1985: Pan-El capped watershed year for S'pore

FOR the first 20 years of its existence as a fully independent nation, Singapore developed at a pace matched only by China in recent years. Average GDP growth exceeded 8 per cent. The island began to be transformed into a major industrial hub, with development concentrated in Jurong. Transport and communications were key to this. Singapore had always been a significant port, initially based on the river and its godowns and the "roads" of the deepwater harbour outside in the 19th century. At independence, Singapore inherited major dockyards at Keppel and Sembawang and wharves that were spreading from Anson to the West. There was a regional airport hub at Paya Lebar.

By 1985, Paya Lebar had been replaced by Changi (Terminal 1 in 1981) and Terminal 2 was well under way. Containerisation was booming and the port was expanding massively, through Anson, into Keppel, and beyond to Jurong and eventually Tuas. Development of the MRT started in 1983, with the first line opened in 1987. Expressways sprang up - the AYE and the PIE were just about complete (albeit with some narrow parts), the CTE and the BKE were well under way. The HDB was in the midst of its biggest-ever building spree (and resettlement). Ang Mo Kio was complete, the hills at Tampines had been levelled to fill in Marina Bay. It was the time when nostalgic locals thought they would lose Chinatown, Raffles Hotel and Little India to the ever-expanding hotel and shopping developments. In terms of physical development, there was not a cloud on the horizon.

As a service centre, Singapore was comparatively underdeveloped, but still the hub for Asean. The government policy of absolute honesty, transparent regulation, relatively low red tape and openness to foreign investment allowed banking, insurance, legal, accounting and other services to flourish. However, there were restrictions which we would not recognise today. Foreign banks could do any foreign business, but the local retail market was off-limits. Licences had to be strictly adhered to. The stock market had yet to disengage fully from Kuala Lumpur, with many dual listings, and neither market could be said to be of international importance.

The year 1985 brought a lot of economic gloom. Singapore went into recession, caused by a global slowdown, especially in the US, its major trading partner. Regionally, there were still trade barriers to overcome, notably with Malaysia, and there was growing competition in some of the traditional industries - ports, airports, shipbuilding and shiprepair. A senior government figure was heard calling the latter two "sunset" industries. Probably something he now regrets!

The third quarter of 1985 showed an economic decline of 3.7 per cent - gloom and doom all around, which was not something Singaporeans were used to. Enter Pan Electric Industries Limited (Pan-El).

The first that the public knew about the PanEl "scandal" was that its shares were suspended on Nov 19, 1985. The reason was that its directors had declared themselves unable to furnish certain financial and accounting guarantees for a rights issue being prepared by Standard Chartered Merchant Bank. Suspension caused consternation in the stock market, because Pan-El was a heavily traded stock, with many small shareholders. At that time, most listed companies were closely held and the opportunities for share trading were limited. The local press took a keen interest.

On Nov 20, Price Waterhouse (PW) were asked to do an immediate investigation, but of what we had little idea at the time. Same for the bankers. PW got involved simply because we were the only large accounting firm not associated with Pan-El. In company with many other conglomerates, Pan-El had spread its audits around. I got the initial brief simply because I was the "spare" consulting partner at the time.

THICKENING PLOT

Pan-El had various activities - the most significant was Selco, involved in international salvage and towing, with some very high-profile salvages. It was reckoned to be the second largest operation of its kind in the world, to Smit Tak of the Netherlands, and was certainly the largest one east of Suez. It owned the Orchard Hotel and had some small property and industrial interests. What it definitely did not do was to manufacture cookers and washing machines, this business having been sold to Acma in return for 10 per cent of Acma shares. The name "Pan-El" caused quite a lot of confusion as a result. Also, what it did do, but definitely did not record as an activity, was to trade in shares. It was the disclosure that it was involved in S$140 million of forward share contracts, some with related companies, that caused the rights issue to be aborted and the shares to be suspended.

Pan-El had had one Peter Tham as a director and major shareholder and it was Tham who had instigated the share trading, via his brokerage - Associated Asian Securities (AAS). However, by 1985, Tham had sold his interest in Pan-El to Tan Koon Swan, via two Malaysian companies - Growth Industrial Holdings and Sigma International, also listed companies and counterparties to some of the forward contracts, all negotiated via AAS. Tan was about to be elected as leader of the Malaysian Chinese Association, which would see him enter coalition in the Malaysian government, headed by Mahathir Mohamad. The plot was thickening very fast, with ramifications well beyond a small Singapore conglomerate.

There were a large number of banks involved, some with considerable unsecured debt, and the mood was to shut down Pan-El immediately. However, because of political implications and international financial implications (a number of mainly Malaysian companies with senior names were also involved with forward contracts, as were many broking firms), it was decided to stay action. The key actions were to:

This was put to creditor banks in a meeting on Nov 21 and was accepted by them. The meeting itself was almost farcical. Because of banking secrecy laws, not many banks knew which other banks were involved. A total of 38 banks turned up, crowding out the Standard Chartered training room - the room was full of "Not you as well?" One senior banker from Malaysia, whose bank was not a creditor, had to be ejected for hiding behind a dividing screen to listen in for his client.

STOCKMARKET CLOSURE

MAS was brought in the next morning, because of worries about the high-profile problems and implications for the markets and political relations. Also, there was the proposed listing of SIA, which was to be a flagship launch for Singapore.

For the whole of the following week, chaos reigned. The banks did their part by not foreclosing on debts, Tan got elected and spent several days with the MAS, promising to provide funds, meetings were held here, there and everywhere, and the CAID seized all Pan-El's accounting records. Since I was still the appointed financial investigator, I was invited to inspect these records. Inspector Richard Pereira (later famed for front-page picture arresting Tan on the steps of the Orchard Hotel) showed me the room they had piled the boxes in. We agreed it would not be in anyone's interest to try to look at them. PW received S$27 million from two Malaysian sources, to be used to prop up Pan-El, followed immediately by a telex saying the funds were not to be used.

An attempt was made at the end of the week to draw up a list of forward contracts involving Pan-El. At this point, it became clear that there was some very funny business going on, notwithstanding all the other ramifications. Forward contracts were not illegal at all and many companies and brokers were involved in them. However, the only list of Pan-El contracts appeared to be in the financial controller's head, with no contract notes. This information only added to the negotiating problems and by Nov 30, it was clear that there was no commercial substance to them and the banks agreed to appoint receivers.

The stock markets in Singapore and Kuala Lumpur were closed for three days from Dec 2, which invited international interest.

The rest of the "crisis" is well documented. The markets survived, the brokers' "lifeboat" fund was hardly used (but the providers of funds all gained new brokerage seats), Pan-El disappeared, with its major activity becoming the foundation of Sembawang Maritime, several people went to jail, the political crisis was averted, the economy turned round, the auditors were sued, Simex was launched and the Hotel New World fell down. Not all of these events are connected, of course. Singapore resumed its progress to world class, especially in financial services.

Pan-El was a small problem in dollar terms but a turning point in all sorts of ways for Singapore. It has had a part in creating the modern state, in terms of politics, economics, banking, regulation, corporate governance, state and commercial relationships and even social mores (gambling). It is said that when a feather falls, the world changes. Pan-El was feather and in the next article, I will attempt to show some of the changes it caused.