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The Asian Wall Street Journal
25th July 2001

At Malaysia's Renong, Change Is About Perceptions

By LESLIE LOPEZ Staff Reporter

KUALA LUMPUR -- Two weeks ago, Renong Group executive chairman and controlling shareholder Halim Saad was summoned to Malaysia's new administrative capital of Putrajaya to meet a key adviser to Prime Minister Mahathir Mohamad.

The message to Tan Sri Halim was simple: Frustrated with the Renong boss's failure to resolve the group's chronic debt problems, Dr. Mahathir had decided that the government would take control of the conglomerate, which has interests ranging from toll roads to telecommunications. According to people familiar with the meeting, Tan Sri Halim was told not to expect a personal bailout. The Renong group would be broken up and eventually sold to new investors to settle its debts, which stand at about 13 billion ringgit ($263.2 million).

On Monday, the government took its first step in that direction, announcing a 3.8 billion ringgit takeover offer for Renong's key asset, United Engineers Malaysia Bhd. The bid set in motion a government plan to wrest all of Renong - Malaysia's largest corporate borrower and the former investment arm of Dr. Mahathir's own political party - away from the 47-year-old Tan Sri Halim.

In a country where big business and political patronage have been intertwined (and criticized) for years, the move was unprecedented. But is the Mahathir government abandoning its habit of playing corporate favorites and bailing them out when they get into trouble? Or is the purge of Tan Sri Halim - once the beneficiary of an array of state-granted privatization projects, contracts and other deals - a public-relations gambit aimed at polishing the country's shoddy corporate-governance image and enticing foreign investors back into its cash-starved stock market?

"This is a positive sign. But whether it a clear policy change is really too early to tell," says Manu Bhaskaran, an economist at SG Securities in Singapore. Echoing a view widely held among bankers and economists, Mr. Bhaskaran says he's awaiting more evidence that Kuala Lumpur will no longer rescue politically favored companies before investors begin pouring fresh money into the Kuala Lumpur Stock Exchange.

"Since the crisis, Malaysia has lost much of the goodwill it had with foreign investors," concurs a fund manager with a Malaysian bank. "Unless the government adopts real changes in the way business is done, no one is going to be impressed."

Government officials involved in the Renong takeover plan contend that the move against Tan Sri Halim really is a turning point. They note that Dr. Mahathir has warmed to the idea that his government must seriously pursue corporate reform if Malaysia is to attract foreign capital to help it weather a global economic slowdown. "If the Renong plan works, it will become a model for other restructurings," says one senior government official, referring to the problems plaguing other once-favored local companies now loaded with debt. Among them: conglomerate Malaysian Resources Corp. Bhd., which like Renong, has historical ties to Dr. Mahathir's United Malays National Organization.

That economic analysts are skeptical about Dr. Mahathir's commitment to corporate reform isn't surprising. If genuine, the policy shift would amount to a tacit admission by the 75-year-old premier that his strategy of trying to promote growth by channeling business opportunities to an elite group of favored Malaysian entrepreneurs over the past two decades has failed.

Consider Renong and Tan Sri Halim. For years, Tan Sri Halim and his companies epitomized the nexus between business and politics in Malaysia. A protege of powerful former finance minister and UMNO treasurer, Daim Zainuddin, Tan Sri Halim started his Renong management career as the nominee of Dr. Mahathir's ruling party. Although Dr. Mahathir and other UMNO leaders have publicly stated that UMNO got out of business and severed its links with Renong in the early 1990s, the government continued to award deals to the group over the past decade. In their heyday, Tan Sri Halim and the Renong came to embody Dr. Mahathir's vision of Malaysia Inc., a policy through which the government helped well-connected companies with infrastructure contracts and non-competitive privatization awards, ostensibly to cut red tape and spur economic growth.

In the wake of Asia's 1997 economic crisis, Dr. Mahathir continued to argue that the Malaysian economic model worked and he blamed the country's corporate troubles on currency traders and fund managers aiming to sabotage the economy. Attempting to avoid a cleansing corporate shakeout, Dr. Mahathir initially ordered Malaysian banks to go easy on the country's large debtors and, in some instances, used public funds to salvage troubled companies.

The high-profile rescues included the 1998 purchase by national oil corporation, Petroliam Nasional Bhd. of a shipping company controlled by Dr. Mahathir's eldest son, Mirzan Mahathir. A more recent bailout was the government's 1.8 billion ringgit purchase in December of a 29% interest in Malaysian Airline System Bhd. from Naluri Bhd., an investment holding company controlled by businessman Tajudin Ramli, another UMNO-linked protege of Tun Daim. The government purchase price of eight ringgit a share represented a 350% premium over the MAS stock price in the open market at the time.

Government officials now say that Dr. Mahathir has privately voiced reservations about the MAS purchase, which was supervised by Tun Daim before he resigned as finance minister last month, and has ordered an audit of certain supply and service contracts arranged by airline's previous management.

In contrast to that, economic analysts suggest that the government appears to be making the right moves in its takeover of Renong. Unlike the MAS deal, in which only Tan Sri Tajudin's company received a huge premium for its stock, Kuala Lumpur's bid for UEM offers the same price to all its shareholders. Nor will Tan Sri Halim receive any immediate financial payoff from the UEM takeover.