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ATimes: Corporate Malaysia: Falling from grace
By Lynette Ong
27/12/2001 2:50 am Thu
Corporate Malaysia: Falling from grace
By Lynette Ong
SINGAPORE - The past year has been an eventful year for Malaysia's
corporate sector, with bailouts of cronies using people's pension
funds along with the quiet "resignation" of the once powerful finance
minister Tun Daim Zainuddin and the revamp of the Renong group - the
epitome of the business-politics nexus in Malaysia and what was once
the success story of Malaysian Prime Minister Mahathir Mohamad's
vision of Bumiputera (indigenous Malay) entrepreneurship.
The exit of Tun Daim - the erstwhile right-hand man to Mahathir and
the once influential financial advisor to the prime minister - from
the political inner circle in July, was a turning point for corporate
Malaysia. The departure of Tun Daim saw many of his proteges, such as
Halim Saad of Renong, and the former boss of MAS airline Tajudin
Ramli, fall from grace.
The government also moved in to take over the highly indebted
conglomerates - Renong-UEM, MAS, Malaysia Resource Corp Bhd (MRCB) and
Kuala Lumpur light rail operators PUTRA and STAR - in an attempt to
reduce the escalating debt level and to revitalize the moribund stock
Heavyweight foreign brokerage houses, such as Salomon Smith Barney and
Merrill Lynch, have raised their sovereign ratings on Malaysia, citing
improved corporate governance and the government's restructuring
efforts as key factors. Indeed, Malaysia wasn't doing too badly at all
- until recently. Last week, the former owner of Renong, Halim Saad,
got away with not having to pay 3.1 billion ringgit (US$816 million)
he owed to United Engineering Malaysia (UEM), in a closely watched
UEM-Renong debt restructuring exercise.
To tell the story of corporate Malaysia, one must start with the New
Economic Policy - Mahathir's grand vision to breed a class of Malay
entrepreneurs as part of the objective to narrow the income gap
between the Chinese and the Bumiputeras (literally sons of the soil).
Halim Saad and Tajudin were among those handpicked by the prime
minister and his advisor Tun Daim to run Malaysia's largest
Thirty years of affirmative action policies resulted in a close nexus
between business and politics - the creation of a handful of
politically well-connected Malay entrepreneurs. These companies have
been fed on the diet of government infrastructure projects, such as
the construction of toll roads and high-tech transport systems, and
have been the major beneficiaries of the government's privatization
drive ostensibly to improve economic efficiency.
Renong Bhd was the former investment arm of Mahathir's ruling UMNO
party. And until recently, it was the country's most powerful
conglomerate with interests spanning from infrastructure, oil and gas,
and banking to property. The Asian financial crisis changed all that.
It exposed the woes of these highly indebted conglomerates since many
of them live on soft loans from government-supported banks whose
non-performing loans ballooned several folds when the financial crisis
Instead of tightening the screws on these inefficient enterprises, the
government gave them the easy solution by bailing them out. The most
infamous case involved the "de-privatization" of the national carrier
MAS from the control of Tajudin Ramli. Tun Daim was believed to have
advised the government to buy back the controlling share sold to
Tajudin in the early 1980s by paying more three times its market value
- the government paid eight ringgit a share when the shares of the
ailing carrier was trading at only 3.6 ringgit (not to mention that in
the first place the national carrier was sold to Tajudin without an
open bidding process).
Another messy bailout involved the IPO of a Renong offshoot
TimedotCom, the country's smallest cellular network operator. Despite
the poor response to the company's market debut, it still managed to
raise the money it needed because the people's pension funds
(Employment Provident Fund, EPF, and the civil servant's pension fund)
coughed out over 1 billion ringgit to underwrite the deal.
There was consequently an outpouring of public outrage against what
was apparently the use of taxpayers' money to rescue financially
troubled companies mismanaged by a group of inept managers. The
national trade union called for a nationwide picket and demanded the
government answer for squandering the people's money. At that
juncture, Mahathir was already under intense pressure politically,
having faced increased challenge from the Barisan Alternatif and
rising popularity of the Parti Islam (PAS).
The series of events appeared to be the straw that broke the camel's
back. Mahathir decided that enough was enough and something had to be
done about corporate governance - or at least the perception of it. As
a result, Tun Daim's political career was cut short.
The Corporate Debt Restructuring Committee (CDRC) was revamped with
the appointment of a respected technocrat Azman Yahya. The resource
company, MRCB, is now run by professionals, and has been rid of the
control by Mohamad Maidin, a close associate of Tun Daim. Foreign
brokerage house, Credit Suisse First Boston, called it "Goodbye
cronies, hello professionals" in its latest assessment of Malaysia's
corporate restructuring efforts. The analysts see "a real change" now
that "the departure of the 'all powerful' Tun Daim has left a vacuum,
which is being filled rapidly by professionals".
The market seems to welcome the positive change as well. The Kuala
Lumpur Composite Index (KLCI) rallied almost 20 percent after
September 11 - admittedly it is partly due to the political mileage
the government's has gained by its tough stance against Muslim
fundamentalists, and the crumbling of the Barisan Alternatif.
However, this is only the beginning and there are bumpier roads ahead
for the government. In a complicated cross-holding between Renong and
UEM, the indebted Renong Bhd has been a drag on UEM, which has a cash
cow in toll collector PLUS of the north-south highway, which spans the
length of peninsular Malaysia's west coast. The government took over
UEM from Renong and its former executive chairman Halim Saad in
September following Halim's failure to resolve the Renong Group's
mounting debt problem of 14 billion ringgit. Time Engineering, one of
Renong Bhd's concerns, has just defaulted on a scheduled repayment on
its bonds. This poses a major problem for the government, which now
effectively owns Renong and which is now desperately trying to
restructure the debt of the country's most indebted conglomerate.
Last week, UEM announced plans to shed its debt by listing PLUS and
divesting its non-core assets by mid-2002. This is good news, bar the
fact that UEM has also decided to forgive the 3.1 billion ringgit that
Halim Saad owed to the company (by terminating what is known as a "put
option"). Since UEM has now been taken over by the government, the
move was at the taxpayers' expense, and was seen as (once again) a
bailout of Halim Saad.
Many analysts see this as a setback of the government's corporate
restructuring effort. Malaysia's corporate governance appears to have
gone two steps forward and one step back. Whether all the investors'
confidence that the market has rekindled in the past months is for
real, we'll have to wait and see - until the new year.