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Asia Times
18th December 2001

Money politics under the spotlight

By Anil Netto

PENANG - Analysts are questioning a controversial deal in the restructuring of Malaysia's biggest conglomerate, the debt-ridden UEM-Renong group. As part of the restructuring plan, the government will cancel RM2.4 billion (US$632 million) owed to the group under a put option by Halim Saad, the group's former owner and manager.

The cancellation not only means that taxpayers will lose out but it has put into the spotlight larger questions of accountability and transparency. It has certainly thrust issues such as corporate governance, money politics and accountability into the forefront at a time when the government is feverishly trying to clean up debts and restore investor confidence.

Enormous questions arise as to who was ultimately responsible for the near-bankruptcy of UEM-Renong, a politically linked engineering and construction giant that was awarded a string of contracts for massive infrastructure projects. "This is a really complicated story," economist Edmund Terence Gomez told Asia Times Online. "It shows the intriguing relationship over ownership and control of the largest Malay company."

The canceled put option stems from a controversial merger in 1998, when Halim Saad's UEM, which owns the cash-generating North-South Highway toll-operator PLUS, took a huge short-term loan to acquire a 32.6 percent stake in its holding company, Renong Bhd, at an inflated price. Analysts viewed that deal as a bailout - an effort to rescue Renong, Malaysia's most indebted group, by injecting capital from the healthier UEM. Investors and analysts reacted negatively, triggering a RM70 billion or 20 percent meltdown in the stock market in the three days after the deal was announced.

After enraged UEM minority shareholders protested, Halim agreed to buy back UEM's stake in Renong under a put option. But Halim's failure to pay the scheduled instalments to UEM eventually led to a government takeover of the group this year. Halim resigned from the group in October after the takeover.

For Gomez there are deeper implications: "Halim was never really independent," he argues, "and he was never really in control because he took his orders" from the highest levels of government.

If that is true, it could explain why Halim appears to have been treated with kid gloves so far. A local daily said UEM is "consulting legal advisers on the next course of action". It is also looking into making provisions of RM2.4 billion for the unpaid portion of the RM3.17 billion put option.

Gomez, who authored the book Politics in Business: UMNO's Corporate Investments, among others, has carried out extensive research into the impact of party politics and economic development on the relationship between politics and business in Malaysia. In another book he co-authored, the rapid conglomerization of the Renong Group and its dominant - if not near-monopoly position in some important economic activities - are attributed to executive patronage.

The cancellation of Halim's put option was announced last Wednesday as part of a massive restructuring plan to trim the UEM-Renong group's RM30 billion debt by next year. UEM said it planned to list the toll-generating PLUS by mid-2002, divest assets in six companies including five listed firms and streamline the group into five core business units. The plan comes on the back of a proposed toll hike for highway users.

Much of the restructuring will hinge on how successful the PLUS listing, expected to be among Malaysia's largest, proves to be. That in turn will depend on whether existing PLUS bonds can be refinanced and whether the firm's non-core assets can be divested.

It's a huge cleanup operation, by all accounts, and it wasn't meant to be this way. Renong was supposed to represent and mobilize large bumiputra (indigenous Malay) capital and to showcase the billionaire bumiputra entrepreneurs that Prime Minister Mahathir Mohamad had wanted to cultivate. Instead, the group found its massive debt burden dragging down the banking system and dampening market sentiment.

The restructuring of UEM-Renong is meant to restore market confidence. But the reprieve for Halim has left a sour taste among analysts. "Why should they terminate the put option?" asks economist Subramaniam Pillay. "Shouldn't they be freezing Halim's assets immediately?"

The cancellation of the put option raises more questions than answers as to who was ultimately responsible for the debacle. "Was Halim acting on his own or was he acting on behalf of more powerful interests aligned to the ruling party?" asks Subramaniam. "Isn't it obvious by now?" A clear explanation is needed as to why Halim is being let off the hook, he maintains.

A full inquiry into this controversial deal, however, may throw up prominent names and shake up the system. So don't expect a comprehensive inquiry into the cancellation of the put option. Instead, expect the government to adopt a "let bygones be bygones" attitude and wait for the heat to subside.