Singapore's Mr Buffett

  AUSTRALIAN FINANCIAL REVIEW
May 24, 2002

Four minders stand in the room and fidget while nervously awaiting the arrival of S. Dhanabalan. The only thing missing is the red carpet for the titan of Singapore's corporate world.

These days, however, it is the words of Dhanabalan rather than Goh Chok Tong that businessmen, investment bankers and fund managers hang on. He is, if you like, the Warren Buffett of Singapore, except that when Dhanabalan talks he risks moving the share prices of the country's leading companies such as Singapore Telecommunications, Singapore Airlines, Development Bank of Singapore and Singapore Power.

Dhanabalan wields indirect control of these companies as chairman of the all-powerful Temasek Holdings, the government investment vehicle, which has stakes in 20 major Singaporean companies and dozens of smaller ones. Temasek was the original name of Singapore and means ``sea town''. The man at the helm of Singapore's government-owned companies has world-class ambitions for his charges, reports Anne Hyland.

  See also:
Temasek Holdings names Ho Ching exec director

FOUR minders stand in the room and fidget while nervously awaiting the arrival of S. Dhanabalan. The only thing missing is the red carpet for the titan of Singapore's corporate world.

Dhanabalan, who doesn't disclose what the S is for in his full name, may have an avuncular air and be diminutive, standing only a little over five feet.

But the ill-at-ease demeanour of his aides betrays his power. Or perhaps it is their apprehension about the media interview that Dhanabalan, 64, is on his way to. Dhanabalan doesn't give interviews unless he has something to say.

This is a man who was once touted as a replacement to Singapore's founding Prime Minister, Lee Kuan Yew, who stepped down in 1990 after 31 years at the helm.

Dhanabalan served in several important portfolios in Lee's Cabinet. However, Dhanabalan's Indian background is said to have affected his being overlooked for the top job in favour of Goh Chok Tong, who is of Chinese descent and was considered to have wider appeal to Singapore's 4 million residents.

These days, however, it is the words of Dhanabalan rather than Goh Chok Tong that businessmen, investment bankers and fund managers hang on. He is, if you like, the Warren Buffett of Singapore, except that when Dhanabalan talks he risks moving the share prices of the country's leading companies such as Singapore Telecommunications, Singapore Airlines, Development Bank of Singapore and Singapore Power.

Dhanabalan wields indirect control of these companies as chairman of the all-powerful Temasek Holdings, the government investment vehicle, which has stakes in 20 major Singaporean companies and dozens of smaller ones. Temasek was the original name of Singapore and means ``sea town''.

Dhanabalan tells the Australian Financial Review that it's the politicians, not he, who have the important job even though what he has at his fingertips is influence that in dollar terms measures almost half the size of the Singaporean economy.

The figure to which he is connected is estimated to be about S$140 billion (A$142.7 billion), which is the combined market cap of the Government Linked Companies (GLCs) that make up 41 per cent of Singapore's Straits Times index, or 12 per cent of the city-state's gross domestic product. ``The tough jobs are held by the politicians because we have a population that has very high expectations,'' he explains. ``I was thrust into something that I don't know if I was born to do, but I'm happy doing it.'' Dhanabalan has been leading Temasek since 1996. This week, Ho Ching, the wife of Singapore's Deputy Prime Minister, Lee Hsien Loong, was announced executive director of Temasek. She is seen as the natural successor to Dhanabalan and it is considered in some circles that change at the top may not be too far away.

For now, Dhanabalan is at centre stage in the significant reshaping of Singapore's major companies. The change for the management and boards of the GLCs, which are credited with making the island one of Asia's most prosperous nations, is coming threefold.

They have been told by Temasek to improve performance either through consolidation or offshore expansion and, if neither of those is possible, that the ``for sale'' sign is going up.

``We have centres of excellence in some of our companies,'' Dhanabalan says. ``The real challenge is how can we use these leverages to grow out of Singapore and either build businesses or acquire businesses that enable these companies to become world-class, not world-size. That's been our preoccupation for more than six months now and I think it's going to be our preoccupation for many years to come.''

That said, the question is, in what direction are Singapore's state-owned companies headed? Geographically, Australia and Hong Kong have been popular of late, the highest- profile deal being SingTel's $14 billion acquisition of Cable & Wireless Optus.

Dhanabalan wants most major DLCs to have 50 per cent of their revenues sourced from outside Singapore in the next few years.

``In the totality of things, North Asia has got a lot more growth potential,'' Dhanabalan says. ``But Australia is a well-regulated market which we understand. Therefore, if we want to position ourselves for growth elsewhere, you need a strong base to grow from and Australia would be a good country to look at. And in this process we want the companies to be also owned by Australians. We hope, that in fact, Australian companies find it attractive to work with Singaporean companies.''

The GLCs stretch across all industries. Apart from the companies mentioned earlier, other major names include semiconductor producer Chartered, the main shipyards Keppel and SembCorp, the port operator PSA, shipping operator Neptune Orient Lines and property developers Keppel Land and CapitalLand.

From an industry perspective, Dhanabalan sees growth for GLCs in telecoms, media (related to content), logistics, aviation (including maintenance and catering), marine industry (ship repair and oil rig manufacturing) and biotechnology.

Stage two of the GLCs' performance improvement is consolidation and on this Dhanabalan is more coy. His only hint is to look at where the GLCs overlap in businesses.

``There are a number of divisions in Singapore where there's duplication,'' he says. ``The companies must see that it is in their commercial interest to want to merge or work together. We have not taken it upon ourselves to knock heads together.''

These nuggets of information are like pieces of gold for fund managers, businessmen and investment bankers who are trying to decipher Temasek's next move. A sale of even a small shareholding or division in one of the GLCs could suddenly mean fees for an investment banker, a merger opportunity for the businessman or simply a reweighting of an investment portfolio for the fund manager.

There is no clear definition yet on which GLCs are likely to be divested except those that are not deemed ``strategic'' to the national interest.

The government has avoided full privatisation of the GLCs because, if they were privatised, Singapore's politicians fear that as a tiny nation it could lose sovereignty over its economy and, worse, that control could possibly fall into the hands of some of its regional rivals.

Yet the government's large hand in the corporate sector via Temasek draws criticism. State-owned entities tend to have lower returns and be less efficient than their private equivalents both domestically and internationally.

A simple measure, like return on equity, can be used to illustrate this in the banking sector. DBS, still almost a third owned by the Singapore government, has a forecast return on equity of 9.6 per cent in 2002 compared with Australia's four major banks where the lowest return on equity is 15 per cent for 2002.

In telecommunications, where the preferred measure of a company's performance is enterprise value as a ratio of earnings, before interest, tax, depreciation and amortisation, and on this SingTel rates poorly. Again on 2002 forecasts SingTel's EV-EBITDA ratio is 11.2 compared with the much better 9.1 times for Vodafone and Telstra at 7.1 times.

GLCs also have a habit of hoovering up the best and brightest of Singapore's graduates and so have been blamed for stifling the development of the country's small to medium-size business market where entrepreneurs might have otherwise flourished. Entrepreneurialism is something the Singapore government is now trying to encourage as it seeks ways to pull its economy out of recession.

The reason for the lower returns from the GLCs has also been blamed on the competitive advantages the GLCs enjoy in access to cheap capital because they are considered low-risk clients. It has been argued that this abundance of cheap capital has led them to overpay for offshore acquisitions, like Optus.

Dhanabalan rebuts such arguments, saying Temasek prefers to judge the financial performance of its portfolio of companies through the measure of economic value added (EVA). ``We also encourage them to put in place compensation schemes that are tied to EVA, so that performance and compensation of the management is tied together.''

Despite his comments on strategy, Dhanabalan maintains that Temasek has little influence and gives minimal direction as a shareholder in the day-to-day business of its myriad of companies.

It's a view that many disagree with, leaving the likeable Dhanabalan open to criticism.

He is chairman of DBS Bank, which is partly owned by Temasek and this cross-fertilisation reflects the smallness of Singapore's talent pool of executives and managers. It also illustrates the risk that having the same people on different boards leaves little room for fresh ideas and new management styles.

It does not stop at Dhanabalan as Ho Ching, as executive director of Temasek, is also deputy chairwoman of Singapore Technologies, which has a stake in mobile operator StarHub. StarHub's rival, SingTel, has Temasek as its major shareholder. In turn, the Deputy Prime Minister's younger brother, Lee Hsien Yang, runs SingTel.

It's a merry-go-round of connections but the Lee family rejects any accusations of nepotism.

``We are such a small society if you want everybody to be disconnected from everybody else, we just don't have the bodies,'' Deputy Prime Minister Lee Hsien Loong told the AFR.

The government has been proactive in trying to draw international foreign talent to manage its companies. The plan to turn GLCs into global champions makes it unlikely there will be any change soon to the level of government ownership, particularly in the major enterprises, if it indeed wants to attain its stated goal.

But Dhanabalan's status as kingmaker may not be so assured.

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