Move to protect council funds - Ministry puts limit on estates' riskier investments

Weekend / December 1, 2007
Loh Chee Kong
Kongcheekong@mediacorp.com.sg

IN THE midst of an increasingly volatile financial market, the Government has moved to restrain Town Councils' investment activities as a precautionary measure.

On Thursday, the Ministry of National Development (MND) gazetted amendments to the Town Councils Financial Rules, which came into effect on Saturday.

The most notable change is a 35-per-cent cap on the amount Town Councils can use out of their sinking funds to invest in non-Government issued securities such as corporate bonds and equities, which are seen as "higher risk" investments.

There is no cap on the proportion used to invest in Government bonds or treasury bills.
MP Inderjit Singh, the vice-chairman of the Ang Mo Kio-Yio Chu Kang Town Council, told Today it was "not a sudden decision" as the MND had been monitoring the situation "for quite some time".

"I think what they discovered is that some Town Councils participate in riskier investments. The MND wanted to prevent Town Councils from being too aggressive. The idea is to protect the sinking fund as much as possible for future use," he said.

In response to Today's queries, an MND spokesperson said that changes to the set of financial rules "are made from time to time to bring them up to date and facilitate the effective administration and operation of Town Councils".

The spokesperson added: "Town Councils are required to set aside sinking funds to enable them to carry out long-term cyclical maintenance or replacement works for the estates. As such, (they) need flexibility to invest funds that are not required for immediate use, while ensuring the funds are not exposed to unnecessary risks."

Noting that the bulk of public sector investments is in Government-issued securities, CIMB-GK economist Song Seng Wun said: "I don't think (the cap) would affect any of them at the moment. It's more to ensure the Town Councils have a reference point."

Previously, Town Councils were given the same investment powers as statutory bodies under the Trustees Act, which spells out the type of investments they could make. But according to Dr Teo Ho Pin, co-ordinating chairman for the People's Action Party Town Councils, statutory boards ?including Town Councils ?were given greater leeway to invest at the turn of the millennium.

And under Section 33A of the Interpretation Act, a statutory body may invest "in such manner as it thinks fit" and "engage in any financial activity or participate in any financial arrangement for the purpose of managing or hedging against any financial risk that arises or is likely to arise from such investment".

Currently, Town Councils have various ways of managing their investments, including setting up finance or business committees or entrusting their money with external fund managers.
Said Dr Teo, who chairs the Holland-Bukit Panjang Town Council: "If we just put the money in fixed deposits, isn't that more irresponsible? There were a lot of criticisms in the past when the statutory boards dared not invest their money."

The Town Councils have recently submitted their 2006/2007 annual reports to Parliament for gazetting.

According to Holland-Bukit Panjang Town Council's 2005/2006 annual report, it has sinking funds of some $89 million. Of this, it holds shares worth some $8.4 million in book value, while investing $31m and $3m in bonds and unit trusts respectively.

Some smaller wards such as Potong Pasir invest solely in Government bonds. According to its MP Chiam See Tong, the Potong Pasir Town Council ?which has a kitty of $5 million ?employs a full-time finance manager to manage its $1.9 million worth of investments.

Holland-Bukit Panjang Town Council was listed as a major shareholder in Creative Technologies' latest annual report, holding 530,000 shares currently valued at about $3.4 million.

Pointing out how the shares of Creative Technologies had fallen drastically in the last few years, Mr Leong Sze Hian, president of the Society of Financial Service Professionals, felt that the investment guidelines should be "beefed up" further to make sure that even with the cap on high-risk investments, Town Councils are prevented from putting too many eggs in one basket.
Said Mr Leong: "There's nothing to stop them from putting all 35 per cent in one stock.

Nowadays, Town Council funds go up to a hundred million. And 80 per cent lost in a single stock can mean a loss of about $30m."

Pointing out that there are always risks involved in an investment, Dr Teo declined to discuss the specifics of the investment in Creative Technologies.

But he reiterated that his Town Council adopted a "wide" investment portfolio. Said Dr Teo: "Our investment committee has made good returns on our investments so far, averaging about eight to 10 per cent per annum, which is better than the bank interest rate."

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