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Asia Times
23rd December 2001

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 exchange.

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 conglomerates.

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 struck.

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.