MINISTERIAL STATEMENT BY MINISTER FOR FINANCE TO PARLIAMENT ON 17 AUGUST 1999 ON PROTECTION OF RESERVES ISSUES RAISED BY THE PRESIDENT AT HIS PRESS CONFERENCE ON 16 JUL 1999

 

Preamble

  1. On 16 Jul 99, President Ong Teng Cheong held a press conference announcing that he would not stand for re-election as President. At this press conference, the President spoke of what he described as a "long list" of problems he had encountered in trying to protect past reserves. In particular, the President raised four issues:
    1. It would take the Accountant-General "52 man-years" to produce the list of physical assets of the Government.
    2. One "unpleasant" encounter where he had to withhold approval of a statutory board budget because it would have caused a draw on its past reserves.
    3. Whether Net Investment Income (NII) should be treated as current reserves or past reserves.
    4. His "disappointment" that the Government did not need him to unlock the past reserves to finance its package of cost cutting measures, because it had changed its treatment of NII.
  2. These issues concern the working of the Presidential safeguards to protect past reserves. The Constitution had been amended in 1991 to provide for a directly elected President who would have discretionary powers to veto the use of past reserves and the appointment of key officials in the public service. Such a move was without precedent in any country. It was a novel experience for both President Ong Teng Cheong, the first person directly elected by the electorate to this new office, and the Government.
  3. The past six years have therefore been a mutual learning experience for the Government and the President. Many problems were encountered and resolved. Both sides have worked together to interpret the constitutional provisions, and to develop working procedures for carrying them out. The agreed understanding is contained in the set of Principles for determining and safeguarding the accumulated reserves, which was published as a White Paper.
  4. I will give the House a full account of the four issues raised by President Ong, to clarify what had actually transpired. In the Government’s view, these problems were neither fundamental nor intractable. They arose mainly because of differences of opinion on the accounting of Government’s physical assets, and difficulties that arose in operating the new system. They were inevitable consequences of the two-way learning process.

    5. Obtaining an Inventory of Government's Assets

  5. The President said it had taken the Accountant-General "more than two, three years" to inform him what the Government’s reserves consisted of. He said that when he asked for an inventory of the physical assets, the Accountant-General had responded that it would take "52 man-years" to produce. He had replied "Never mind. Go ahead", and finally he received the list plus diskettes a few months before the 1997 elections.
  6. Members of this House must wonder why it would take "52 man years" to produce a listing.
  7. The President’s office had requested a listing of physical assets from the Accountant-General, Mr Goh Khee Kuan, on 18 Jun 96. At a meeting with the President on 14 Aug 96, i.e. less than 2 months later, the Accountant-General provided a listing of State buildings, while the Commissioner of Lands provided a listing of State lands. Updates were subsequently sent to the President’s office.
  8. At the meeting, the President remarked that to protect past reserves, the reserves should ideally be denominated in dollar value. In response the Accountant-General conceded that following accounting principles, one should take the value of what was protected at that point in time, but it would take 56 man-years (not 52) just to value the existing properties. He added that for the purposes of protection of the reserves, it did not matter when the valuation was actually made, and it could be at point of sale. This was recorded in the minutes.
  9. "56 man-years" does not mean it takes 56 years to complete the task. A man-year is a measure of the amount of work to be done, and not of the time it will take to do it. It means that it takes 56 men working for 1 year, or 28 men working for 2 years, or 1 man working for 56 years. It is not unreasonable for a team of 56 men to take 1 year to value the entire stock of land and buildings owned by Government. The land was in some 50,000 parcels, including miscellaneous parcels like roads, drains and even some reservoirs. Some land parcels had to be verified through actual surveys.
  10. Thus, the President’s recollection of what the Accountant-General had said was mistaken. The Accountant-General did not say that 52 man-years were needed to produce the listing of physical assets. He actually said that it would take 56 man-years to conduct a complete valuation of the physical assets. Furthermore, at the time he said this, he had already produced the listing that the President had requested. He did not produce it only after another two or three years, or only after the President insisted upon it.
  11. It is therefore clear that the Accountant-General and the Government departments have cooperated fully with the President, and have not in any way sought to hinder the President in his job of protecting the reserves.
  12. The question whether to revalue all State properties at each changeover of Government had arisen earlier. On 15 Jul 96, the Auditor General had written to inform the Ministry of Finance and the key statutory boards and government companies that he would require all state properties to be revalued at market value as at the date of changeover of the Government. He cited the Constitution, the impending general election, and the Audit Act.
  13. The Ministry sought the Attorney General’s advice on the Auditor General’s directive. On 30 Sep 96, the Attorney General’s Chambers advised that, in so far as the directive concerned land, such a complete revaluation was unnecessary as a matter of law. It did not result from the Constitutional need to protect the reserves, as the question whether past reserves were being drawn down did not arise unless a piece of land is actually about to be sold off or alienated. Furthermore the proposed revaluation was a waste of resources, as firstly the reality was that much of state land would remain as state land, and secondly the value of each piece of land depended on planning and zoning restrictions, which the Government could change.
  14. The Ministry forwarded this opinion to the Auditor General. The Auditor General then revoked his directive to revalue all properties at changeover, stating that there was now no legal basis to do so.
  15. How to protect State lands and buildings in the reserves is a complex issue which the Government and President’s office subsequently studied in much greater depth. The final arrangements agreed upon make up an entire two-page Paragraph of the White Paper on Principles.

    16. Withholding Approval of a Statutory Board Budget

  16. President Ong said that public officers should change their mindset, and report to the President any improper transaction which may draw down the reserves. He said that he suspected that some public officers in the Executive, including some ministers, considered the President a nuisance.
  17. The President cited as an example one "unpleasant" encounter when he had to withhold approval of the budget of a statutory board. Its expenditure of $27 mn had exceeded its income surplus of $23 mn, which would have caused a draw on its past reserves. He was prepared to approve the drawdown, but there were problems because of its accounting system. He brought the matter to the Government’s attention, the matter was resolved and he approved the budget.
  18. The statutory board in question is the Central Provident Fund Board. The chronology of events is as follows.
  19. On 8 Nov 96, the CPF Board put up its budget for 1997 to the President for routine approval. The budget showed an operating surplus of $23mn. The submission was accompanied by a declaration signed by the then Chairman, Dr Andrew Chew, and the General Manager, Mr Lim Han Soon, that the budget was unlikely to draw on the Board’s reserves which were not accumulated during the current term of office of the Government.
  20. On 6 Dec 96, the Principal Private Secretary to the President informed the CPF Board that the Council of Presidential Advisors (CPA) had noted that the Board had budgeted a capital expenditure of $27 mn, which exceeded the budget surplus of the year by $4 mn. The excess would have to be funded by the Board’s accumulated surpluses. But with a changeover of government scheduled to take place soon, all of the Board's accumulated surpluses would become past reserves. Therefore, the CPA wanted the Chairman and the General Manager of the CPF Board to clarify the basis on which they made their declarations, "knowing full well that there will be a General Election soon".
  21. The General Manager replied on 7 Dec 96 to explain that the CPF Board accounts were on an accrual basis. In accrual accounting, capital expenditure is depreciated over the useful life of the asset, rather than in one lump sum in the year of expenditure. The operating surplus of $23 mn projected by the CPF Board had already charged annual depreciation of $11 mn against the year’s income. Therefore there was no drawdown of past reserves, whether or not elections were held.
  22. The General Manager further explained that even on a cash basis, the CPF Board would still project a budget surplus of $7 mn. On a cash basis, we would indeed deduct the $27 mn capital expenditure from the projected operating surplus of $23 mn, but we would also have to add back the depreciation of $11 mn. Otherwise we would in effect be deducting the capital expenditure more than once, erroneously. The CPF Board’s budget and accounts were thus in order and there would not be any draw on the CPF Board’s past reserves.
  23. However, the President did not accept the CPF Board’s explanation. He wrote to the Prime Minister on 16 Dec 96, stating that he would approve the budget because the expenditure was not wasteful and was in the public interest. However, following the Constitution, he would be gazetting his opinion that the budget was likely to draw on the past reserves of the CPF Board after the changeover of Government.
  24. The Government did not agree with the President’s approach. The Prime Minister replied the next day repeating the explanation given by the CPF Board, and requested President to hold back gazetting his opinion. He suggested that since there seemed to be a difference in interpretation of the budget, we should get the Accountant-General or the Auditor-General to state whether or not there would be a drawdown of reserves following the changeover of government.
  25. The President replied on 20 Dec 96. He agreed to hold back gazetting his opinion, and stated that he would also hold back his approval of the budget until the issue was resolved. In response to the Prime Minister’s proposal to seek the views of the Accountant-General or the Auditor-General, the President wrote:

    26. "My duty does not include clarifying with the professional bodies the principles and interpretation. That duty lies with the Government."

  26. The President also explained his reservations over accrual accounting:

    27. "My concern here is that this approach [i.e. accrual accounting] will allow a profligate Government to hide its lavish spending under the guise of capital expenditures. In the final analysis, it is the Government which have to recommend whether this is a principle that should guide my actions.

    In the absence of clearly enunciated and mutually agreed principles and procedures for dealing with such matters, I would rather err on the side of stringency. If the principles had been settled earlier, this uncertainty about what is or is not a draw would not have arisen."

  27. Accrual accounting is standard practice not only in statutory boards in Singapore, but in commercial firms worldwide. Companies and statutory boards have auditors whose duty is to ensure that what are declared as capital expenditures have in fact been properly spent on capital items. Furthermore, under the Constitution, the CEO and Chairman must declare whether the budget is likely to draw on past reserves, and board members and CEOs have a duty to inform the President of any proposed transaction which is likely to draw on past reserves. As an additional safeguard, the appointment of the Chairman, Board and CEO of the key statutory boards and government companies are subject to the President’s veto.
  28. In view of the President’s stand, the Government took an explicit decision reaffirming that statutory boards and Government companies should continue to prepare their accounts and budgets on an accrual basis. This has since been incorporated in the White Paper on Principles.
  29. On 27 Jan 97 the Prime Minister wrote to the President seeking his agreement to accrual accounting, and explaining the safeguards in place. On 30 Jan 97 the President replied stating that he had approved the CPF Board’s budget and agreeing to the principle of accrual accounting. But he still said that "the concern that a profligate government could hide its lavish spending under the guise of capital expenditure was not fully addressed".
  30. This account of events makes clear that no public officer failed in his duty to report a possible drawdown of reserves to the President in this instance. The Government does not understand why the President regarded this genuine difference of opinion as "unpleasant".

    31. Net Investment Income – Current or Past Reserves?

  31. The President raised the question whether Net Investment Income (NII) should be treated as current reserves or past reserves. He said he had been told that according to Generally Accepted Accounting Principles (GAAP), NII constituted current reserves, but he was not sure as he was not an accountant.
  32. The proper treatment of NII is not a question of opinion. It depends on the constitutional definition, and on what constitutes standard accounting practice. On these matters the Government does not act arbitrarily on its own. It takes legal advice from the Attorney General’s Chambers, and professional advice from the Accountant-General and the Auditor-General. Similarly, the President and CPA can obtain legal and professional advice, should they wish to. The Constitution does not envisage either the Ministers or the President and CPA having to be their own lawyers or accountants.
  33. Let me explain what exactly NII is. NII is the interest and dividend income earned from investing Government’s reserves, net of expenses on investment and debt servicing. NII does not include any capital gains or losses that may be made from the disposal of investments, which are classified as Investment Adjustments.
  34. Under the Constitution, the President has custodial powers over "reserves which were not accumulated during the current term of office of the Government". The Attorney General’s advice is that this definition does not cover NII, because NII is accumulated during the current term of office of the Government. This is so even when this NII is derived from investing past reserves that are themselves locked up. Therefore the President’s second key does not extend to NII. The President has not challenged this legal opinion.
  35. Treating NII as current income is also the standard approach under Generally Accepted Accounting Principles.
  36. The President also said that the Government had locked up NII as part of past reserves since 1992, but last year decided that "the NII should now belong to the current account". This is not accurate. The actual situation is as follows:
  37. Under the Constitution, NII is and has always been current income. The Government has not changed this treatment. However, it has carefully studied whether it should do so, and lock up part of NII as protected reserves, especially that part of NII earned from investing past reserves.
  38. This is a complex issue. We have to project the likely state of the economy and budget position of the government over the long term, to assess how much revenues the government will have and what it will need to spend. This involves many uncertainties. We must also weigh carefully the proper balance between restraining a profligate government on the one hand, and allowing a responsible government enough flexibility to operate on the other. The matter is not pressing, and if we decide hastily and make a mistake it will be difficult to reverse later.
  39. It was the Government, not the President, who first raised the issue of NII in Jan 92, well before President Ong took office. Against a backdrop of comfortable surpluses, it decided to take the more conservative stance of locking up all the NII earned from past reserves, and to amend the Constitution for this purpose, not immediately, but after about a year of implementation.
  40. However, subsequently the Government did not follow up to amend the Constitution. Revised projections of revenue and expenditure showed that earlier expectations of continuing large surpluses had been too optimistic. The Government therefore looked for more flexible alternative ways to protect the NII.
  41. The matter has been discussed at length between MOF, the Cabinet, and the President’s office. The Government seriously studied including a more stringent definition of NII in the White Paper on Principles. It finally decided against doing so, because the present uncertain economic outlook made long term budget projections difficult. A second reason was that doing so would cause the Principles to go beyond the Constitutional provisions. The Principles cannot override the Constitution; they can only give effect to them. A future government would not be bound by the definition of NII in the Principles.
  42. The President and CPA have given their opinions, including the suggestion to lock away half of the NII from past reserves. The Government has carefully considered their views. The suggestion to lock away part of the NII has merit. But we have to find the right basis for determining how much to lock away, as a fixed proportion like 50/50 may not be appropriate for all circumstances. The Government therefore has not yet made a final decision.
  43. In Mar 99, the Government informed the President’s Office that while it had earlier been inclined not to change the status quo treatment of NII, it had relooked at the calculations and concluded that there could be a case for protecting NII or a significant part of it. This would require a Constitutional amendment, rather than a provision in the Principles which would have no legal force. The Government needed time to study how best to protect NII. This study could lead to an amendment of the Constitution next year.
  44. Therefore while NII continues to be current reserves, the Government is aware of the problem which the President has highlighted, and has been working with him and the CPA to find a solution.

    45. No Need to Draw on Past Reserves Because of NII?

  45. The President expressed his "disappointment" that the Government declined his offer to unlock past reserves to finance its package of cost cutting measures, and said that the Government was able to do so because it had changed its treatment of NII to count as current reserves.
  46. This is not the Constitutional and financial position. As I have just explained, NII has always been current reserves under the Constitution. In any case, the Government has not needed to fall back on NII at all, whether these constitute past or current reserves, to fund its special packages and budget deficit. Through careful financial stewardship, the Government has accumulated sufficient budget surpluses within its current term of office for this purpose. The budget surplus does not include any NII, because NII is an item "below the line" in the government budget.
  47. I informed this House during my FY99 Budget Debate round-up speech on 9 Mar 99, that between 25 Jan 97 (the day the present Government took office) and 31 Mar 98, the Government had generated an operating budget surplus of $6.3 bn. After taking into account the expected deficits in FY98 and FY99, we would still have a cumulative surplus of $368 m as at 31 Mar 2000.
  48. As it has turned out, in FY98 instead of the budget deficit of $466 mn originally estimated, we achieved a budget surplus of $925 mn. Hence by the end of FY99 we now expect to have a cumulative budget surplus since this government took office of $1.8 bn, excluding NII.
  49. Therefore the Government has had no reason to ask the President to unlock past reserves, regardless of the treatment of NII. This is a positive outcome of our prudent policies, and not a cause for "disappointment".

    50. Conclusion

  50. I have explained that while there were difficulties between the President and Government, they arose from honest differences in views. The Government extended full cooperation to the President and CPA, and made no attempt to obstruct or show disrespect to the President. Despite the problems encountered, the Government remains committed to protecting past reserves and making the institution of the President with custodial powers a success.

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