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Corporate Bailouts: National Interest or Vested Interest?
By Dr Terence Gomez

9/6/2001 12:22 am Sat

Highlights from Aliran Monthly

Corporate Bailouts

National interest or vested interest?

by Dr Terence Gomez

When Time dotCom's initial public offer (IPO) was poorly received and when it was revealed that much of this company's equity was now owned by a few public institutions, it was widely believed that another bailout had been executed by the government.

Time dotCom is, however, a company with much potential. This firm has in place a massive, completed and fully paid fibre-optic cable network spanning the peninsula, which gives it the possibility of capturing a large subscriber base for its telecommunication services.

Hence Time dotCom will enjoy a head start over competitors when third generation cellular communication technology is introduced in Malaysia. Time dotCom also has the capacity to provide fixed line, cellular, payphone and internet services. Only Time dotCom and Telecoms are expected to remain integrated telecommunication companies in the long run.

Public Ownership of Time dotCom

But if Time dotCom is a potentially profitable company, what is the problem with the EPF and other government-owned institutions acquiring a stake in this firm?

Time dotCom's RM1.9 billion IPO came under close scrutiny because the company was a debt-ridden, loss-making enterprise that did not have the necessary management expertise to develop its potential in the telecommunications industry. Time dotCom was also a subsidiary of Time Engineering, itself a publicly-listed company of the Renong Group controlled by Halim Saad.

Time Engineering, Renong and Halim are heavily mired in debts that they have had problems servicing. Renong is closely associated with UMNO, and Halim has publicly stated that he has served as a proxy for the party's corporate assets.

Therein lies the problem with Time dotCom's IPO: the links between politics and business, and the need for Time Engineering to list Time dotCom as a means of managing the Group's debt crisis.

Time dotCom's IPO was one of the key elements of Time Engineering and Time dotCom's debt restructuring scheme involving loans amounting to RM5.37 billion. However, only 25 per cent of the firm's equity was taken up during the IPO, apparently also because the price of each Time dotCom share, valued at RM3.30, was exorbitant.

Time dotCom's major shareholders now include Time Engineering and a number of government-linked institutions, namely EPF, Khazanah Nasional, Danaharta and the Pension Fund. The IPO 's underwriters were assured that all unsubscribed Time dotCom equity would be taken up by government institutions. This is probably the key reason why this corporate event is viewed as a bailout.

Politics of Business

What does the Time dotCom issue reveal?

First, it demonstrates how power in government has been increasingly concentrated in the hands of a small group of politicians, namely Prime Minister Mahathir Mohamad and Finance Minister Daim Zainuddin. In other words, this IPO provides further credence to the view that all other arms of the government and public institutions have become extremely subservient to the office of the executive.

Second, given this close nexus between politics and business, and the concentration of power in the government, it is questionable if most government policies and actions are undertaken in the public interest.

Third, the government has not learnt any of the lessons of history, especially on issues pertaining to transparency and accountability.

The 1997 financial crisis it drew attention to the links forged between politicians and businessmen that had facilitated the rise of a number of major companies, aided by the use - and, in many cases, abuse - of the domestic financial sector. The crisis revealed that financial institutions controlled by the government or well connected businessmen had channelled loans to a privileged few.

For example, a mere 15 corporate groups accounted for 20 per cent of Malaysia's entire bank loans. Of the RM39 billion loaned by banks for share acquisition, almost 45 per cent were given to individuals. One company, Renong, had accumulated debts excedding 5 per cent of total loans in the Malaysian banking system. Former Deputy Prime Minister Anwar Ibrahim later alleged that less than 10 people were jointly responsible for loans worth around RM70 billion.

The banks with the most non-performing loans were mainly government-owned institutions, including Sime Bank and Bank Bumiputra. In the third bailout in its history, Bank Bumiputra needed a capital injection of RM1.1 billion and the government bought over the bank's non-performing loans. Sime Bank, controlled by Mahathir's former political secretary, Mohd Noor Yusof, before being sold to Sime Darby, was taken over by the well connected Rashid Hussain (RHB) Group.

Deepening Financial Crisis

As the crisis deepened, many well connected businessmen, including Halim Saad and Tajudin Ramli, Finance Minister Daim's business protégés, and Mirzan Mahathir, the Prime Minister's son, found that the value of their corporate stock had shrunk drastically, leaving them with severe loan problems.

In 1997, as the price of Renong's stock fell, the EPF was caught in controversy when it was reported that this public institution had made substantial purchases of the shares of United Engineering Malaysia (UEM), one of the Renong Group's most profitable firms. The EPF's acquisition of UEM equity raised concerns that this institution was being used indirectly to prop up Renong.

Subsequently, UEM, already burdened with debts, secured a RM800 million loan from Malayan Banking, Bank Bumiputra, Bank of Commerce and RHB - all government-owned or well connected banks - to implement a controversial purchase of Renong equity from Halim. This acquisition upset UEM minority shareholders. It was alleged another bailout had been instituted that continued the abuse of the domestic financial sector for vested interests.

Bailouts and 'National Interest'

Contrary to some misconceptions, there have not been many bailouts, but they have been extremely costly. Most of these bailouts have been justified in the 'national interest'.

Proton, manufacturer of the privatised Malaysian car, had to be bought by Petronas from the debt-ridden DRB-Hicom, because the car manufacturer had been incorporated to drive Malaysia?s heavy industrialisation initiative.

Bank Bumiputra could not be put out of business ostensibly because it promotes the development of Bumiputera capital.

Renong is important because it is representative of the large-scale Bumiputera companies that the government is keen on developing.

The loss- and debt-ridden Malaysia Airlines (MAS), the nation's privatised airlines, had to be re-nationalised to rescue it from imminent bankruptcy.

Since the construction of the privatised Bakun Dam had commenced before the financial crisis, the contractor, Ekran, had to be compensated for work already completed before the project was taken over by the government.

Criteria for Bailouts

However, the criteria for determining who should be bailed out were based on a variety of considerations.

Renong and Proton, it seems, had to be saved to prevent Mahathir's grand visions of creating Malay conglomerates and developing Malaysia's car industry from being derailed.

There may have been personal reasons behind other bailouts. The Opposition parties charge that the government had acquired MAS equity at an inflated price to bail out Tajudin's companies, which are deeply in debt.

There appeared to have been some differences among political elites as to whether there should be bailouts. The government's acquisition of corporate assets owned by Mirzan's debt-ridden firm, through a Petronas-controlled public company, was widely reported to have contributed to the problems between Mahathir and then Deputy Prime Minister, Anwar Ibrahim.

When these bailouts were implemented, no one seemed to have asked how these projects were conceived and whether their contracts were awarded in an open and transparent manner.

The viability of the heavy industrialisation plan, specifically the Malaysian car project, had been widely questioned, even by members of Mahathir's cabinet. The privatisation of the Bakun Dam was widely protested, among other reasons, because Ekran had no previous experience in dam construction. Similarly, when MAS's privatisation to Tajudin drew public criticism because he had not been involved in the airlines industry.

Thus, well before the 1997 financial crisis, the selective distribution of costly privatised projects without open tender had sparked criticisms of favouritism and lack of transparency and accountability in the Mahathir administration.

Picking Winners

Mahathir, however, was genuinely confident of his ability to 'pick winners' who would help him achieve his vision of creating a class of Malay capitalists. Later he picked non-Malay capitalists, too. Francis Yeoh and T. Ananda Krishnan, for example, secured power supply and telecommunications licences respectively although they did not have the requisite experience in these industries. But both managed to develop their enterprises through joint-ventures with foreign firms and acquired know-how in the process.

But Renong has shown little sense or direction in the way it was developed. Renong's huge debts were accumulated through a pattern of growth based upon the acquisition of companies in almost all major industries.

The government would also argue that Renong and Halim had been used to serve the 'national interest'. According to the Asian Wall Street Journal (17 March 1999), Halim had been instructed by the government to acquire the ailing National Steel Company (NSC) in the Philippines, a firm owned by politician-cum-businessman and former Member of Parliament, Joseph Chong. Halim had planned to inject NSC into Renong, but could not do so because of the latter's debt burden which was exacerbated by the financial crisis.

Halim may have been instructed to take over NSC, ostensibly because it was in line with Mahathir's desire that Renong expand its activities abroad and diversify its interests. Yet, was Renong qualified to move into this business? Was the viability of the venture adequately assessed given the problems that Perwaja Steel faced in the same industry in Malaysia?

Given also the covert manner of the NSC takeover, effected through the Hongkong-based Hottick, and the debt burden the latter accumulated in the process, it would appear that 'national interest' was a convenient explanation to justify a monumental mistake. To acquire NSC, Hottick secured loans, apparently without collateral, from government-owned Malayan Banking and Bank Bumiputra, as well as RHB Bank and Bank of Commerce.

Despite Renong's massive debts, the government implemented a merger of Bank of Commerce and Bank Bumiputra, which gave Renong a large stake in the newly enlarged banking concern. This raised concerns over the possibility for further abuse of the enlarged banking enterprise. Meanwhile, Hottick's loans amounting to RM3.09 billion were taken over by the government agency, Danaharta.

Important Questions

Other important questions can be raised about bailouts in the 'national interest'.

Is it necessary to have a company of Renong's size as a symbol of the development of Malay capital, especially when clearly this private firm does not represent the interests of all Bumiputeras? Who remains accountable for Renong's pattern of growth that contributed to its debt problem? Should public and state-owned enterprises and institutions be used to bail out Renong?

And why could not Renong reduce its debts by divesting its interests in companies that were still quite profitable, particularly those in non-core activities? That would have forced Renong to be more focussed.

Other conglomerates in Asia, including Korea's Samsung, Thailand's CP Group and Hong Kong's First Pacific, had been forced to divest key assets to reduce debts, and reassess their style of business and rationalise their operations.

Mahathir's intentions might have been honourable when he selectively distributed government concessions to develop domestic capital. But his process of 'picking winners' has been very costly for the nation.

This need not have happened if the selection process had been transparent and based on criteria other those of political or personal affiliations. Such political and personal interests in corporate ventures now hinder the government from instituting urgently needed corporate reforms.


Dr Terence Gomez, a political economist at University of Malaya, has published extensively on politics and business in Malaysia.