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The Far Eastern Economic Review
Issue cover-dated 19th July 2001

Surviving a Change of Guard

The resignation of Finance Minister Daim Zainuddin has cast serious doubts over the future of his corporate protégés

By S. Jayasankaran/KUALA LUMPUR

THE ABRUPT RESIGNATION of Daim Zainuddin as Malaysia's finance minister in June has sparked questions about the future of his "boys"--a select group of Malay businessmen whom Daim groomed into major corporate players.

No one more so than Halim Saad, the beleaguered chief of the Renong conglomerate, who was the biggest beneficiary of Daim's 14 year-old experiment to create a class of Malay entrepreneurs. Indeed, Halim, 47, has helped create modern Malaysia: Renong--which has assets of over 25 billion ringgit ($6.6 billion)--built highways, sports stadiums, bridges, an urban mass transit system and its only national fibre-optic grid. And in doing so, Halim came to exemplify the success of Malay business and, as it were, to justify Malaysia's affirmative action policy for ethnic Malays.

But favouritism and patronage can come in the way of creating a self-sustaining business elite. Political masters come and go and, with them, their protégés. Halim's future is widely perceived by analysts to be bleak primarily because of Daim's resignation--but also thanks to his precarious finances. No compelling reasons were cited for Daim's exit nor did Prime Minister Mahathir Mohamad even acknowledge his services. That has ominous portents in a country where wrong political links can prove fatal in business. There's a precedent for this. Following Anwar Ibrahim's ouster as deputy premier in 1998, some of his allies lost control of their business empires. Anwar was also finance minister.

The questions over Halim come at an awkward time for the government. There is pressure on Mahathir, for now acting finance minister, to change the way corporate favourites are treated. Withdrawing protection to Halim and allowing market forces to winnow his group out, analysts say, would signal to foreign investors that Malaysia is serious about improving corporate governance. It would also give the battered stock market--down 25% since January--a much-needed boost. Halim dismisses this. "For the market to go up, people look at two things, " he told the REVIEW. "Liquidity, of which there is none, and the performance of the companies themselves. The rest are mere side issues."

But the sideshow is the talk of Kuala Lumpur. Daim's method of creating Malay wealth was politically unpopular because it seemed to benefit only a few Malays. Mahathir, anxious to win back wider Malay support, could move away from the Daim formula of dishing out plum deals to favoured businessmen. Its corollary would be the withdrawal of state support from troubled favourites.

Mahathir is already hinting at a rethink. Over the last two months, the premier has shelved a 6 billion-ringgit rescue plan for two urban transit systems, one of which was built by Renong, and ordered the review of several Daim-supervised deals. Mahathir is also mulling over whether to expand the policy of allowing strategic foreign partners into larger concerns instead of replacing one set of tycoons with another.

Mahathir is unlikely to unleash market forces completely because it could spark a collapse among heavily-indebted companies, Malay and non-Malay alike. It's also likely that new Malay businessmen will continue to emerge but it's unlikely they would be given the kind of state support Halim enjoyed. "I think Mahathir wants to be seen doing the right thing," says a senior government official. "I don't think there are going to be any more obvious bailouts."

Daim's plan was simple. To create a class of competitive Malay businessmen, who could take on not only Malaysia's Chinese tycoons but the world, he used the levers of political patronage--privatization awards, contracts, licences and easy credit--to build up a handpicked clutch of bright, young Malay professionals. It was spectacularly successful at first. In 1996, for example, Halim Saad was estimated to be worth $2 billion. But there were others. Tajuddin Ramli was given a five-year monopoly in mobile telephony in the late 1980s which evolved into listed Technology Resources Industries, or TRI. In 1993, he went on to buy--with the single largest bank loan ever made to an individual--Malaysia Airlines or MAS.

In the 1990s, Razali Rahman and Hassan Abas were allowed to take Peremba, a state-owned property firm, private. Wan Azmi Wan Hamzah was given enough discounted shares in initial public offerings to make a big splash in property and finance. Businessman Amin Shah was awarded the privatization of Malaysia's naval dockyard. Other names that have cropped up more recently include Ghani Yusoff in property and Akhbar Khan in broking. Nor were the beneficiaries exclusively Malay. Tycoon Vincent Tan got his big break in 1985 when Daim allowed him to take over state-owned gaming company Sports Toto. Other smaller non-Malay beneficiaries include Robert Tan (car leasing), Daim's former secretary Doris Yap (construction) and lawyer Josephine Sivaretnam (stockbroking).

The Asian Crisis hit the big boys hard. With the possible exception of Peremba's Razali and Hassan, the others were stuck with huge debts and rapidly shrinking asset values. But Daim was there to help. In a widely criticized deal, Tajuddin Ramli's controlling shareholding in MAS was bought by the government at 8 ringgit a share when its market price was just over 3 ringgit. The 1.8 billion-ringgit windfall he received should help him restructure debt-laden TRI.

Wan Azmi may be in danger of losing his flagship property company, Land & General, after a bank moved to foreclose on a loan this year. But he will manage: The businessman was awarded a large chunk of a 2 billion-ringgit water-privatization award last year. Two of Amin Shah's listed companies are under a state agency-supervised debt workout but his naval dockyard operations remain profitable.

Analysts think that most will survive in Daim's absence. But a compelling irony is that no one is sure about the fate of Halim, the biggest of them all. He has to cough up over 4 billion ringgit in a year's time under various commitments. That's one reason why even good companies like Renong affiliate, United Engineers Malaysia, or UEM, trade almost 70% below net asset value. Halim needs help--specifically, the perception of backing from the premier would keep the banks from harassing him. But so far, he's demonstrated tremendous survival skills. When the Asian financial crisis broke, Renong's group debt was over 25 billion ringgit, the highest among Malaysian corporates. With strong government backing, however, Halim rescheduled major debt payments till 2006 and settled another 4 billion-ringgit loan in full.

TROUBLED DEAL

What's clear are his immediate problems. On July 14, Halim has to pay UEM 100 million ringgit. That's the second instalment of the 3.2 billion ringgit Halim has promised to pay UEM by July 2000. It stems from a 1998 deal under which UEM has the option to sell the 32% stake in Renong it purchased in 1997 back to Halim. UEM, then relatively ungeared, borrowed over 2 billion ringgit to buy the block in cash-strapped Renong. Whether he has the money is doubtful, a perception sharpened after Halim recently asked UEM to postpone the July 14 instalment. The tycoon thinks he can obviate the option by taking both Renong and UEM private, but that will still require 2.5 billion ringgit.

That's not all. Last year, Halim proposed to buy 22% of Renong from Time Engineering, another group unit, for 875 million ringgit. Worse, the Renong shares are part-collateral for a $250 million bond that comes due in December and analysts say that bond holders will demand payment. "Financially, Renong is okay for five years," says Jason Chong, research head at Merrill Lynch in Kuala Lumpur. "But personally he's got problems."

Halim, more than any other Malay tycoon, has built quality infrastructure with speed and Mahathir admires that. Officials of the ruling United Malays National Organization, or Umno, also concede that Halim is "ultra-loyal", never questioning either Mahathir or Daim--and the Renong group has consistently funded Umno when asked. Finally, there is the theory that Daim, reputedly one of Malaysia's wealthiest men, won't let his protégé down. "I think Daim will help Halim," says a Malay businessman who knows both men. "It's only (a question of) money and Daim has lots of it."