I have written on this blog about the problems with relation based systems. The main problem with relation based system is the asymmetries of information. In relation based systems, investments are protected by a relationship based on trust with someone in power or on the other side of the transaction rather than the law. If there is a problem with the transaction or investment, the investor has to hope that their relationship will be sufficient to protect their investment or to enforce the contract. Often it is not.
The problem is that it is difficult or impossible to know who knows whom, what they know or how much power they actually have. Investors and business people from rule based systems are often the victims of this problem since they assume that they are protected by laws in a relationship based system or they are protected by the local customs.
Recently there was an excellent example, but the victim was appropriately Singapore’s Temasek, the investment vehicle and the destination for mandatory pension contributions. It is 100% owned by the Singapore finance ministry.
Two months ago I wrote in this blog about the problems of government owned businesses like their lack of transparency and their tendency to for arrogant and inappropriate business decisions. At the time I wrote the blog it appeared that my predictions were wrong, because Temasek had achieved double digit gains. It appeared that such criticisms were misdirected at Temasek. Singapore has a reputation for honest technocrats who efficiently run state businesses. The problem is that such creatures are about as real as Santa Claus.
An excellent example is the problems that Temasek is experiencing in Thailand. Temasek made a deal with Thaksin Shinawatra, then Prime Minister of Thailand, to purchase Shin Corporation, Thaksin’ family owned telecommunications company. To help the sale proceed, Temasek utilized its relationship and connections not only with Thaksin, but also with Tongnoi Tongyai, who was described as a royal counsellor to Crown Prince Vajiralongkorn. Since Temasek was used to the way people did business in relationship based systems it wanted to cultivate close ties with the crown prince, the most powerful figure in Thailand after his father, the king.
Apparently Temasek got caught by the asymmetries of information. Mr. Tongnoi Tongai may not have had the power he said he had. According to an article in the Financial Times, "Mr Tongnoi's claims of being a personal adviser to the crown prince "have caused damage not only to the country but also instability for international investment in Thailand", the crown prince's office added, saying his duties had been "translating and drafting English documents and occasionally writing letters"
Even Temasek’s connections with Thaksin did not protect it. Thaksin was overthrown in a bloodless coup, illustrating the other problem with relation-based systems. It is not only that your contacts may misrepresent themselves as to their power or their loyalty. The people you have relationships with can die or lose power.
The result is, of course that Temasek lost money. It is estimated that Temasek lost hundreds of millions of dollars. But the money was not Temasek’s or the Lee’s. It belonged to the people of Singapore, who were unprotected by the law.
