserves. Before we can ascertain the returns, however formulated, from past reserves, we need to determine the composition of past reserves, which may include financial assets such as investments and equities and physical assets such as buildings and land.

The difficulty in calculating the NII from past reserves has been the lack of clarity regarding the size of our past reserves. Indeed, this was one of the issues President Ong Teng Cheong raised at a 1999 press conference before leaving office. He expressed concern over not knowing what past reserves consisted of and his difficulty in obtaining relevant information. How could he safeguard something which could not be clearly identified?

The problem of identification is compounded by the fact that past reserves are not static. They grow through accumulation of interest and dividends, and capital gains during the Years of Fat where budget surpluses are enjoyed. However, if market conditions are not favourable, during the Lean Years, past reserves can depreciate in value.

The size of past reserves, and many other matters relating to the "long list" of problems President Ong raised was debated before this House in July 1999. This led to the adoption of a White Paper setting forth the Principles for determining and safeguarding the accumulated reserves of the Government and Fifth Schedule SBGCs. This was a form of non-binding 'soft constitutional law' setting out non-exhaustive guidelines to promote a 'harmonious working relationship' between the President and Government, ensuring that daily government operations were not unduly fettered. The goal was to prevent any "significant" draw down

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on past reserves by the Government without the President’s consent.

Article 2(1) of the Constitution defines "reserves" in relation to the Government as "the excess of assets over liabilities of the Government". The White Paper identifies the relevant assets, that is, financial and physical assets, such as investments, loans, equities and buildings, as well as what constitute liabilities.

Article 148A empowers the President to withhold assent to a Supply Bill likely to draw down on past reserves. Article 148D provides this may be overridden, where the President rejects the advice of the Council of Presidential Advisers, by a two-thirds parliamentary resolution. If the President approves such a Supply Bill, his opinion must be published in the Gazette , which provides for some transparency.

Past reserves comprise net financial assets and physical assets. While financial assets and liabilities of the Government are calculated on a cash accrual basis, Fifth Schedule SBGCs generally adopt an accrual basis. Apart from the difficulty in listing and valuating the assets, the determination of 'past reserves' at the start of and during any current term is fraught with uncertain variables. For example, one uncertain component of past reserves relates to (a) the excess of taxes over expenditure every financial year, and (b) earnings from investments of previous reserves. The difficulty in determining the investment earnings from previous reserves is that we need to know the Government’s exact investment portfolio in order to calculate whether profits are made, or losses sustained. We would need to precisely identify these two components of past reserves for the President to make an informed decision as to whether a government budget eats into past reserves and whether this should be supported.

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Article 142(4) of the Constitution provides that past reserves are not accumulated by the current Government and include accretions deemed to be part of the reserves.

The first imponderable affecting the exercise of presidential discretion is: what is the extent of past reserves? We also need to know what the accumulations and accretions are. This cannot be known without knowledge of the extent of the Government’s holdings of financial and physical assets. However, such information, particularly in relation to the Government’s investment holdings, is not disclosed on grounds of national interests. If the President does not know whether a proposed budget draws down on past reserves, how can he or she exercise discretion?

Since the President’s watchdog duties are constitutional duties, this means, in principle, that whether these duties have been fearlessly and faithfully discharged should be subject to judicial scrutiny. On what basis will the Courts be able to determine whether the President has acted prudently or fulfilled his constitutional mandate?

The proposed amendment further exacerbates existing complexities. It introduces the new term: "relevant assets".

Under Article 21(3), the President is obliged to consult the Council of Presidential Advisers before performing certain functions such as withholding assent to a Supply Bill. Under clause 3 of the Amendment Bill, a new function is added. The President must, under the new Article 142(1A), consult with the Council before exercising his discretion to concur with the Finance Minister on the "long-term real rates of return" expected

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to be earned on the respective components of the relevant assets.

The Finance Minister must then certify the spending limit for that financial year, which is capped at 50% of the total of all amounts ascertained by applying the "long-term real rates of return". Article 142(1A) goes on to provide that any reference to past reserves in this Part shall exclude those reserves equal to the amount so certified.

If the President’s watchdog powers are triggered by potential encroachment on past reserves, this new provision apparently means that in identifying "past reserves", we are to exclude those reserves which the Finance Minister has certified as forming part of the amount to be spent for that financial year, not exceeding 50% of the total of all amounts determined by applying the expected long-term real rate of return under new Article 142(1A)(a). What might otherwise be counted as past reserves are not to be counted as past reserves. Is this so? Also, what is the rationale for the "not more than 50%" benchmark?

Furthermore, in relation to proposed clause 3(c), and the Minister’s existing responsibility under Article 142(3) of the Constitution to certify to the President the amount of the NII of that financial year from past government reserves deemed to accrete to the past reserves, can the Minister clarify what, broadly, are the items comprised within the new insertion "past reserves of the Government not comprised in the relevant assets"?

We need to know what relevant assets are before we can calculate long-term real rates of expected return.

Clause 3 offers a definition or description of "relevant assets". However, this includes more unknowns. One component of "relevant assets" includes the net assets and certain moneys of MAS, and the total net assets managed

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by the GIC and its wholly owned subsidiaries. This is not generally accessible information; indeed, it is a well-known secret notwithstanding the recent report issued by GIC on the management of its portfolio! It is unclear what the scope of "relevant assets" is. How then is the long-term real rate of return calculated? Will more information be forthcoming, perhaps in another White Paper? This needs to be clarified, in the interests of transparency.

If there is uncertainty with respect to "relevant assets", on what basis may the President in his discretion decide whether or not to concur with the Finance Minister on what long-term real rates of return are expected to be, and to ascertain that the spending limits for a financial year will not exceed 50% of the likely returns on the relevant assets? It is the President’s job not to allow more than 50% of the likely returns on relevant assets to be spent and the People who elected the President will want to know whether this task is discharged with due diligence. How is monitoring possible when it is hard if not impossible to measure what is meant to be monitored?

Can the Minister clarify whether the definition of "relevant assets" applies to current and past reserves of the Government and the other actors mentioned in proposed clause 3(d) who hold relevant assets?

Why are the assets managed by entities substantially owned by GIC, let us say owning at least a 50% share, not included in the computation of "relevant assets"? What is the rationale for using 100% ownership as a benchmark?

Should the holders or managers of relevant assets include Fifth Schedule entities, particularly, Temasek and statutory bodies? Indeed, can the Minister

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confirm whether SBGCs have been restructured or privatised so as to warrant an updating of the Fifth Schedule list?

Aside from the impenetrable imponderable of what "relevant assets" comprise of, another imponderable, particularly to those lacking public finance literacy, like myself, is the term: "long-term real rates of return". What exactly does this mean? I presume long-term means about 20 years?

The proposed provisions in this Amendment Bill provide no guidance as to what the formulation "long-term real rates of return" entails. On what basis will the real rates of return be decided? Will further guidelines be provided? Can the Minister also clarify the accounting standards and methods concerning definitions of "real rate of return", "adjusted for change", "expenses arising from or incidental to investing and managing", set out in proposed clause 3(d)? Will these be spelt out in a code or regulation pursuant to the Financial Procedure Act or other appropriate legislation? In the alternative, will untethered flexibility be the order of the day in leaving the Auditor-General or Accountant-General absolute discretion to determine the meaning of these terms? Who will hold this process to account?

Sir, my concern is this: there is a danger of extensive discretion inherent in putting vague public finance terms like "relevant assets", "realised capital gains" and "long-term real rates of return" into the Constitution, the supreme law of the land which is more suited to the articulation of broad principles rather than detailed regulations; such terms certainly do not bear self-evident meanings. Will not the vagueness in the formulation of these terms affect how the relevant constitutional actors will apprehend and apply these terms?

All the President’s men in the Council of Presidential Advisers must be able to

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render sound financial advice on these complex fiscal matters, but will they have sufficient information to do so? Indeed, if the Council recommends or the President independently decides not to concur with the Finance Minister, what mechanism is available to break this potential deadlock?

Is judicial review available, to ascertain if the President or other actors have acted constitutionally? If it is, what standards will the courts or constitutional tribunal apply?

What if judges disagree with the President or Finance Minister as to what long-term real rates of return are? We are not talking pin money or pocket change here! Will this matter be exempted from judicial determination, much like questions of security? Could the Minister kindly clarify? Are we faced with problems of definitional ambiguity, with terms not susceptible to precise evaluation? Will this hamper the operation of the proposed new regime?

Lastly, could the Minister shed some light on whether the proposed Amendments will, based on existing figures, result in increased net returns for the Government’s current reserves and past reserves, as compared to the current NII mechanism?

Sir, the system of financial checks associated with the elected presidency grafted by constitutional reform upon the inherited Westminster parliamentary system is still evolving, some 17 years after its inception. Despite its then novelty, the elected presidency was considered important enough to the scheme of limited government to warrant a unique entrenchment mechanism involving the possibility of a popular referendum under Article 5(2A) of the Constitution. This remains in abeyance. Indeed, if Article 5(2A) was in force,

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today’s amendment might necessitate a referendum insofar as it impinges on the President’s financial guardianship over past government reserves. While the introduction of the Elected President might be considered revolutionary, in confiding more executive authority in this office than that customarily associated with a ceremonial Westminster Head of State, its development trajectory has been evolutionary. This is consonant with the brand of constitutional pragmatism extant in Singapore practice, where truth is located in experience and social realities rather than grand theories or lofty abstractions.

After the passage of this Constitutional Amendment Bill, the likelihood is that the Government will want to have a 'trial run' period to test how it works. Would the Minister comment on when the Government is likely to entrench the elected presidency by bringing into force Article 5(2A), which would also give Singaporeans the long-awaited entrenchment of other constitutional provisions like Part IV, which safeguards our fundamental liberties?

Sir, in principle, I support the Government’s move towards a more liberal spending policy on social services such as workfare and health care, as it is important for the heart of a society always to care for the poor and vulnerable. This amendment by affording greater access to more money from the reserves will facilitate this. More money will also be needed to support further expenditure on education and transport, which is integral to human development. Taxes alone may not be enough, particularly in economic downturn.

Nevertheless, I find myself as a constitutional law professor somewhat befuddled with these complex Constitutional Amendments which, to me, would seem to be more at home in a statute on financial procedures and

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accounting practices. I hope the learned Minister can help shed light on the issues raised, particularly, how, given the definitional ambiguities involved, the relevant actors can effectively discharge their respective constitutional functions.

5.23 pm

Mr Gautam Banerjee: Mr Deputy Speaker, Sir, thank you for allowing me to speak on the Constitution of the Republic of Singapore (Amendment) Bill.

This Bill to amend the Constitution to fundamentally change the basis on which the government of the day can spend Singapore’s reserves has been contemplated during various discussions and debates in this House for a number of years. Indeed, every year during the Committee of Supply debate following the Finance Minister’s Budget Statement, this subject has received attention from many MPs asking the Government to undertake a review of the hitherto strict, narrow and limited ways a government can use past reserves for current spending.

The fact that the Second Reading of this very important Bill is taking place today when we are in the midst of a global financial crisis of unprecedented proportions is entirely a coincidence. However, the financial meltdown we have experienced over the past few weeks will inevitably influence the discussion and debate we will have in this House during the Second Reading of this Bill. But I view the timing of this debate as positive because it has raised the awareness of how complicated and convoluted the global financial system has become and that we cannot implicitly place trust and reliance in the system, or on venerable and reputable institutions, which for years have been pillars of strength supporting the global financial infrastructure that we have taken for granted. We are fortunate in some ways that we can take on board

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some basic "do's" and "don'ts" from this present financial crisis that we are embroiled in, as we change our Constitution to allow the use of our hard-earned and precious reserves for current spending.

Sir, before I comment on this Bill, let me say that I agree with the Government that a review of the present rules relating to the use of reserves is necessary because of the following reasons:

Our present rules only allow the use of:

(a) dividends, interest and other income received by the Government during the financial year from investing the reserves of the Government; and

(b) the interest received by the Government during the financial year from loans whenever given by the Government.

Under our current rules, all capital gains, realised or unrealised, are not available for spending.

Also, the present rules on the spending of our reserves implicitly assume that all our reserves are invested in fixed income instruments, which clearly they are not. A quick look at the accounts of GIC will reveal that a significant portion of the "relevant assets" referred to in the Bill are in asset categories such as private equity, real estate or alternative investment funds, which do not provide regular interest income on dividends. In any case, the concept of total returns should take into account not only the fixed annual income that is received from these assets, but also the change in the carrying value of the underlying assets. So unless we update the present rules on spending of reserves, we will have available for current spending only a small proportion of the total returns that are being earned on our reserves.

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Under the current rules, most of the returns being generated from our reserves will, therefore, not be available for the present generation of Singaporeans. So it is necessary to recalibrate the use of our reserves if we are to be fair to different generations of Singaporeans.

Mr Speaker, Sir, allow me now to examine and comment on the main provisions of this Bill.

The Amendment Bill applies only to relevant assets, which is defined to be assets held by GIC and certain assets held by MAS less certain liabilities. Other assets remain under the current constitution provisions, and all the capital gains therefrom are still considered past reserves.

The Minister will derive and apply an expected long-term real rate of return to the relevant assets. Fifty percent of the amount so computed will form part of current reserves. The actual dividends, interest and other income received from the relevant assets will be ignored (ie, they will go into past reserves) to avoid double counting. This "expected long-term real rate of return" is forward looking and based on the Minister’s expectations and assumptions. It may not be the same as the historical realised rate of return. It also may not be the same as the actual realised returns each year. The only check and balance is the President’s concurrence. This is a completely different basis from the current Constitution which is based on actual returns.

The inclusion of capital gains will ensure consistency in the treatment of asset classes with different proportion of yield versus capital gains. Returns from investment take the form of dividend/interest or capital gains upon disposal. Often, the two elements are inter-related. For the same investment, a

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lower dividend/interest distribution will, in theory, result in higher eventual capital gains, and vice versa, for example, high growth companies. Hence, it is inconsistent to include only the dividend/interest but not the capital gains.

The "expected long-term real rate of return" entails the use of various assumptions and expectations about the future. These are subjective, so the Bill seeks to incorporate certain safeguards into the proposed amendment.

Firstly, only 50% of the long-term return is allowed to be used. This provides some buffer against uncertainties, which are inherent in any forward-looking assumption and expectation.

Secondly, the Minister is required to review the long-term real rate of return each year. This ensures that current market conditions and outlook are taken into account, and the rate revised if necessary.

Thirdly, the President has to concur on the long-term real rate of return each year. This allows a process of check and balance on the assumptions and expectations adopted. This is very important given the subjectivity and judgment involved in deriving the rate.

I believe the checks and balances in the Bill have been well thought through, but my main concern is that they must not only work but be seen to work by Singaporeans at large. We have to step up transparency and communication compared to what we do now. Unlike the present system, which is based on historical earned income, the proposed new system will be based on assumptions of future trends and outcomes – and requires a great degree of judgement. So we should discuss and embellish the checks and balances. I have the following suggestions, which I would like the Minister to consider:

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The "expected long-term real rate of return" used for the computation should be capped by the actual historical long-term real rate of return of the components of the relevant assets. While the past is not necessary an indication of future investment performance, a cap based on historical actual return provides a sanity check on the assumptions and expectations adopted. In the long run, the historical cap will be automatically revised upwards if the actual returns consistently turn out to be higher.

(2) Both the "expected long-term real rate of return" used in the computation and the "actual historical long-term real rate of return" should be published.

(3) The basis of computing "expected long-term real rate of return", including assumptions to be made, should be set out and consistently applied from year to year.

(4) As part of his annual concurrence with the "expected long-term real rate of return", the President should have powers to review the assumptions and expectations adopted, the application and any change in the basis used, and the computation. This review should be carried out independently of the Government. A process for this review, including the resources and expertise that will be required to support the President should be clearly set out, discussed and debated in this House.

Given the very significant changes and their implications for the future, it is worth spending time satisfying ourselves in this House that we not only have a robust system of checks and balances, but there is also good communication and transparency.

Sir, at the end of the day, we can have all the checks and balances in place but as the financial crisis that we are

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embroiled in has clearly demonstrated, that unless the people in charge are competent, honest and have the interests of all Singaporeans at heart, the system will fail. By amending the Constitution with this Bill, we are raising the stakes and the demands on the Government of the day. So the clear message to all Singaporeans is that we should continue to have the best, brightest and honest amongst us to be in charge of the Government and the finances of the nation.

Before I conclude, I would like a clarification from the Minister. Given that the expected rate of return includes both realised and unrealised investments, how is the Government proposing to fund the amount available for current use if the long-term expected rate of return exceeds the realised dividend/interest and capital gains each year? Sir, put in another way, how do we manage the liquidity issue because the expected long-term rate of return is based on assumptions and expected outcomes, not actual cash that has been earned?

Sir, thank you for giving me this opportunity to speak on this Bill.

5.32 pm

Mrs Josephine Teo (Bishan-Toa Payoh): Mr Deputy Speaker, Sir, I rise in support of the Bill.

Sir, the call on Government to tap its reserves to fund spending has been made consistently. This is to avoid having to tax Singaporeans more heavily, such as through GST increases, even as we increase public spending.

The proposed amendment is another step to allow Government to tap more into our reserves. I note that the Government has taken pains to ensure that the proposed amendment will preserve the real value of past reserves at

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minimum and allow for the reserves to continue to grow. This is important.

The Finance Minister has explained that the changes are to meet our increased spending needs. The Government has estimated that these increased expenditures will cost an additional 3% of GDP within five years, whereas our increased GST will generate additional revenues of about 0.8% of GDP. Therefore, on the assumption that current revenues are just about meeting current expenditures, we will face budgetary shortfalls in the future. The Minister had earlier said that our budget had stayed neutral, on average, since 2001. However, if we look over a longer time horizon, we see a different picture.

Indeed, we had budget surpluses for 14 of the last 20 years since 1988, except for the six years from 2001 to 2006. Cumulatively, in the last 20 years, we have generated over $50 billion in surpluses. What then are the reasons for the Ministry to expect that this record of performance cannot be sustained? I hope the Minister can give a more complete picture of the expectations on our current revenue sources while we are not expected to grow much further in the future.

A related question is: if we do not have the Net Investment Return (NIR), does it mean that we have to forego the increased spending? Or does it mean that we have to use other funding sources, eg, issuing Government bonds? It would be useful also for the Minister to share the Government's considerations in using different funding sources. Have we considered the cost effectiveness of tapping our reserves instead of these other funding options? For example, if our expected long-term real returns are 5.5% and the bond yields are 5%, is it

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not better for us to issue bonds instead of tapping on our reserves through the NIR?

My second area of concern is what happens if the actual real returns are lower than expected real returns over a five-year period, for example. Supposing the expected real returns of 5% and if inflation exceeded expectations by 3% over a five-year period, or if our investment returns were actually poorer over the five-year period, do we still stick to the original long-term projections or do we make the necessary adjustments? What happens to the money that we have already taken into the budget and spent them all? Do we adjust the next tranche taken into the budget to recognise the over estimation?

Finally, there is the question of risk. Just because we can tap more into our reserves, it should not become a licence for us to spend on extravagant projects. With the proposed amendment, Singapore's reserves will still grow but the risk is that the growth is much slower. This is unless the increased funds taken into the budget are used wisely to strengthen Singapore to generate more growth which will in turn multiply our reserves. Therefore, I propose that the following criteria be considered before committing to a large expenditure in the future:

First, it should stretch Singapore's growth potential right through our limits of growth with potential multiplier effects.

Second, this sort of expenditure should help to keep Singapore a shining city for all.

Third, it should allow Singaporeans to share in the fruits of our success, to improve substantially our quality of life, thereby generating the support for our future growth strategies.

Sir, if I may, I would like to conclude my remarks in Mandarin.

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( In Mandarin ): _[For vernacular speech, please refer to Appendix A.] _ Mr Deputy Speaker, I heard this saying recently: if there is a mountain, we depend on the mountain; if there is water, we depend on the water. If there are no mountains and no water, then we have to depend on our two legs. Throughout our 43 years of nation-building, we have adopted such an approach, stayed united and cultivated a society based on self-reliance. As a result, Singapore has surmounted all odds and developed steadily. We are now able to enjoy a high standard of living. However, we cannot depend on our "two legs" alone in achieving future progress. The Chinese say it is like rowing a boat against the tide – you move either forward or backward. We face intense competition and must dare to innovate. For example, oil-producing countries in the Middle East can tap their vast resources. They can plan ultra-modern cities that the world has never yet seen, they can recruit top global talents in every field, and they can set up first-class research universities.

We do not have oil, but our reserves are quite substantial and can be better utilised. This Amendment Bill will indeed provide us with more revenue to spend on economic development and social infrastructure. However, we must establish the pre-condition that most of these funds will be used to break through our limits of growth, and should not be squandered on extravagant projects. Our attitude should not be to "depend on our reserves, if there are no mountains, no water". We have to depend on our intelligence, our wisdom, so that we can use our reserves sensibly, rationally and appropriately for the benefit of our nation. Only then can we hope to secure the steady development of Singapore.

Sir, I support this Amendment Bill.

*Cols. 473-474.

5.39 pm

Ms Jessica Tan Soon Neo (East Coast): Mr Deputy Speaker, Sir, thank you for

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allowing me to speak on the Constitution of the Republic of Singapore (Amendment) Bill on the proposed new framework for spending of investment returns.

I rise in support of the amendments to the Constitution for the new framework for spending investment returns, as the intended principles of the amendments are to increase the contributions of investment returns to the budget while preserving the real value of past reserves, and also to allow for the reserves to grow. Given the current economic situation, I think all of us will agree that the amendment is a timely and welcome one to increase the funding to the budget to support both important social and developmental spending. I would also like to ask the Minister whether all other channels of sources of income have also been considered apart from increased taxes, because I think many will agree that given today's current economic situation, as Minister Lim Hng Kiang had earlier shared the stickiness of inflation, and that further taxation of our people would definitely have adverse impact. So this is definitely welcome.

Sir, let me now touch on the point of preserving and enhancing the value of our reserves. Minister Tharman had reiterated the point that given Singapore has no natural resources, it is vital that we ensure that we drive for economic growth and increase spending for longer term social and developmental needs, as we continue to grow the value of our reserves. As this new framework will be based on the long-term expected returns on investments by GIC and MAS, this would, to some extent, introduce risk to spending ahead of actual monies received or realised value of capital gains. This will increase the risk profile. I hear the reassurance given with the proposed governance framework to safeguard the reserves, but echo the same concerns

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highlighted by my parliamentary colleagues who have spoken before me on the need for clarity of the definitions of "long term" and "expected returns".

If we continue to see the extreme economic situation and adverse conditions that exist and that we are experiencing in the markets currently, will the 50% cap on NIR and the amendments to governance process to enable the President's role in safeguarding the past reserves be sufficient? While I appreciate the expected returns approach to avoid the inherent volatility of total returns on an annual basis, and this prevents also a feast or famine approach based on a bull and bear market respectively, I am concerned on the possible erosion with a few years of under performance to be expected to the reserves if expected returns for whatever reasons due to the adverse market conditions continue to erode the value of the reserves.

Will the proposed change in the budgeting process or the governance model enable the elected President's role in safeguarding our past reserves allow for constructive dialogue and flexibility to reach agreement on the proposed rate of long-term real rate of returns? Will the process allow for the President to have consultation with an independent board of advisers on the proposed long-term rate of returns?

I see the wisdom of having the mechanism to break the deadlock in the event of a dispute to revert back to the average historical rate of returns. I believe the Minister mentioned a 20-year period that would be used, although this is not optimum. Would the process allow for intervention to review the proposed rates in the event of prolonged under performance against expected returns? Apart from just having a mechanism to revert to just the historical rates of

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returns, will the process allow for consultation and review of the rates?

Sir, I hope the Minister will be able to clarify these areas, because I believe that the amendments are the right ones to support the need for increased spending and to continue the investments required to keep Singapore competitive. But these areas need still to be discussed and clarified.

With that, Mr Deputy Speaker, Sir, I support the Bill.

5.44 pm

Mr Seng Han Thong (Yio Chu Kang): Mr Deputy Speaker, Sir, I will speak in Mandarin first.

(In Mandarin ): _[For vernacular speech, please refer to Appendix A.] _ Mr Deputy Speaker, this amendment to the Constitution will be very significant to the future of Singapore, particularly to narrowing the gap between the poor and vulnerable group and the rich people in Singapore. I would support the Bill. I will speak first on a matter of principle and then on some technical points.

First, on a matter of principle, the amendment is to expand the definition of the "net investment returns" which could be utilised by the Government. Why should we do that? Prime Minister Lee Hsien Loong had already mentioned this in the year 2006. What the Government is trying to do is to spend more money on helping the low-income people, so that they will have a better standard of living. This move on expanding reserves so as to increase spending on the poor and vulnerable group is worthy of support by all the people of Singapore, especially in tough times when the economy is going through a restructuring. The economy has been developing so quickly and its growth is so fast that many people, especially those in the poor and vulnerable group,

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are not able to catch up with the rest and are lagging behind. Some of them in the elite group have even fallen behind and become part of the vulnerable group.

If we go to our neighbourhood, we can find that there are a lot of new immigrants. They come and they are seen by Singaporeans as the privileged group. With comparison, the people found that they lose their advantage to the new immigrants. So I think to spend more of our reserves to help the vulnerable group is something which we need to support. Who are the vulnerable people? In the community, we see more ice-cream vendors – whether the weather is fine or no good, they will have not much business and they will have problems to make ends meet. In the manufacturing sector, when the factories change their production mode, these people will lose their jobs. But, fortunately, with the help of the Government, the subsidies given to these elderly workers helped them to undergo retraining programmes through NTUC to acquire new skills, so that they can be employed. However, the process will take a long time and life will be difficult for them.

For these people, they may not understand why electricity tariff will be raised. When it is raised, it is raised by such a big margin. And when price went down, it is just a little. When the Formula One was in Singapore, they could not understand why some people could spend few thousand dollars but they could not afford to. And they do not understand why we are digging up our roads. When we are digging up the roads to lay underground cables, it is to provide gas or build underground tunnels, so that all these facilities will enhance the value of our property. So, in other countries, one square foot of land can be just a dollar, but it can cost a few thousand dollars in Singapore.

Of course , all know that the Government is capable of creating wealth.

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Recently, the Government Investment Corporation (GIC), for the first time, published its annual report and the average rate of return is 4.5% over last 20 years. Therefore, the people are confident of the Government's investing strategies. And they say, if you want to have sound investments, we need the veterans, people like Minister Mentor Lee Kuan Yew and some of our senior Ministers. Our GIC has been able to generate good returns on our reserves because they have been very prudent and they have very good strategies.

In the face of the financial crisis, many people, especially the vulnerable elderly, would ask why the Government has not encouraged senior citizens to keep their money in CPF, so that they can enjoy 5% interest. It is better keeping the money with CPF as with the money in hand, they go to coffee-shop and may get cheated. When they invest in stocks and shares, they may lose money. We all know that the Singapore Government has been giving a lot of rebates and ang baos to the people, yet people are complaining that it is not fair. The Government has been kind and it simply deposits the money into their bank accounts. Unlike in Indonesia, we recently heard of the case of a rich man who was distributing money to the people – just 40,000 rupiahs, which is about $6 – it had resulted in a mad rush for the money, and many were crushed to death. Eventually, 23 people died in the stampede.

In Singapore, the money is wired straight into the people's bank account. But, on what criterion? If we give more to the old, then the young ones will say it is not fair. If you give more to the 3-room flat dwellers, the 5-room dwellers will say it is not fair to them. If you based it on income, some will say they have more mouths to feed. So it is difficult to satisfy everybody. I think we should adopt a different approach based on economic

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growth. When times are good, we should give healthcare incentives and CPF top-ups to the people. When the economy is not so good, we need to care for the people, eg, giving transport vouchers and other vouchers to help the poor and vulnerable people. Because the Government can generate wealth, that is why it can afford to distribute the money to the people. I think we should distribute more to those who need the money and not just equal distribution to everybody.

Mr Deputy Speaker, I will now speak in English on two technical points so that the Minister for Finance will understand better.

*Cols. 475-478.

(In English) : Mr Deputy Speaker, Sir, the proposed changes will definitely be helpful to free more earnings or returns on the investment of the reserves. The Government will have more funds at its disposal to invest in the longer term social needs of Singaporeans, such as education, healthcare and socio-economic infrastructures. I have two technical questions for the Minister: (1) How would the long-term expected return be calculated? Does it include mark-to-market losses that most likely the GIC and Monetary Authority of Singapore's investments in property equity and debt securities would have suffered during a financial turmoil? How could the Government predict the future since it is "expected return"? What happens if the realised return over a period turns out to be negative?

(2) This proposed change has opened up more revenue sources for the Government to spend. The Government may also want to set some ground rules on how it should be spent. For example, should the spending of fund from a realised capital gain be channelled mostly, if not all, to long-term development needs or building the long-term competitiveness for Singaporeans?

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5.52 pm

Mr Lim Biow Chuan (Marine Parade): Mr Deputy Speaker, I support the Amendment Bill to the Constitution of the Republic of Singapore.

Sir, the Bill seeks to amend the Constitution to allow the Government to spend up to 50% of the Net Investment Returns or expected long-term real returns on net assets invested by the GIC and MAS. This will allow the Government to have access to more funds which would include capital gains which are available from the investment of the Government reserves.

The current financial turmoil has affected many countries in the world and this has led to predictions of a difficult depression. Singapore is already in a technical recession and there is this fear amongst many companies and workers that there will be slower growth next year, job losses and fall in income. Allowing the Government to have access to more funds would certainly allow the Government greater flexibility to achieve its plans to develop a top-quality economy and to build a resilient community. For this year's budget, even with a contribution of $2.22 billion from the Net Investment Income, we still end up with a budget deficit of $0.8 billion. In view of the current economic crisis, there are predictions that tax collection is likely to fall, and it is thus critical for the Government to be able to tap on a bigger source of funds which take into account the total returns on the reserves, including capital gains. With the flexibility of tapping on up to 50% of the long-term real returns and up to 50% of Net Investment Income from the reserves, the Government would be in a better position to plan its expenditure for healthcare and other social expenditure like Workfare. There is already a huge demand on Government expenditure to develop the infrastructure of the country like spending

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on education, road expansion, development of a larger trade network and public housing. Without the additional source of funds, the Government's other option may be to raise taxes like GST.

There may be some people who ask whether by this amendment, we are saving less for the future. In 2001, during the debate on the amendments to this same Article 142 of the Constitution, the former Minister for Finance said that "past reserves belong to the people, and the Government is merely a guardian and steward of these reserves". Minister Mentor also said that the Government owed an obligation not just to the present generation but also to the future generation. I feel that we can strike an appropriate balance in saving sufficiently for the future as well as providing adequately for the present generation. At the end of the day, there will still be at least 50% of the Net Investment Returns which will go back to the reserves as savings for the future. Further, the more we save in the reserves, the lesser funds we have to spend for the current generation. The question really is how much do we wish to save for the future generation at the expense of the present generation of Singaporeans. Perhaps the Government can clarify whether it has a long-term fixed target as to how much it would wish to maintain in its reserves or how much does it wish to grow its reserves too.

Sir, if you speak to the people of the present generation, they will all complain about the increased cost of living. They complain about the increase in taxes via the GST, the increase in property tax, healthcare cost, ERP, public transport fares, food prices, even telephone charges, and the recent hike in utility charges. The general perception for the man-in-the-street is that what they earn is never going to be enough to offset against the ever increasing cost of living.

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And the frightening thing is that as the population ages, the cost of healthcare would definitely go up, and so would other social costs as the income gap widens between the rich and the poor, as well as the lower-middle income. The question to me is not so much whether we should allow the Government to use up to 50% of the Net Investment Returns from the reserves but, rather, how do we spend the funds wisely.

Hence, I urge the Government to consider using part of the funds available from the Net Investment Returns to help keep costs down for the average Singaporeans. If the Minister for Finance is able to estimate a higher long-term real rate of return to more than 2% of GDP, could the Government consider a reduction in GST or a reduction in property tax to keep the cost of living down? I would also urge the Government to consider reduction in public transport cost by cutting some indirect taxes on the public transport companies. What about having a bigger budget for some Government agencies, like the ICA or the Police, so that they can employ more contract staff to improve on their response to the public?

Sir, I would prefer that the Government finds ways to keep the overall cost of living lower rather than provide targeted financial aid to the needy as the only solution. I watch with concern each time we have an increase in transport fares, telephone charges or utilities. And what we see is a long queue of people at the community clubs applying for financial help to cope with these increases. But, really, Sir, there is nothing much they can do as the cost of living is simply too much to bear for many of them. For the many lower-middle income or middle-income residents who do not qualify for the financial assistance or transport vouchers, they seethe in anger quietly as they see

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their savings deplete with every increase in cost of living.

As a Member of Parliament, I know that the Government is spending huge amounts of money on utilities rebate, Edusave top-ups, Senior Citizens Bonus, GST credits, etc, to help these people cope with the increase in cost of living. However, each time I meet my residents, I never cease to hear repeated complaints from them that life is more difficult and that their income is severely stretched due to the various increases in the cost of living in Singapore. It is not my intention to ask that the Government spends its income in an imprudent manner on the current generation, but I believe that the Government can and should use part of the Net Investment Returns to help ease the cost of living for its citizens.

With this, I support the Amendment Bill.

5.58 pm

Mr Siew Kum Hong: Mr Deputy Speaker, Sir, thank you for allowing me to participate in this debate. As a Nominated Member, I will not be able to vote on this Constitutional Amendment. Nevertheless, I wish to express my support of this Bill.

Sir, the world is on the verge of a global recession or has possibly already entered one. Indeed, Singapore is already in a technical recession and things will almost certainly get worse before they get better. The Government has always said that it is building up the reserves for a rainy day. Well, it is going to thunderstorm over the next few quarters and Singaporeans will be expecting the Government to use the reserves to help Singaporeans. So the timing of this Constitutional Amendment could not have been better.

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This Amendment will unlock more of the investment returns from our reserves to fund social expenditures than are needed today. The economy has in recent years become less reliant on direct taxes and become more reliant on indirect taxes. But with the upcoming economic troubles that Singaporeans will inevitably start running into, this means that there will be less tax revenue precisely at the time when more help is needed for struggling Singaporeans. So being able to tap on more of the returns from our reserves will go a long way in helping the Government balance its books.

The Minister has explained the mechanics of this Constitutional Amendment and I will not go into that. It suffices to say that the current formula artificially excludes capital gains from the calculation of investment returns from the reserves and the new formula corrects this by including realised capital gains in the returns that may be used, and hence presents a much more accurate measure of these returns. Having said that, I have a few concerns that I hope the Minister can address and, perhaps, clarify.

Firstly, the new formula will not apply to Temasek Holdings' portfolio of assets which is not included in the definition of "relevant assets" introduced by clause 3(d) of the Bill. The new formula applies only to relevant assets which will comprise only the assets managed by the GIC and the assets of MAS, less the Government's liabilities.

The Minister has stated the reasons for excluding Temasek Holdings, but this exclusion remains surprising. After all, Temasek is reported to have achieved a historical annual rate of return of 18% or so. Temasek is perceived to be similar to a private equity fund, which is prepared to make higher-risk investments than GIC. In a way, it is the higher-risk and higher-return portion of the Government's diversified portfolio. Presumably, the

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higher rate of return enjoyed by Temasek over GIC is at least substantially due to capital gains in Temasek’s portfolio. To exclude Temasek’s portfolio from this new formula would be to undercut the new formula and remove much of the potential benefits.

The sizes of GIC’s and Temasek’s portfolios are not publicly known. It is, therefore, impossible for the public, and indeed this House, to ascertain what are the effects and repercussions of excluding Temasek’s portfolio of assets. Hopefully, the Minister can elaborate on why Temasek’s portfolio is excluded from the new formula, and what impact this exclusion will have on the amount of incremental budget that would have been available to the Government. In this regard, it will also be very helpful if the Minister could shed some light on what are the Government's estimates of the fiscal effect of these changes.

Following from this exclusion of Temasek’s portfolio of assets from the new formula, it becomes possible for the Government of the day to manipulate the actual amounts that become available for use under the new formula. If the Government of the day wants to increase the returns from the reserves that are available for usage as net investment returns, it may seek to transfer assets from Temasek's portfolio into the assets under GIC's management, so that these assets then become relevant assets to which the new formula applies.

This possibility cannot be desirable. There should be more transparency, and more controls, over the allocation of reserves between the respective portfolios of Temasek and GIC, so as to prevent such situations. Of course, bringing Temasek Holdings under the umbrella of the new rule will obviate any such manipulations.

Also, on the point of transparency, the President and the Minister have to agree

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on the expected long-term real rates of return of our reserves at the start of each financial year, and the Minister then has to certify to the President the amounts available for spending using the agreed expected long-term real rates of return. Prof Thio has rightly noted that the President may have difficulty in determining whether the Minister's proposed rates are appropriate.

Furthermore, the Constitutional provisions do not require the rates of return, or the basis upon which they were calculated, to be published. There is, therefore, no way for Singaporeans or this House to evaluate whether the agreed rates are appropriate. One would also expect the expected long-term real rates of return to be consistent over time, but there is no way for the public to ascertain whether the agreed rates between the President and the Minister are indeed consistent over time, or whether they change radically from year to year. These are potential flaws that could weaken the strength of the system we have put in place to protect our reserves.

Still on the issue of the expected long-term real rates of return, these rates effectively set a benchmark for the performance of GIC. That must be so, because the rates effectively state the returns that we expect the assets managed by GIC to achieve over the long term. That being so, I hope the Minister can confirm whether the long-term performance of GIC will be assessed against these agreed rates, and if so, how that will be translated into a system to measure the annual performance of GIC, which admittedly will fluctuate from year to year. But if the Minister does not intend to use these agreed rates as a benchmark for measuring GIC’s performance, I hope the Minister can clarify why not.

Indeed, this further strengthens the case for including Temasek Holdings

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under the new formula. When the Government was queried on the performance of Temasek Holdings and GIC in the past, it has consistently maintained that it looks at their performance over the long term. This is an answer that, I dare say, has not sat well with many Singaporeans.

We now have a mechanism for assessing the long-term performance of our reserves. So, why not take advantage of this opportunity to place both Temasek and GIC within this framework, so that in future there is an objective benchmark against which the performance of these companies can be measured? This would be the perfect answer to those who are concerned with ensuring that the performance of Temasek and GIC are adequate.

There is also a question over the treatment of unrealised capital losses. The definition of "realised capital gains" includes realised capital losses. So, how will unrealised capital losses be addressed? Does GIC adopt any form of mark-to-market accounting that would capture such losses? I hope the Minister can shed some light on this.

Finally, I would like to take this opportunity to touch on the investments made by Temasek and GIC in the recent past. I do not propose to discuss the merits or otherwise of the massive investments into the financial institutions. I believe that it is perhaps too early to tell whether or not they were wise.

However, I would make this point. Now that the returns from the reserves have assumed a much more important role in the Government’s budget, the reserves have become even more relevant to the people. This Bill will more closely

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align the size and performance of our reserves, with the well-being of Singaporeans. Singaporeans frequently ask, "What is the point of having massive reserves that are never touched and are never used to help us?"

With this Bill and with these changes, the point should start becoming clear to the people. That being the case, Singaporeans will expect more transparency, more accountability and sustained good performance in the management of our reserves. That is because the Government’s ability to help and improve the lot of Singaporeans will become more tied to the continued strong performance of our investments.

When the investments by GIC and Temasek perform poorly in a financial year, could this affect the expected long-term real rate of return in the next financial year, which would then affect the amount of funds available to the Government to use in helping Singaporeans? It will be even more unsatisfactory to Singaporeans, if they learn of more big investments using their reserves that do badly, and are told by the Government that it does not micro-manage GIC or Temasek and that they invest for the long term.

That was the answer given when the investment into Shin Corp was made, and when the investments into the financial institutions such as UBS, Citigroup and Merrill Lynch were made, and many Singaporeans were not satisfied with that answer. We can expect them to be much more unhappy in similar cases in future, because their well-being could become much more directly affected by the performance of such investments. The Government will have to be much more conscious of this moving forward, and will have to better accommodate and address the concerns and questions of Singaporeans with regard to our reserves.

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Sir, I have made some criticisms of the Bill, and have touched on some areas of concern that I hope the Minister can clarify. But there should be no mistake in whether I agree with the objectives of this Bill. I firmly do, and I endorse it even though I am not able to vote on it. With that, I support this Bill.

Mdm Ho Geok Choo: Mr Speaker, Sir, I rise in support of the Bill as the new approach to calculating what is available for expenditure by the Government is based on sound premises.

Firstly, the new approach could make the investment of GIC and MAS more transparent, a path that benefits Singapore to take, as it is a significant player among the sovereign wealth fund investors.

Secondly, by including capital gains in the calculation, it will turn Singapore from a typically cash-rich, comfort-deprived individual who prefers money in the bank to a standard of living that a more generous use of savings can buy to one who lives comfortably yet continues to live within his means.

Thirdly, there are enough safeguards against overspending, namely, (i) President has to assent to the long-term rate used for estimating what's available to be spent; (ii) only 50% of what is available will be spent as the 50% cap on maximum spending is retained even within the Net Investment Returns model; and (iii) not all the Net Investment Returns will be used for current expenditure for improving the hardware, such as transport infrastructure, and software, such as healthcare, education and to give more assistance to the low-income group of Singapore, and could be regarded as capital investment for the future with their own future returns.

Sir, there is some concern, as expressed by some colleagues before me,

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that long-term rate used to determine what is available for spending may over-shoot or under-shoot the real outcomes, and, hence, Government could be spending more than is available in bad years and underspend in good years. Sir, underspending should not be any reason for concern if it means that the future turns out to be more bountiful than projected. However, if under-projection becomes the norm, then we know that the formula and those providing the scenarios may need to be fine-tuned.

Sir, the real area for concern is when the mismatch between projection and outcome is due to over optimism and Singapore is spending more than its investments are yielding. Even then, the 50% bar will ensure that overspending will not be to an extent that eats into the capital and the capital gains within the reserves. Perhaps one way to even out the feast or famine situation and also to reflect that in international markets where high volatility is currently the norm and where it is not always possible to make long-term projections with nano accuracy is for us to have an equalisation fund. Such a fund, Sir, would drain off the excess from under-projected returns in years of plenty to supplement the lean years when projected returns are far above what materialise eventually. However, given that long-term rates covering 15 to 20 years will be used, representing, as the Minister had earlier mentioned, several business cycles of today's fast-moving business world, it is likely that the outliers would be moderated and there would not be wild swings between actual and projected returns from year to year.

Sir, I would also like to suggest another potential alternative for the use of Net Investment Returns as a formula for budgeting due to the risks involved. To address the volatility of earnings and, hence, its impact on Government's

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spending, perhaps we can retain the use of Net Investment Income as the basis for our budgeting. However, capital gains and losses could be included in the calculation of net investment income. We can also include a new provision that requires parliamentary or presidential approval for the Government to draw down amounts exceeding 50% cap on Net Investment Income. This approach would ensure a measure of safety in that our budget is still based on money that has been received but allows for flexibility should the need arise.

At this juncture, Sir, I wish to register a few points. One is on the sentiment from some Singaporeans. I am concerned with the public perception of the timing of introducing this Constitutional amendment as, at one time, it was decided to lock the reserves. Subsequently, the Government unlocked the reserves. Now, with the deepening financial crisis, any change made at this stage may lead people to perceive that the Government is in a financial mess. It is, therefore, important that the Government address this point with the people.

Secondly, I would like to suggest that provisions be made for an annual review to be carried out by an independent body to check whether Net Investment Return when implemented, in effect, eats into the reserves.

How much will the change from the regime of Net Investment Income or Net Investment Returns raise the amount of money available to the Government in absolute terms is another question which I hope the Minister would be able to throw some light on.

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Fourth, like colleagues before me, I would also like to ask why have Temasek's assets been entirely excluded from the Net Investment Returns regime. Should these assets at least be included in the changes that deem as realised capital gains directly attributable as part of the past reserves?

Fifth, Sir, I would also like to stress on the need to eliminate wastage and unnecessary expenditure and for us to look for ways to ensure efficiency in generating income. For example, some of the unused buildings could generate rental income and be put to good productive use instead of being left unused.

Finally, Sir, in support of this Bill, I wish to reiterate that, of course, incomes like dividends and interest are usually more predictable than the growth in the value of an investment and what the capital gains realised may be should the investment be sold. Still, dividends and interest income do not operate in vacuum and are related to market and economic performances. Injecting the capital gains component into what is available from the country's reserves would provide us with a useful third leg in the pool of funds available to support the Government's annual budget spending especially in a slowing economy in the next few years.

Sir, on this note, I would like to support the Bill.