STATE-OWNED ENTERPRISES IN SINGAPORE: HISTORICAL INSIGHTS INTO A POTENTIAL MODEL FOR REFORM Tan Cheng-Han, Dan W. Puchniak, Umakanth Varonil' Introduction It is easy to forget that a few decades ago state-owned enterprises (SOEs) were generally viewed as inefficient quasi-government departments which posed no meaningful competitive threat to privately-owned corporations. In fact, as recently as a decade ago, many pundits posited that SOEs were on the verge of extinction.' Arou nd that time, two American 1 Including all of the Faculty of Law and ((nter for Law and Business, Nac ional University of Singapore . Earlier drafts of this article were presented at the 3rd NUS­ Sydney Law Symposium held at the University of Sydney on September >5· >6th, 2014; at the Workshop on The Beijing Consensus? How China has changed the western ideas of law and economic development and global legal practices organized by the Center for Asian Legal Stud i<.'S, National University of Sing•pore on January 8-9th, 2015; and at the East China University of Political Science and Law, Shanghai on January 15Lh, 1015. The authors are grateful for all the useful comments they received from these presentations, as well as those from Chen Weitseng, !..an Luh Luh and Curtis Milhaupt. ' The Long View: And The Winner Is ... : Special Report: State Capitalism, THE EcONOMISf, Jan. 21, 2.012. 61 academic luminaries boldly declared the "End of History for Corporate Law" claiming that the market-oriented model of the shareholder-centric corporation had triumphed over its principal competitors (SOEs included}.' Over the last decade, however, the renaissance of SOEs has made comparative corporate Jaw seem more like the beginning of time rather than the end of history. In thi~ n~w ~r~, SOI:s hav~ made a valiant return from the precipice of extinction and now compose a substantial portion of the world's most powerful corporations. Indeed, SOEs have come to dominate several key global industries and are the backbone of the Chinese economy {which is on course to become the world's largest economy).' The meteoric rise of SOEs, combined with the spectacular economic growth of China, has made the future of SOEs in China an issue of global importance. The success and sustainability of China's SOEs has been vigorously debated both within China and internationally. In the midst of this debate, however, a somewhat surprising view appears to be emerging: that Singapore's SOEs (also referred to in Singapore as government-linked companies or GLCs} may provide a good model for reforming China's SOE Mode1.5 In fact, very recently, the Chinese government decided that by 2020 ' Hen ry Hansmann & Reinier Kraakman, The End of History for Corporate Law, 89 G£0. L. REV. 439 (2011). 4 The Visible Hand: Special Report: State Capitalism .. THE ECONOMIST, jan. 11, 2.012. ' For example, Li-Wen Lin & Curtis J Milhaupt, We are the (National) Champions: Understanding the Mechanisms of State Capitalism in China, ·65 SrAN. L. REV. 697, 754 (2013) states that Temasek, Singapore's state holding company, is a potential model for Chinese economic strategists. See also, Reforming China's state-owned firms: From SO£ to GLC -China's rulers look to Singapore for tips on portfolio management, THE ECONOMIST, Nov. 2), 2013; Ronald j. Gilson and Curtis j. Milhaupl, Sovereign Wealth 62 the Singapore GLC Model would be replicated in China 30 times over- making this proposed reform potentially one of the most important corporate governance initiatives of our time.6 On the brink of such a watershed reform, it is tempting to jump quickly to make predictions about the impact that transplanting the Singapore GLC Model will have on Chinese corporate governance. This article, however, avoids this temptation. Rather, it focuses on a more basic, yet fundamentally important, question that seems to have been largely overlooked in the rush to reform: what is the historical foundation and important drivers of the Singapore GLC Model? By answering this question, this article hopes to clarify exactly what China is aiming to transplant and whether it is even transplantable at all. Ultimately, this article concludes that the Singapore GLC Model is so closely intertwined with Singapore's idiosyncratic history and unique regulatory culture that, although the model has been extremely successful within Singapore, transplanting it to China (and we suspect, most likely, anywhere else} could be difficult. In the process of arriving at this conclusion, this article further illuminates two broader points that cut to the core of comparative corporate Jaw theory. First, as alluded above, the success of the Singapore GLC Model and China's ambition to emulate it challenge notions that corporate governance systems are converging towanls a market-oriented (American) Funds And Corporate Governance: A Minimalist Response To The New Mercantilism, 6o STAN. L. REV. 1345, 1359 (>oo8); Tan Lay-Hong & Wang Jiangyu, Modelling an Effective Corporate Governance System for Chino's Listed Stote4 0wned Enterprises, 7 j. CORP.l. STuo. 143 (2007). • JO Chinese SOEs to Follow Temasek Model by 2020, WANT CHINA TIMES. May 30, 2014. 63 model of the shareholder-centric corporation.' Indeed, an examination of the historical evolution of the Singapore GLC Model illustrates that a highly successful economy and system of corporate governance can be built on a foundation of corporations that have the government (and not only private free-market actors) as their ultimate controlling shareholder. Importantly, this feature of Singapore corporate governance has been maintained even as Singapore has moved from a developing, to a developed, and now to a world· leading economy that generates a GOP per person that exceeds all of the G7 countries' and has produced the world's highest percentage of millionaires.• Second, the success of the Singapore GLC Model challenges the basic conception that private enterprise rather than the state is necessarily more efficient at allocating capital to its most productive use. In fact, in Singapore's case empirical evidence suggests that, at least in certain circumstances, the converse may be true. As such, although the Singapore GLC Model may yet prove to be difficult to transplan.t, it suggests that even in today's global economy many different piiths to ~orpor~te governance success remain. Rather than finding any one model, the key to effective corporate governance (if there is one a t all) appears to be finding a system that fits each particular jurisdiction's economic, institutional. historical, political and cultural 7 Hansmann & Kraakman, supra note 3· • World Economic Outlook Database April zo•4· International Monetary Fund Database, http:f{www. imf.org{external{pubsfft{weo{>Ot4/0t{weodata{indcx .aspx (last visited March 6th, zo•6). 9 Shibani Mahtani_, Singapore No.1 For Millionaires-Again, WAU ST. J., jun. 1, :1012.. 64 environment, which will, of course, vary (sometimes substantially) from jurisdiction to jurisdiction and even within each jurisdictjon over time ... l. The Attraction of the Singapore Model In 1960, a year after Singapore attained full internal self-governance, it had a GOP per capita of U.S. S4z8 that was close to the world average" and faced significant challenges." Today, Singapore is one of the richest countries in the world. With virtually no natural resources, effective governance has been the key to Singapore's success. This has not gone unnoticed. For the past eight years, the World Bank has recognized Singapore as having the best regulatory and economic environment in the world for doing business.'3 Transparency International consistently ranks Singapore in the top five countries in the world for having the lowest level of corruption.'' The Wall Street journal and The Heritage 1° For another example of this approach to successful corporate governance,see Dan W. Puchnia.k, The Japanization of American Corpo1ate Governance? Evidence of the Never­ Ending History for Corporate Law., 9 ASIAN-PAC. L. & Po~·v ). 7 (>OQ?). " See The World Data Bank, http://databank.w.orldbank.org/data/views/rep<>rts/tableview.aspx (last visited March >8th, 2015). 11 See infra Part II. •J Doing Business: Measuring Business Regulations. The World Bank Group, http://www.doingbusiness.org/ (last visited March 6th, :wt6). 14 See, e.g., Transparency International, Corruption Perceptions Index 2014 , https://www.uansparency.org/cpiaOI4/ results (lasr viSited March Olh, 2010). 65 Foundation consistently rank Singapore in the top few countries in the world with respect to economic freedom. '5 The Asian Corporate Governanc·e Association has repeatedly ranked Singapore as having the best corporate . A . •• governance m sta. At first blush, Singapore's leading regulatory, free-market and corporate governance rankings suggest that it may be a poster child for the American-cum-global model for good corporate governance- which is built on the notion that the dispersedly-held, shareholder-centric, Berle-Means corporation is the zenith of efficiency.'' If one d rills down a bit below the rankings, however, it quickly becomes apparent that Singapore's corporate governance model is distinctly un-American at its core. In fact, the dispersedly-held, shareholder-centric, Berle-Means corporation virtually does not exist i.n Singapore. To the contrary, Singapore's corporate governance system is built almost entirely on companies owf)ed by concentrated block-shareholders. In fact, over ninety percent of Singapore's publicly listed companies have block '' 2015 Index of Economic Freedom. The Heritage Foundation, http://www.heritage.org/index/ ranking (last visited March 6th, 2016). ' 6 ASIAN CORPORATE GOVERNANCE ASSOCIATION, CG WATCH 2014- MARKET RANKINGS (2014), available at http://www.acga ­ asia.org/public/files /CG_ Watch_2014_Ke y _ Cha rts_ Ext ract .pdf. 17 For an overview of the American-cum-global model for good corporate governance, see Dan W. Puchniak, Multiple Faces ofShartholdtr Power in Asia: Complexity Revealed, NUS LAw WORKINC PAPER NO. 2014/005 (2014), available a·r http:/ /ssrn .com/abstractc2400958. 66 shareholders who exercise controlling power . .a In addition, empirical evidence suggests that' as Singapore's wealth has increased, its concentration of shareholdings has also increased-the opposite of what proponents of the American corporate governance model would predict. '9 Even more incongruent with the American, market-oriented, shareholder-centric model, is that listed companies in which the government is the controlling shareholder (i.e., GLCs) account for thirty-seven percent of the total stock market capitalization in Singapore.'• As such, the Singapore government is by far Singapore's most powerful shareholder. In this light, the initial attraction of Chinese Communist Party officials to the Singapore GLC Model appears obvious- it provides a highly successful model in which the government remains the linchpin of corporate governance and the economy. Perhaps even more attractive to Chinese Communist Party officials, however, is the evidence that on a micro-economic level the Singapore GLC '8 LUll LUll LAN & UMAKANTII VAROTTIL, SIIAREIIOLO[R [MPOW[RM[NT IN CONTROLLED COMPANIES: THE CASE OF SINGAPORE, in RESEARCH HANOBOOK ON SHAREHOLDER PowER (Randall Thomas & jenoifer Hill eds.) (forthcoming. 2015) (manuscript at 14) (on file with authors). •9 Stijn Claessens et at.. The Separation of Ownership and Control in fast Asian Corporations, 58 J. FIN. ECON. 81 (2001); Tan Lay Hong. Exploring the Question of the Separation of Ownership From Control: An Empirical Swdy of the Structure of Corporate Ownership in Singapore's Top Usted Companies, WORKING PAPER, ::tOIO, available at http://docs.business.auckland.ac.nz/Doc/exploring-the-question-of-ownership-from­ control.pdf. 10 Based on 1008 to 2013 market capitalisation :iat.l, GLCs accounted for )7% of the stock market value. Isabel Sim et al., The States as Shareholder: The Case of Singapore, Center for Governance, Institutions & Organisations, NUS BUSINESS SCHOOL INSTITUTIONS, FINAL REPORT Ouly 1, >014), at 6 . 67 Model appears to produce strong corporate performance and promotes good corporate governance- something that has eluded Chinese SOEs. To the extent that investors will demand a discount to the share price for companies that are perceived to be inefficient or have sub-optimal governance structures, studies have shown that far from Singapore GLCs tradi ng at a discount to their peers, capital markets in fact value GLCs more highly than non-GLCs. One study estimated this premium at twenty percent after taking into account other variables that might affect firm value such as industry effects, size. and monopoly power, profi tability (it being the case that GLCs are generally more profitable), and bankruptcy risk., Another study corroborated this by finding that GLCs on average exhibit higher valuations than those of non-G LCs after controlling for firm specific factors. This study conclud.ed that on average GLCs provided superior returns on both assets and equity and are valued more highly than non-GLCs. GLCs also did better in many performance measures and did not appear to be worse off in other measures. As such, they were more highly valued." Interestingly, this study also fou:nd that GLCs in general managed their expenses better than non-GLC companies. The lower expense-to-sales ratio among GLCs indicated that GLCs were more profitable because they ran leaner operations. Such a finding demonstrated that GLCs in Singapore were l' Carlos D. Ramirez & Ling Hui Tan, Singapore, Inc. Versus the Private Sector: Are Government-Linked Companies Different?, IMF WORKING PAPER WP/ 03/156 (>OOJ), available at https://www.imf.org/external/ pubs/ft/wp/2003/wp03156. pdf. u james S. Ang & David K. Ding, Government ownership and the performance of government-linked compan;es: The case of Singapore, 16 jOURNAl 0~ MULTINATtONAL FINANCIAL MANACEMEI'IT 64, 85-86 (2006). 68 different from the generally inefficient nationalized firm run by governments. ') In addition, more recent studies suggest that GLCs have implemented better corporate governance practices than non-GLCs- which bodes well for their future sustainability and economic performance ... The question that arises is why Singapore GLCs were exceptional in this regard and whether such exceptional ism is transplantable.' ' In this a rticle, we suggest that Singapore's history around the time of self-governance and eventually independence, in particular her political and social circumstances, was a major factor in the development and governance of her GLCs. Of particular importance was the tenuous hold that the People's Action Party (PAP), which has governed Singapore since independence, had on power at that time. To increase its legitimacy and support, the PAP set out to improve the lives of Singaporeans and this necessitated good economic management. One important aspect of this was to develop the economy beyond entrepot trade. The establishment of GLCs was an important part of the country's industrialization plan. In Singapore, competent economic management had a strong correlation to pol itical legitimacy and survivability. Although these conditions are not entirely unique to Singapore, a detai led analysis reveals that they are distinctive enough to call into question whether the Singapore GLC Model is easily transplantable. lJ ld. , at So. 14 Sim et al., supra note w. 11 W.G. HUFF, What is the Singapore model of economic development?, 19 CAMB.J. ECON. 735, 743 (1995) st.>tes that the Singapore development model carries the lesson that public enterprise organized through a sort of political entrepreneurship can be run efficiently and at a profit. 69 II. Singapore Politics and Society during the Period of Self-Governance Given the long period of PAP dominance in Singapore's political life, it may be difficult to recall that unlike many other post-colonial governments, the PAP government did not initially have strong mass support. Thus, after the publication of the Rendel Report in February 1954 which was to lead to elections the following year towards some degree of self-government, Lee Kuan Yew, who was later to become the first Prime Minister of Singapore, felt it was necessary to form an alliance with extreme left-wing militants who were under the influence of the illegal Malayan Communist Party. While Lee Kuan Yew and his group were aware of the force and discontent of the Chinese educated masses, they realized that an alliance with such men, dangerous though it might be, offered the on ly path to political success. The future belonged to politicians who could command the allegiance of the Chinese educated . .oThe task was no doubt made more daunting by the fact that Lee Kuan Yew himself was English educated and could not speak Mandarin or any Chinese dialect fluently. For their part, the left-wing Chinese extremists saw Lee Kuan Yew and his group as a convenient front to ga.in political power because they were more likely to be acceptable to the Briti:Sh. Thus, in its early days, the PAP was divided into two wings, the non-communists under Lee Kuan Yew and the pro-communists under Lim Chin Siong. During the early years of the PAP, LiM Chin Siong and his wing were the real force in the PAP, commanding the support of organized labour and the Chinese masses.'' Thus, at the PAP's third >6 C.M. T URNBULL. A H ISTORY OF MODERN SINGAPORE, 1819·2005 (2009), at 255· 17 /d. at 262. 70 annual conference in August 1957. Lim Chin Siong's wing won half of the seats for positions to the party's central executive committee. The future of the moderate non-communist wing appeared precarious and lee Kuan Yew and an ally, Toh Chin Chye, who was chairman of the party, stepped down from the leadership. A d ramatic turn of events occurred soon after when the labour Front government under Chief Minister l !m Yew Hock arrested thirty-five active communists including five members of the newly elected PAP central executive committee and eleven branch officials. This allowed Lee Kuan Yew and his allies to regain control of the PAP ... In 1959 new elections were held and the PAP obtained a strong majority winning forty·three of fifty-one seats in the Legislative Assembly. In power, the PAP pursued merger with the Federation of Malaya. An important reason for this was economic survival. Despite considerable progress, industrial development in Singapore in the 1950s was unspectacular and the city could not be regarded as an industrial center. In 1959 an industrial development program was initiated in the Federation of Malaya. New industries set up there could obtain "pioneer status" and tariff protection.'• This was a potentially serious development for Singapore, wh ich regarded Malaya as an important economic hinterland. There was also an urgent need to provide employment. While open unemployment at around five percent in 1957 was not exceptionally high, this did not take into account large numbers of people who could not be regarded ' 8 td. at 267. ' • W.G. HUFF, T HE ECONOMIC GROWTH OF $1NCAI'ORE- T RADE AND DEVELOPMENT IN THE TWENTIETH CEN'TURY, >89· 90 (1994) . 71 as fully employed. Nineteen percent of Singapore households and twenty-five percent of individuals were found to be in poverty, which was defi ned as a hous~hold incom~ that was insufficient for minimum standards.'" The rapid rise in the birth rate also foreshadowed future d ifficulties. Between 1947 and 1957 Singapore's population grew at 4·4 percent annually with natural increase accounting for most of this growth.l' This would eventually translate into significant labour force growth and government policy had to take this into account. Singapore's reliance on entrepot commerce and the income from British military bases would be insufficient to meet the needs of a rapidly growing population .which would require an increase in socia l services.-" In a 1955 report of a mission organized by the International Bank for Reconstruction and Development, Singapore's ability to meet public financial requirements from domestic resources was doubted unless additional taxes were levied and present balances drawn upon." This was because net public expenditure for social services was expected to increase significantly, albeit from ~ low !eve!,>< ,. /d. at >91. 3 ' ld. at 292.. " TURNBULL. supra note >6, at >75·76. ll JOHNS HOPKINS, THE ECONOMIC DEVELOPMENT OF MALAYA REPORT OF A MISSION ORGANIZED BY THE INTERNATIONAL BANK FOR RECONSTRUCTION AN D DEVELOPMENT (1955), available at http://www· wds.worldbank.org/external/default/WDSContentServer/WDSP/IB/>OOJ/Ol}o8/G00178 8JG- 981G19111JJIJ7/Rendered/ PDF/ mulriopage.pd f. " /d. at 139. 72 Goh Keng Swee, who was later to become Singapore's Deput:y Prime Minister, described the political situation faced by the PAP government in the following way:» "As a condition for assuming office (in 1959], we had secured the release of the communist united front leaders who had been jailed by the British. The mass organizations were, therefore, once again under complete communist domination, and the governmtnt elected on a social democratic platform was virtually their political prisoner. By 1960, the social democrats in the PAP reluctantly came to the decision that they had to break with the communists, and possibly bring the fight into the open. Their chances of success were extremely small, and it was likely that the communists would then take o ver the reins of government .. either directly or, more likely, through proxies willing to prostitute themselves for a brief illusion of political glory."J6 Although it is sometimes remarked t hat the difficulties of the 1950s and 1960s may be overstated to enhance the role played by the PAP "GOii KENC SWEE, TH E PRACTICE OF ECONOMIC GROWI'H, 96 (1995) [hereinafter GOH ( •99sll. J6 He went o n to say that at times it seemed that escape from disaster was achieved only th rough the assistance of a benevolent Pro·l'idence. /d. at 98. 73 government as led by Lee Kuan Yew, it cannot be doubted that the political dimate at that time was fluid and uncertain. To fncrease its popular support, the PAP government embarked on a program of social reformn One priority was to construct more public housing. The Housing and Development Board was established on February lSI, 1960 with Lim Kim San, who was to later become a government minister, as its first chairman. The Board replaced the Singapore Improvement Trust and was tasked with solving Singapore's housing problem. At the time, many were living in unhygien ic slums and squatter settlements with only nine percer>t living in government flats. In less than three years the Board builtl1,ooo flats and by 1965 it had built 54.000 flats. Today, about eighty-two percent of Singaporeans live in public housing.,. Other significant steps were to improve health facilities, utilities, and education. For example, expenditure on education rose from s6oo,ooo in 1960 to $10 million in 1963 and the school population increased over the same period from 290,000 to 430,ooo. The PAP pledged to provide universal free primary schooling as its first educational priority and embarked on a crash school building program and the recruiting and training of teachers-'9 Such ambitious social goals would be unsustainable without economic development. In the 1950s and early 196os, a generally held view was t hat "TURNBULL, supra note 26, at U4- 285. See Housing & Development Board, http://www.hd!l.gov .sg/fi•o/fiJOJ20p.nsffw I AboutUsH DBH istory?Open Document (last visited Marc-h 20th, 2015.) 19 TuRNBUU, supra note z.6, at 284. 74 Singapore was not viable as an independent entity and had to be part of Malaya. Historically, Singapore had played an important role in the Malayan economy and it was considered that she would not be economically viable without union with the Federation of Malaya. Singapore's leaders were keen on merger with the Federation as this would ensure Singapore's continued access to Malayan markets. On August JISt, 1963, Singapore together with Sabah and Sarawak joined the Federation of Malaya to form the new Federation of Malaysia. However, the period of ~erger proved to be a difficult one and on August 9th, 1965 Singapore ceased to be part of Malaysia. The separation from Malaysia was traumatic for the Singapore leadership as many within the PAP had not cpnceived that Singapore would have to go it alone.•• However. Goh Keng Swee was convinced by July 1965 that Singapore's economy could only flourish if it was completely free of control from the Malaysian central government." A further potentially devastating blow was to come several years later when on January 15th, 1968 the British '"In his autobiography, LEE KUAN YEW, fROM THIRD WORLD To fiRST-THE SINGAPORE STORY: 1965 -woo (2.000), he wrote at 19 that ne never expected to find himself in charge of an independent Singapore which faced "'tremendous odds with an improbable chance of survival. Singapore was not a natural counrry but man· made, a trading post the British had developed into a nodal point in their world-wide maritime empire. We inherited the island without its hinterland, a heart without a body ... See also TuRNBULL, supra note 26, at 2.74-2.75· 4 ' TURNBULL. supra note ~6. at ~95· He was probably alone in this view. /d. at 299. Goh Keng Swee admitted that the expulsion from Malaysia was a terrifying experience for Singaporeans of his generation. Ste his speech in March 1986 to the Government of Egypt titled "Transformation of Singapore's Ecor.omy, 1960-1985'" reproduced in LINDA Low (ED.), WEALTH OF EAST ASIAN NATIONS: SPEECHES AND WRTT/NGS BY GDH KENC SWEE (1995) (hereinafter Goh (1986)), at >4. 75 government announced that its forces east of Suez would be withdrawn in December 1971. Given that the British military bases in Singapore provided substantial employment, not to mention the importance to t he economy of the businesses that supported the military bases, this was a severe setback to the government of a new and developing country.•' Beyond the immediate economic consequences, the withdrawal of British forces also meant that Singapore would have to invest more in building up its military. This would place further pressure on its public finances. There was also the issue of confidence in Singapore's future, which was necessary to attract investment into the country.43 It has been said that the beginnings of a significantly expanded and more intrusive role played by the government in the economy can be traced to the announcement of the military withdrawal." Prior to this the government 41 LEE KUAN YEW, supra note 40, at 69 estimated that British military expenditure was some 20% of Singapore's GOP, provid.ing over )O,ooo jobs in direct employment and another 40,000 in support services. La:wrence B. Krause, Government as Entrepreneur, in MANAGEMENT Of SUCCESS: THE MOUlDING O f MODE.RN SINGAPORE 438 (1!)89) stated the British expendit-ures constituted u .7%- of GOP in t¢7 and were responsible, direcrtly and indirectly, for the employment of38,ooo local workers, 20% of the work force. ~ Singapore's \I'Uincrability, or perce.ived vulner-abiliry, is still an important elemen1 in government policy and rhetoric today. See, e.g. GAVIN PEEBLES & PETER WILSON, EcoNOMIC GROWTH AND DEVELOPMENT IN SINCAPORE- f>Asr AND f.UTuRe, 6-7 (>oo>). "Ow Chin Hock, Singapore in NGUYEN T RUONG (ED.) , THE ROLE Of PUBLIC ENTERPRISE IN NATIONAL DEvtLOPMENT IN SoUT>IEAST ASIA: PROBLEMS Atoo8). 43 Chan Chin Bock, How Sinyopore Became a Newly Industrialized Economy, in StNCAI'ORE ECONOMIC DEVELOPMENT BOARD, HEART WORK 2: £08 & PARTNERS: NEW fRON"nERS FOR TI-lE StNGAI'OR£ ECONOMY I} (wn). ·~ Goh (1986), supra note 41, at 24- 25 referred to the period t96o- 19l)5 as the first phase of economic development in Singapore, which achjeved little. Nevertheless, some valuable lessons were learned: (•) import substitution industrialiution would not be a feasible policy for Singapore; (z) another option was to produce for the export market; and (3) political stability is a necessary component of economic growth. 78 One difficulty with the industrialization strategy was that Singapore's largely entrep6t economy did not natura lly lend itself to industrialization. The base of human capital necessary for this was insufficient, and the governmen t may also not have been able or willing to look to the Chinese-educated businessmen who had traditionally made up Singapore's entrepreneurs.,. The capital markets were relatively underdeveloped and ill equ ipped to support large private undertakings. Additionally, the private sector may have also been risk averse'' A former EDB Chairman has gone so far as to say that Singapore had no industrial base whatsoever to build on." Multinational corporations were one potential method for developing an industrial base, the other being strong state involvement in certain sectors of the economy.» It was the government's perceived need to support the transformation of the Singapore economy that led to the formation of GLCs. Singapore's leaders found that control over key domestic markets and institutions was the most effective way to respond to opportunities in the world economy to meet the main planning ~HUFF, supra note 19, at 32.0. 5' Lee Sheng Yi, Public Enterprise and Economic Development in Singapore, 21 MALAYAN ECONOMIC REVIEW 49, 51 (1976). 51 Chan. supra note 48, at 13. On the other hand, HUFF, supra note 29, at 189 expressed the view that by 1959, despite industrial development not being spectacular, a solid foundation for industrialization had been built. , HUFF, supra note 2.9, at 310, quotes Goh Ken& Swee in an interview: "we imported entrepreneurs in the form of multinational corporations and the government itself became an entrepreneur in a big way"; HUFF, supra note 25, at 739-74l See also LEE KUAN YEW, supra note 401 at 75J which states the government concluded that Singapore's best hope lay with the American multinational corporations that brought higher technology in large-scale operations to create many jobs. 79 objectives of absorbing surplus labor and promoting economic growth.5' Tihe . colonial inheritance of statutory boards such as the Singapore Harbour Board meant that the state's action did not break entirely with the past' 5 More importantly, as mentioned earlier, the British exit served as a significant catalyst for even greater state involvement. To ameliorate the impact o n Singapore from the withdrawal of British troops, the British government agreed to hand over some of its assets. One was the naval dockyard at Sembawang. which was handed over for a token sum of SG01.oo. Sembawang Shipyard Pte Ltd was established on june 19th, 1968 to begin business as a commercial ship repairer with Swan Hunter (International) Limited as Managing Agent. Similarly, Keppel Shipyard (Pte) Ltd was established in 1968 when Keppel Harbour was taken over from the British Royal Navy. The former Royal Air Force Changi air base was chosen in 1975 to be the site of Singapore's international airport and the site expanded through land reclamation. Today it is managed by Changi Airport Group (Singapore) Pte Ltd and is one of the most successful airports in the world. Other properties that the British handed over to Singapore included Sentosa Island, a major tourism site; the former British Army headquarters at Fort Canning; the Seletar military airfield; and the Pasir Panjang military complex that now houses most of the academic departments of the National University of Singapore, the country's oldest university. The Singapore government did not stop at establishing GLCs from the assets handed over by the British. Indeed, the government went well beyond s- HUFF, supra note ::s, at 748, citing an interview with Goh Keng Swee. ss HUFF, supra note 29, at JJI. 80 what the colonial government would have thought was within its remit. GLCs were a means for the government tO take the lead in establishing new industries, including in the services sector, where the private sector could not or would not. Indeed, National Iron and Steel Mills Limited was incorporated as early as August 12th, 1961 and was the first manufacturing plant in the jurong Industrial Estate that the government had established. 56 The Development Bank of Singapore, now known simply as DBS, was established in 1968 to take over the development finance section from EDB . .DBS was thus an important catalyst for Singapore's industrial development in the early years after independence. Lee Kuan Yew explained that "DBS helped finance entrepreneurs who needed venture capital because [the) established banks had no experience outside trade financing and were too conservative and reluctant to lend to would-be manufacturers."" Other important GLCs that were established included Singapore International Airlines; Neptune Orient Lines the national shipping company;s8 and Chartered Industries of Singapore Pte Ltd which was established to make ordnance for the Singapore Armed Forces. In 1968, Singapore Shipbuilding & Engineering Pte Ltd, now known as ST Marine Limited, was established to support the Singapore Navy, and in 1975 Singapore Technologies Aerospace Pte Ltd 59 was formed to support the Singapore Air Force. Today, Chartered Industries, ST Marine and ST S6 Some companies such as National Iron and Steel Mills Limited were established as joint ventures with Singaporean and overse.as inves-tors. S7 LEE KUAN YEW, supra note 40, at 59· S8 Thus GLCs were also established in the services sector as shown by Singapore Jnternational Airlines and Neptune Orient Lines. 59 Today it is known as ST Aerospace Umited. 81 Aerospace are all part of the ST Engineering group, one of Singapore's large•t GLCs. It has also diversified its customer base significantly with much of its business today coming from commercial companies.6o The circumstances in which Singapore found herself probably explain the importance of GLCs in her econ omy compared to other Asian peers such as Japan, Hong Kong, South Korea an d Taiwan. Hong Kong's development was largely driven by private enterprise. While many large companies in Japan, South Korea and Taiwan did benefit from state support, that backing d id not lead to widespread government ownership of companies. What may have distinguished Singapore from these economies were Britain's generosity in giving Singapore land (without charge) that could be used for economic or defense purposes, and the perceived market failure of lacking sufficient entrepreneurs to support industrialization . 6' Acting in tandem, these two factors caused the state to become a significant market participant.6 ' Indeed , in 1977 Goh Keng Swee explained that government-owned enterprises in 6o Chua Beng Huat, State· Owned Enterprises. State-Capitalism and Social Distribution in Singapore, Tl-iE PACIFIC REVIEW (forthcoming in xxxx), has also described how Singapor,e uncoupled certain colonial era statutory boards' regulatory functjons from the supply of services, allowing the government to regulate the prices of domestk services whil-e simultaneously enabling suppliers to become opportunistic commercial enterprises both in Singapo.re and abroad, and thereby transforming them into multinationa l corporations in the process. 6 ' LEE KUANYEW, supra note 4039, at 54-55, 59· 6186; Lee Sheng Yi, supra note 510, at 55-· 61 The Singapore government's entrepreneurial role also affected savings behavior, helpi ng to finance the capital accumulation necessary for economic development. Se-e GREGOR HOPF, SAVING ANO II Goh Kens Swee, Public Enterprises, Speech at the NTUC INCOM E Annual General Meeting (Jun. 10, •9n), reprinted in Low, supra note 41, at 122-ll.J [hereinafter Goh (•9n)). In addition, there were companies established for specific needs, such as those to support defense needs . ., Goh Keng Swee, What Causes Fast Economic Growth?, Speech at the 4'" K.T. li lecture at Harvard University (Occ. •3· •993). reprinted in LOw, supra note 41, at 2.52.; Goh (1995), supra note 35. aq . ., Goh (•9n). supra note 63, at 122- 123. 66 PEEBLES & WILSON, supra note 4243. at 30. 0" Chin Hock, supra note 4344, at 169, also suggests that government participation served as a safeguard against excessive foreign control and ownership. 67 T here have been suggestions rhat rhe PAP government used rhe opportuniry presented by Singapore's expulsion from Malaysia to engender a constant sense of crisis 83 The PAP's approach to economic survival was thus a pragmatic one. Goh Keng Swee said that the PAP had to try a more activist and interventionist approach as the laissez faire policies of the colonial era had led to little economic growth, massive unemployment, wretched housing, and inadequate education. An aspect of this more interventionist approach was tlhe government's direct effort in promoting industrial growth through G LCs which in turn created substantial employment.63 The Singapore government was not unaware of the risks of such an approach. Lee Kuan Yew.has written of his fear that the GLCs would become subsidized and loss making nationalized corporations as had happened in many new countries. However, he was persuaded by Hon Sui Sen, who was then a Permanent Secretary and lat er became Minister for Finance, that it was possible to succeed as these companies could compete in the market. If they were not profitable they would be shut down. Lee Kuan Yew, together with other cabinet colleagues such as Goh Keng $wee, thought this bold plan was worth the risk given the dearth of entrepreneurs.69 so as to build support for the PAP and encourage Singaporeans to make sacrifices for the future, see e.g. HOPF, supra note 6162., at 32.4 - 32.6; PEEBLES & W ILSON, supra note 42. at 7· While it is true that the PAP government does try to justify many polides on the basis of Singapore's inherent vulnerabil ity as a small state, and was undoubtedly astute enough to make use of Singapore's expulsion to solidify its support, it is suggested that its feaJ of going it alone was genuine. Historically, geographically and cultura lly Singapore was bound to the Malayan peninsula and the idea of an independent Singapore separate from Malaya would not have been the preferred option at that time and unthinkable to a large part ofthe population. 63 Goh (1995), supra note 3435· at 104 - 105, .. LEE KUAN YEW, supra note 40, at 87. 84 Singapore's industrialization efforts proved successful. The economy saw a shift to manufacturing. Its share in total output grew from 16.6 percent in 1960 to 29.4 percent by 1979. In 1992, manufacturing contributed 27.6 percent of GOP a'nd accounted for 27.5 percent of employment. 10 Public enterprises were, by the first half of 1974, thought to account for fourteen to. sixteen percent of tota l manufacturing output.7' The successful management of the Singapore economy is a majo1· factor for the PAP's longevity as the ruling party in Singapore. Accordingly, when elections were held in September 1963 the PAP gained a clear victory, winning thirty-one out of fifty-one seats. The Barisan Sosialis, which had been formed by former PAP members, managed to win thirteen and the United People's Party won one. The PAP's victory in the following election held in 1968 was even more comprehensive. The Barisan Sosialis boycotted the election and the ruling parry won every seat that was contested. The Barisan's boycott in 1968 meant that the outcome of the election was a foregone conclusion. The 1963 election is therefore a better indicator of a decisive switch in popular support to the PAP. While it is true that the Barisan operated at a disadvantage in that election as some of its leaders were in prison, the outcome was not certain. According to a historian, the result of the 1963 polls appeared to hang in the balance and the PAP's dear victory was a surprise to both PAP and Barisan supporters alike.7' The PAP obtained just under forty-seven percent of the popular vote while the Barisan obtained 70 HUFF, supra note 1415, at 739· 7 ' Lee Sheng Yi, supra note 5051, at 64. 7 " T URNBULL, supra note 2526, at 286. 85 around }}%. A major reason for this was the PAP's governance record. Th·e party's good economic management and social policies had helped it to garnN more support from the populace. As the PAP leadership under Lee Kuan Yew was aware of its initially precarious position within Singapore's political arena, and sought to win the support of the majority of Singaporeans, their strategy was to improve the social and economic conditions of the people. Good economic management was regarded as an important key to strengthening the PAP's political position, and government entrepreneurship was intended to facilitate Singapore's economic development. n GLCs gave the government considerable influence in certain seg)nents of the economy. The link between economic legitimacy and political power in Singapore cannot be understated. Singapore has for most of her modern history been a largely immigrant society focused on commercial enterprise. The Chinese, Indians and other races that came to Singapore did so to engage in trade or to find work. By the end of the nineteenth century Singapore had a secure place in the pattern of world trade as a staple port, the entrepot for Southeast Asian raw materials and Western manufactured goods, with an increasingly sophisticated infrastructure of commercial institutions and expertise." Singapore today is still essentially a commercial city and h..-r survival is premised on her abil ity to be commercially relevant to the wide·r region around her and as an important node for Western commercial enterprises and investors. Thus while economic growth is important to a ll 1l Goh {1995), supra note 3435· at 103 refers to the government having to involve itself in d irect ownership and control of many industrial, financial and commercial enterprises to bring about economic growth. 74 TURNBUI..I.., supra note 2526, aL 105. 86 countries, it is an almost existential condition in Singapore. It is therefore not surprisi ng t hat economic legitimacy is probably the most important determinant of political legitimacy in Singapore. The social contract with the people that has kept the PAP government in power since independence is widely accepted to be the promise of employment and a fair distribution of economic benefits, a significant part of wh ich is represented by the provision of good public housing which a large majority of Singaporeans reside in.n It has been suggested that any serious diminution of the positions of GLCs would have major implications for the political regime, one reason being that the fortunes of the GLCs will influence the reformulation of any new social contract between the government and Singapore's citizens. 76 Thus fortuitously from the outset the conditions to encourage the responsible management of GLCs were in place. The management of G LCs in the Singapore context cannot be separated from the overall approach that the PAP government adopted in the development of the Singapore economy. After all it was civil servants acting at the behest of their political masters who were tasked in the earlier years with managing GLCs, which they did with the goal of economic development in mind. In keeping with the goal of fostering good governance, the government also adopted a zero tolerance approach to corruption. It is well " The perception that this social contract is less eff'ect ive today was a major contributing factor to the results of the l.OtJ General Election in Singapore which saw the opposition winning an unprecedented 6 out of the 87 elected seats in Parliament and the loss of 2 cabinet ministers. Subsequently, the Workers Party won a by·electiOI) in january 2.013 when the PAP Speaker of Parliament resigned his seat .. 16 Garry Rodan .. International capital, Singaport's state companies, and security, 36 CRmCA~ASIAN STUDIES 479,480 (1004) . 87 known that corruption was fairly widespread in Singapore in the 1950s and 1960s and the PAP set out to contrast its conduct with that of the previous Labour Front government. Much of the corruption in Singapore at the time was of the petty kind but there wer·e also larger scandals. The PAP government set out to eradicate corruption and today Singapore is regarded as one of tihe least corrupt countries. This undoubtedly was also a factor in GLCs in Singapore being relatively well managed and not the victims of rent seeking that often occur in SOEs elsewhere. Indeed the aversion of the PAP government to corruption, particularly in the public sector, is evidenced by the fact that under Singapore law, a publk servant who receives. any gratification shall be presumed to have received such gratification corruptly as an inducement or reward, unless the contrary is proved by such public servant.n With GLCs seen as an important engine in the development of tihe Singapore economy, the main method chosen by the government to exercise control over GLCs when civil servants ceased to manage such companies was the appoilltment of top civil servants to the boards of these companies. These civil servants serve a monitoring function but otherwise government control is very loose. The government makes no attempt to appoint managers or other personnel to manage the companies and normally does not interfere in the management of. GLCs.78 The boards of GLCs are policy boards rather than 71 Prevention of Corruption Act (Cap Z41). , 8 . The general position without the presumption is that the prosecution has to prove both the gratification and that su.ch gratification was solicited or given "'as an inducement to or reward for" doing or forbearing to do something, Prevention of Corruption Act. , 5· .,. Lee Sheng Yi. supra note 5051, at 57; Goh (•m). supra note 6263, at 124. Though it was said in the 1970s that cert"ain top civil servants were found to sit on several boards 88 functional (managerial) ones.'9 This model has endured and is still largely in operation today though one important difference is the interposition of a company to play the role that the state once did. Temasek Holdings Pte Ltd was incorporated on January lSI, 1974 to hold and manage the investments and assets previously held by the Singapore government."" Its sole shareholder is the Minister for Finance and the transfer of government assets to Temasek was to allow it to manage those assets on a commercial basis ... Temasek states that it is an engaged shareholder that promotes sound corporate governance in its portfolio companies. This includes supporting the formation of high caliber, experienced •nd diverse boards to guide and complement management leadership. Temasek's policy is not to direct the at che same time and that such interlocking directorships allowed control cu~d coordination with government policies to be ensured. see Ow Chin Hock, supra note 4344, at 177, and also PH ILLIP N. PILLAI, STA11l Ei'ITERPRISE IN SINGAPORE: LEGAL IMPORTATION AND DEVELOPMENT 117, 202~04 (t98J). Pillai points out that government directors are clustered along related industries to allow specialization and prevent over-extension that would lead to such director> being unable to expand adequate time and e11ergy on the activities of their companies. Specialization means that these directors would be ramiliar with the industry, trends and developments and could more readily contribute and safeguard the state's investment than if they were directors of companies in widely disparate groups. 79 PIUAI, supra note 7n8. at n6. &o A commentator has opined that the state·business relationship is even closer today, esp«ially in the previous decade when Temasek Holdings and its GLCs have expanded, see Ho lLUM. J. TRANSNA'I"L L. 213, 213 (1999) (arguing against convergence of corporate governance because "'each national governance system is a system to a signif'icant extent"), 9' M ARK ) , ROE, STRONG MANAGERS, WEAK 0WNElS: THE POunCAL ROOTS or AMERICA" CORPORATE FI, ANCE (1994); MARK J. ROE, POLroCAL DETERMINANTS OF CORPORATE GOVERNANCE: POLITICAL CONTEXT, CORPORA1'E IMPACT (>OOJ); Raghuram G. Rajan & Luigi Zingales, The Great Reversals: The Politics of F;nancial Development in the Twentieth Century, 69 J. FIN. EcON. 5 (>oo)}; RAGIIURAN G . RAJAN & LUIGI ZINCAI.tS, SAVING 95 play an imporrant role in shaping corporate governance structures and practiCE$. Having said this, it is entirely possible that over time, Singapore's dominant form of corporate governance could evolve sufficiently to resemble the market-oriented model of a shareholder-centric corporation. Even so, it is perhaps a fallacy to assume that there is a · resting point" for corporate governance structures. A "converged" system of corporate governance may itself evolve over time into something materially different. While the optimism among Chinese officials to achieve a transplant of Singapore's successful GLC model into China is comprehensible, as might be the case with other countries exploring this model as a potential one for reform, we caution against its wholesale adoption without regard to tihe underlying historical factors in Singapore that have been at play. The goa l of this article has be.en to highlight these historical factors with a view to providing some further strands of thought into the convergence-versll1s­ divergence debate. At the same time, we consider this study to be the initial building block for further academic research on Singapore GLCs. Possible further avenues for research include: (i) the precise nature of management and governance structures and mechanisms in GLCs, and how they operate in fact; (ii) comparison between the governance structures and mechanisms between GLCs and privately-owned companies in Singapore; and (iii) comparison between tbe governance and performance of GLCs and SOEs in other (APITAUSM FROM THE CAPITALISfS: UNLEASHI"C THE POWER OF FINANCIAL M ARKETS TO CREATE WEALTH AND SPREA00PPORnJ"ITY (2.004). 9' Amir N. Licht, 1'/Jt Mother of All Path Dependencies: Toward a Cross-Cultura/1'heory afCorporote Governance Systems, 16 On. J. CORP. L. 147 (wot). 96 jurisdictions. These will enable a further understanding of the role and impact ofSOEs, which continue to be a dominant force in several Asian markets, with their influence extending to other parts o' the world. More broadly, it is our hope that these approaches will expand and challenge conventional notions and theories in corporate governance, so as to widen the discourse. Finally. we should expressly add a caveat about what this article is not about. We do not seek to argue by implication that Singapore should continue to re ly on GLCs as major drivers of her economy. While her historical circumstances suggest a strong path dependency towards strong state involvement in the economy,~ it is and will remain an open question whether this should still be the case or if it is time for the government to further distance itself from the commercial sphere. This continues to be a matter of debate within Singapore. What this article seeks to demonstrate is that Singapore has shown it is possible to have efficient SOEs, and that this was because of her unique experiences and circumstances. n An additional factor that reinforces this path dependency is Temasek's role in safeguard ing and investing Singapore's reserves. a role that it plays together with other government institutions such as the Government Investment Corpor.ltion of Singapore, the Monetary Authority of Singapore and the Central Provident Fund. 97 Copyright of Columbia Journal of Asian Law is the property of Columbia Journal of Asian Law and its content may not be copied or emailed to multiple sites or posted to a listserv without the copyright holder's express written permission. However, users may print, download, or email articles for individual use.