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AWSJ: Malaysia's UEM Bailout
By Terence Gomez
26/7/2001 9:51 pm Thu
Column: Malaysia's UEM Bailout
By TERENCE GOMEZ
(Editor's Note: Mr. Gomez is Associate Professor at the Faculty of
Economics, University of Malaya, Kuala Lumpur.)
When the Malaysian government announced last Monday that it intended
to spend 3.8 billion ringgit(US$1 billion) to buy out United Engineers
Malaysia (UEM), it was widely believed Mahathir Mohamad was setting up
another bailout. As a key component of the country's deeply indebted
Malay-owned conglomerate, Renong, the company looked like a prime
candidate for rescue by the government. Until November 1990, companies
in the Renong Group had been under the direct ownership of Mahathir's
ruling United Malays' National Organization .
Naturally Dr. Mahathir denies a bailout. Regardless of the prime
minister's position, it is hard to see how public interest alone could
justify the UEM takeover. Nor is this takeover part of his
government's attempt to create a more transparent and accountable
corporate environment, as practically every analyst quoted in
Malaysia's docile domestic media has argued.
The Renong Group's debt crisis has been around since 1997 following
the outbreak of the financial crisis. Since the conglomerate involves
businesses as diverse as hotels, expressways, telecommunications,
petroleum and banking, critics had long suggested that to trim down
its debts the group divest some its lucrative assets, presently
conservatively valued at 25 billion ringgit. Now, suddenly, this is
what the government claims it has in mind.
The domestic press has also argued that a restructuring of Renong/UEM
will help alleviate corporate governance concerns that have affected
investor confidence in the Kuala Lumpur stock market. In response to
the financial crisis, new institutions and regulations were put in
place to help promote greater transparency and accountability in the
corporate sector. The Renong Group and its controlling shareholder
Halim Saad were seldom subject to these regulations, however.
The scandals were frequent. In March 2001, when the initial public
offering of a Renong subsidiary, TimedotCom, was poorly received, much
of the company's leftover equity was taken up by a few public
institutions. On another occasion in 1997, UEM was used to buy up a
massive 32.6% stake in Renong for 2.34 billion ringgit. This
acquisition, implemented partly through a 800 million ringgit loan
provided by government-owned and politically well-connected banks,
upset UEM minority shareholders. The bailout looked like continued
abuse of the domestic financial sector for vested interests.
But some signs suggest a shift in the political climate. The political
falling-out between Dr. Mahathir and his once-influential ally, Daim
Zainuddin, who resigned as Finance Minister last June, is part of it.
Neither Dr. Mahathir nor Mr. Daim has really explained the latter's
resignation as finance minister. Certainly, few Malaysians concerned
about corporate governance and accountability would complain about
Daim's departure, or of the fall-out between the two leaders, or even
of the UEM takeover by the government. But most Malaysians should be
worried about the manner of the takeover and what it reveals about the
state of Malaysian politics.
The UEM takeover provides important insights into two key issues.
First, it throws light on the structure of the state - how power has
increasingly become centered in the hands of Prime Minister Mahathir.
(All others arms of the government have become subservient to the
office of the executive.) Second, it reveals the impact that this
concentration of political power can have on the issue of property
rights involving assets owned by businessmen in the corporate sector.
Simply, the UEM takeover and concentration of political power draws
attention to the issue of ownership and control of domestic firms. In
Malaysia, even majority ownership of a company means nothing in the
face of a strong state determined to push through government policies
or corporate restructurings. The point is relevant to the UEM case,
but is also evident in the consolidation exercise involving the
Those most susceptible to a takeover of their corporate assets are
probably those who have also benefited most from state patronage, but
were unfortunate enough to be aligned to a political patron who had
fallen out with the prime minister. Mr. Halim, a protege of Mr. Daim,
has been forced to relinquish ownership of his equity in Renong.
Despite Mr. Halim's long-standing involvement, he is giving up his
interests without a fight. It is likely that other businessmen closely
aligned with Daim will soon be similarly forced to relinquish their
collectively vast control over the corporate sector.
Politically inspired takeovers are nothing new for Malaysia. Through
the ostensible enforcement of corporate governance, politicians in
control of the executive have often transferred corporate assets into
the hands of their allies. When Deputy Prime Minister and Finance
Minister Anwar Ibrahim was ousted from office in 1998, his business
allies quickly lost their corporate assets - most of which ended up in
the hands of businessmen aligned with Mr. Daim. At the time, he had
emerged, along with Dr. Mahathir, as one of the most powerful
politicians in the country.
While the selective imposition of regulations on some enterprises has
helped create the impression of a well-governed corporate sector, a
number of oddities continue to occur - especially in the cases of
companies linked to Mr. Daim's allies. Apart from the TimedotCom
bailout, Tajudin Ramli, another Daim protege, was well-compensated by
the government with public funds when he relinquished control of the
debt-ridden and loss-making Malaysia Airlines.
Messrs. Halim and Daim are now quietly portrayed by the domestic press
as being primarily responsible for Renong's debt crisis and the lack
of transparency and accountability in government respectively. Dr.
Mahathir, however, also has to bear responsibility for Renong's
present state of affairs. In the pursuit of his vision of creating
Bumiputera entrepreneurs in control of huge conglomerates, Mahathir's
government generously bestowed in a non-transparent manner numerous
privatized concessions on companies in the Renong Group, as well as
other favored businessmen, like Tajudin.
The Renong Group grew rapidly through a spate of acquisitions, funded
mainly by loans from government-owned financial institutions. But in
spite of its huge size, Renong acquired little expertise in any
industry. There was no attempt by the government to discipline or
check Renong's unproductive form of corporate development. In fact,
government aid in various forms to Renong was justified on the grounds
that it served the national interest.
What can we expect from corporate restructurings now that Dr. Mahathir
is serving both as prime minister and as finance minister? Government
agencies will likely be used to take over the enterprises of Mr.
Daim's business associates. Eventually, ownership of most of this
equity will have to be passed back to the state or to individuals
aligned to Dr. Mahathir.
In view of executive hegemony over the state, the nature of corporate - and public - governance henceforth will depend entirely on Dr. Mahathir. The prime minister has asked the public to trust him, promising greater transparency and accountability in government and in the way the Renong Group will be restructured. However, as long as power is centralized in the hands of a dominant executive, investors will be skeptical of corporate deals undertaken in the "public interest."