FIRST SUPPLEMENTARY ESTIMATES OF EXPENDITURE FOR THE FINANCIAL YEAR 1ST APRIL 1996 TO 31ST MARCH 1997 (Paper Cmd. 6 of 1996)

Dr Richard Hu Tsu Tau: Mr Speaker, Sir, the First Supplementary Estimates of Expenditure for the Financial Year 1st April 1996 to 31st March 1997 will be introduced to Parliament in the Committee of Supply later today. In it, the FY96 Main Estimates approved by Parliament for FY96 will need to be augmented by $4.2 billion under the Financial Transfers head of expenditure. $2.7 billion of this sum will be required to pay for Government's subsidy in its second offer of Singapore Telecom shares later this year. The remaining sum of $1.5 billion is the compensation Government will pay to Singapore Telecom for the earlier termination of its exclusivity rights. In addition, the FY96 Development Estimates approved by Parliament will also have to be augmented by $3.05 billion through Supplementary Development Estimates.

The additional sums requested are to meet several items of expenditure for which no provisions were made in the FY96 Budget. I will now explain the reasons for these requests.

Item 1 -- Government subsidy for the second offer of Singapore Telecom shares (ST2)

In the Budget Statement this year, I announced that the Government will be making a second offer of Singapore Telecom (ST2) shares to Singaporeans this year. This is part of Government's effort to build a share-owning society, to enhance the assets of Singaporeans, and to give Singaporeans direct stakes in the growth and prosperity of Singapore.

The shares will be offered at a discount to the market price. They will also come with a loyalty bonus package, similar to that offered in the first Singapore Telecom issue (ST1) in 1993, to encourage Singaporeans to hold on to the shares as long-term investments. Hence, Singaporeans will not only pay less than the market value for the shares, but will also receive bonus shares which they do not have to pay for, provided they hold on to their shares.

Every Singaporean who takes up the offer will therefore enjoy a direct subsidy on the ST shares. The present Government will bear the cost of the subsidy. It will pay out of the Budget to Temasek Holdings a sum equal to the difference between the market price and the discounted price of the shares, plus the value of the loyalty shares. This will make the subsidy explicit.

We have not yet finalised the details of the share offer. We will announce the number of shares per citizen, and the price of the shares in due course. I have budgeted a sum of $2.7 billion in the Supplementary Supply Bill for the total subsidy, based on preliminary estimates.

This is about the same amount as the subsidy involved in the first Singapore Telecom shares issue. But for ST1, we did not bring the subsidy out explicitly, so that Singaporeans were unaware of the large subsidy they had received. Hence, the Government has decided to treat ST2 differently.

The eventual subsidy will depend on the discounted price of the shares, the prevailing market price of the ST shares at the time of share issue on allotment, the number of shares offered, and the take-up rate. If the $2.7 billion turns out to be insufficient, we will increase the budget further.

The subsidy of $2.7 billion will be paid from the budget surpluses accumulated by the present term of Government. It is a major expenditure, equivalent to 2% of GDP, or more than $1,000 per adult citizen. It is also more than 40% of the budget surplus originally estimated for FY96 of $6.4 billion.

The Government is able to offer this subsidy only because the economy has done well, and we have achieved healthy budget surpluses. As long as Singapore continues to prosper, Singaporeans can look forward to more of such discounted share offers, and other asset enhancement schemes. And they will see their assets grow together with the economy. The Government's Asset Enhancement Programme will ensure that Singaporeans will always be able to share in the success of Singapore. Item 2 -- Payment of $1.5 billion compensation to Singapore Telecom

On 1st April 1992, Singapore Telecom (ST) was granted a licence which gave it exclusive rights to provide telecommunication services in Singapore for a period of 15 years until the year 2007.

At the time, it was not possible to foresee the speed with which the telecommunications market worldwide and in the region would be opened up, and the rapidity with which technical advances would revolutionize the telecommunications and information transmission markets. These changes make it necessary for the telecommunications market in Singapore to be opened up to international competition much earlier than envisaged, so as to allow Singapore to harness the full benefits of the technological changes in order to maintain our position as a telecommunications hub in the region.

As a result, Government announced on 11th May this year its intention to introduce competition in the telecommunication industry in the year 2000, to allow Singapore to benefit from the full range of capabilities and opportunities made possible by the deployment of the latest technology, services and applications and to prepare the industry for the intensifying of world-wide competition. This required a modification to the licence granted to Singapore Telecom on 1st April 1992.

The granting of a licence and the rights, terms and conditions under the licence are rights conferred by Government to a public telecommunication operator granted the licence. These rights could be modified subject to compensation, where appropriate, for any damage arising from the modification. This is provided under the Telecommunications Authority of Singapore (TAS) Act 1992. TAS has to make sure that the Government is fair to these operators who have made substantial investments in infrastructure and network facilities in order to provide services within the understanding of the licence given to them earlier. This reputation of fairness is something we want to uphold.

The Government engaged Deloitte & Touche, an international accounting and financial consultancy firm, to give an independent computation of the compensation amount. It has the necessary expertise and understanding of the global telecommunications market and development to recommend to Government a compensation amount that is fair and reasonable to ST. The consultants used an economic model to derive the compensation amount. The model projected ST's earnings based on the current situation, ie, with competition in the year 2002 and expiry of exclusive rights in the year 2007. They compared this against ST's projected earnings when its exclusive rights expire in 2000. The difference between these two figures is ST's likely loss. The consultants have computed this amount to be $1.5 billion. In computing the amount, the consultants established all cost and revenue drivers, and took into account all key factors such as service streams, price erosion, market share loss, stimuli in market growth, and Singapore's operating environment to simulate as closely as possible the impact of competition to ST. Government has accepted their recommendation and will compensate ST the sum of $1.5 billion to be paid in full on 31st March 1997. ST, who engaged its own consultant, has, after due deliberation, accepted the compensation amount.

Item 3

A supplementary sum of $3.05 billion is required under the Development Estimates. This is composed of $2.76 billion required to compensate statutory boards for lands returned to the Land Office. These lands are surplus to the statutory board's requirements and are not germane to their operations. A further sum of $0.29 billion is required for payment of lands acquired as a result of the construction of the North-East MRT line.

Mr Chng Hee Kok: Mr Speaker, Sir, I have three questions for the Minister.

The first question relates to ST shares. Unlike ST1, now there is a market price for ST2. As a result, a large volume of vendor sale of shares may have a negative impact on the share price at the time of sale. If this is the case, this adverse impact may translate into a price drop. Therefore, the subsidy of $2.7 billion may disappear. My question to the Minister is, how will he ensure that when the new shares are sold at a discount from the market price, that it would not have a serious negative impact on the share price, whereby it will be perceived that there is no subsidy?

My second question is, learning from the experience of ST1, will the shares be sold on the basis of the A, B and C tranches?

My third question is on the exclusive rights or the monopolies granted to ST. I have spoken in this Chamber before on why it is very important for ST to be competitive, not from the consumer's point of view, but from the national point of view. Is there any other exclusive rights or monopolies that are granted to ST that we should consider taking them off?

Dr Richard Hu Tsu Tau: On Mr Chng's question whether the sale of the new shares will have a depressive effect on the existing shares, I think it is not possible to give an exact answer to his question because it depends on the reaction of the market. But our experience with the ST1 issue was that the majority of the shares issued had been held and the volume of shares which were sold was very small. It was less than 1%. That being the case, I think the effect of this issue of shares on the market is likely to be quite moderate, if at all. But a great deal depends on the sentiment of the market at the time of issue. The other point, of course, is that Government will have to ensure, at the time of issue and allocation, that the discount offered is sufficiently large to absorb any temporary fluctuation of the share price at the time of issue.

As to his second question whether there are other exclusive rights, I will have to refer his question to the Minister for Communications, who is more familiar with the intricacies of telecommunications business.

Mr Chng Hee Kok: The Minister has not answered my question on the A, B and C tranches.

Dr Richard Hu Tsu Tau: As I have mentioned earlier, the exact formulation for the issue has not been finalised. This will be announced in due course.

Mr Mah Bow Tan: Sir, I just want to take this opportunity to answer Mr Chng. I would like to inform Mr Chng that the exclusive rights that have been granted to ST, which will be removed by the year 2000, refer to all the services currently under exclusivity. So there will be opportunities for full competition by the year 2000 in all these areas. 1.45 pm