http://interactive.wsj.com/

The Asian Wall Street Journal
20th July 2001

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 banking sector.

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.