Sunday, November 23, 2008

Win some, lose some

I disagree with Sai Kor’s diatribe on how Town Councils invest their funds.

First, we should understand why Town Councils have large amount of funds. While many expenses are regular and routine (e.g. pay cleaners and gardeners, lift maintenance fees), there are bigger ticket items that come only once in a longer period (e.g. painting, re-paving) as well as ad hoc (some upgrades, repair costs).

To accommodate the latter, part of the conservancy fees are proportioned into sinking funds. Good planning requires that you set aside a regular saving towards each major predictable expense.

For example, to plan for a 100k expense in 10 years (say for repainting a building), the Council would have to set aside 10k a year.

The thing is, with inflation, the cost of the repainting, which is budgeted at 100k today would cost more, possibly 150k. But at the same time, the 10k being set aside each year would amount to more than 100k if it is put in the bank, possibly more than 150k if it is invested.

Just a year ago, everyone’s concern was that inflation far exceeded the fixed deposit rate. The 10 year scenario would be that the accumulated funds (say 120k) would fail to meet the 150k cost, and the funds would need to be topped up. At some point, the difference would need to come from the residents.

In this scenario, I can imagine residents referring Council members to the Parable of the Talents in the bible, and imply that they are irresponsible stewards if they do not invest to ensure that the funds are not eroded by inflation. In these turbulent times days, however, “invest” and “gamble” have an overlapping connotation.

But what is the alternative?

Win some, lose some, I say.

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