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Perwaja losses - AWSJ
By web aNtu
14/6/2000 11:32 pm Wed
Subject: AWSJ: Perwaja Steel Update June 12
From Asian Wall Street Journal 12th June 2000
By LESLIE LOPEZ Staff Reporter
Malaysia's Perwaja Sees Losses Mount
KEMAMAN, Malaysia - Along the coast of northeastern Terengganu state, a
steel plant hulks silently over the waters of the South China Sea. On a
recent hot afternoon, the sprawling complex is deserted. Its rusting
chimneys are smokeless.
"It's been like this for more than a year," sighs a former employee of
Perwaja Terengganu Sdn. Bhd. "There is just one shift and the plant
comes alive only at night to keep costs down."
Perwaja was to be the centerpiece of a state-led industrialization drive
Prime Minister Mahathir Mohamad began in the early 1980s. Today, it is
Malaysia's most costly industrial failure and the biggest financial
fiasco to befall Dr. Mahathir's 19-year old administration.
It's been four years since Kuala Lumpur acknowledged that Perwaja was
insolvent - undermined by mismanagement, production woes and a mountain
of debt. At the time, the government said it would swallow Perwaja's 9.9
billion ringgit ($2.61 billion) in accumulated losses and other
liabilities and start over. In a controversial move, Dr. Mahathir
brought in a small local steel company - Maju Holdings Sdn. Bhd. - to
acquire and rescue Perwaja. The new managers promised profit would soon
Instead, Perwaja continues to bleed red ink and remains mired in
problems. According to government officials, the steel-maker has ama#sed
another 800 million ringgit in accumulated losses since 1996. Moreover,
the officials and members of parliament say that reports prepared by
Malaysia's Accountant General show that Perwaja's net liabilities
climbed to more than 9.1 billion ringgit at the end of 1998, including
5.1 billion ringgit in state-guaranteed borrowings from local and
The fresh financial burden comes amid still-incomplete investigations
into what went wrong with Perwaja. An Anticorruption Agency probe into
allegations of irregularities and mismanagement, begun in April 1996,
has come to nothing. No Perwaja employee - past or present - has been
charged with any wrongdoing.
What's more, Dr. Mahathir's plan to revive Perwaja by selling its steel
a#sets to Maju has stalled because of Maju's lack of financial clout and
slack steel demand. The result: Perwaja - 15 years after it produced its
first steel - has yet to earn a single ringgit in profit.
Perwaja's troubles are reverberating through Malaysia's struggling steel
sector. The Malaysian currency's 34% depreciation since mid-1997 has
saddled steelmakers with rising costs for imported materials such as
iron ore and scrap iron. Senior industry officials say the steel sector,
which has five main companies producing a gamut of products for a
relatively small domestic market, is operating at just 50% capacity.
"We are looking at a complete rationalization of the (steel) sector and
its players," says C. Rajandram, chief of Malaysia's Corporate Debt
Restructuring Committee, which has appointed British consultancy W.J.
Atkin to oversee consolidation of the steel sector.
The government's attempt to nurture a steel sector behind high tariffs -
averaging about 25% on steel product imports - isn't an isolated case of
heavy industry hubris. Consider Perusahaan Otomobil Nasional Bhd., or
Proton, the long-sheltered state-controlled auto company.
Protected by an average 200% tariff on imports of foreign-built cars, as
well as substantial duties on parts for rival auto makers' locally
a#sembled vehicles, Proton controls about 60% of the domestic market.
But that dominance is threatened by regional and international trade
agreements that will force Malaysia to eliminate import tariffs by as
early as 2003, allowing foreign competitors much freer access.
The challenges facing the steel and automotive sectors pose a dilemma
for Malaysia. The government could concede that its plunge into heavy
industries was a flawed policy, cut losses and try to make its ventures
competitive through tie-ups with international investors. Or Kuala
Lumpur could plod on, pump more money into the steel and car industries
and jeopardize Malaysia's participation in the global market by
retaining tariffs on imports. That would expose Malaysia's rebound from
its worst-ever recession in 1998 to big risks. Some economists contend
that pouring funds into Old Economy industries that can't compete
internationally could discourage foreign investment and delay Malaysia's
effort to move up the technology ladder.
For the moment, it appears that Dr. Mahathir is bent on protecting his
industrial projects. Earlier this month, the 74-year-old premier said he
was having "second thoughts" about complying with the Free Trade Area
strategy of the a#sociation of Southeast Asian Nations. Dr. Mahathir
said that auto makers such as Proton would be at a disadvantage under
the plan, known as AFTA, because they must import technology and
components. "If we open up our market then naturally we will not be very
competitive," he said. Although Dr. Mahathir didn't refer to Perwaja,
it, too, would be affected by the AFTA plan, under which six of the 10
Asean members have agreed to cut tariffs on an array of manufactured and
agricultural products to no more than 5% by 2002.
While Proton's protected grip on the domestic car market has a#sured it
of profits, Perwaja has never come close to making money.
The company was formed in 1982 as a $465 million joint-venture between
then-state-owned Heavy Industries Corp. of Malaysia Bhd., or Hicom, and
Nippon Steel Corp. Under a turnkey contract, Nippon Steel built a
billet-making plant and a direct-reduction facility to smelt ore into
hot briquetted iron. But the project floundered, racking up large losses
in the mid-1980s. In 1987, the direct-reduction plant, which never
functioned properly, was closed.
Frustrated with the lack of progress, Dr. Mahathir stripped Hicom of its
51% interest in Perwaja and appointed Eric Chia, a close a#sociate and
trusted troubleshooter, to overhaul the venture in 1988. Nippon Steel
eventually gave up its 30% stake in the company and dropped out of the
project, leaving ownership in the hands of the Malaysian government,
which took 81% of Perwaja's equity, and the Terengganu state government,
which held the remaining shares.
Under Tan Sri Chia's stewardship, Perwaja borrowed heavily and expanded
rapidly. Before long, the tough-talking, burly businessman announced
that the steel operation was making a profit and promised that the
government would soon recoup its investment by listing Perwaja on the
local stock exchange.
But by mid-1990s, it became increasingly apparent that Perwaja's
putative turnaround was an illusion that masked deepening financial
woes, production snags and widespread management irregularities.
There were no profits. An internal audit report that was completed in
December 1995 and became public two months later declared that Perwaja
was insolvent and was unable to pay the interest and principal on its
5.7 billion ringgit in domestic and foreign borrowings. The report also
detailed an array of alleged irregularities during Tan Sri Chia's
tenure. Among them: inaccurate accounting records and hundreds of
millions of ringgit in apparently unauthorized and one-sided contracts
between Perwaja and Malaysian and foreign companies.
Tan Sri Chia resigned from Perwaja shortly before the audit report was
completed. In 1996, Malaysia's anticorruption agency revealed it was
investigating the Perwaja affair and Tan Sri Chia's involvement in it.
Since then, the agency has periodically acknowledged that the
investigation is continuing. The last time it did so was late last year.
But results haven't been publicly disclosed. Since his resignation, Tan
Sri Chia, who hasn't been accused of wrongdoing, hasn't responded to
requests to discuss his role at the company. A person answering the
phone at his Kuala Lumpur home last week said that Tan Sri Chia is
currently in the U.S.
Kuala Lumpur had to honor Perwaja's huge debt obligations in 1996
because a default on one loan could have triggered cross-default clauses
in loan agreements with other creditors, exposing Malaysia to a
potential banking crisis.
But the scandal didn't deter Dr. Mahathir from pursuing his steel
dreams. In a bid to salvage the Perwaja, Kuala Lumpur decided to
privatize the company by transferring its steel a#sets - free of its
debt burden, which was to be shifted to the government - to Equal
Concept Sdn. Bhd. That company is 51% owned by a Maju Holdings and 49%
by the government. But the privatization plan has been stalled by a soft
economy and Maju's inability to raise the necessary funding, according
to government officials familiar with the situation.
Equal Concept, led by Maju Chairman Abu Sahid Mohamed, manages Perwaja's
steel operations. It is struggling with slowing demand and rising costs
for imported iron ore because of the ringgit's depreciation. Equal
Concept officials declined to be interviewed for this article, but
people familiar with the company say that Perwaja's steel business
posted a loss of 340 million ringgit in 1998 and that the company
continues to run in the red.
To keep costs down, Perwaja's plant in Terengganu is operating just one
shift between 10 p.m. and 8 a.m. and produces about 40,000 metric tons
of steel products a month, almost entirely for the local market. That
represents about 37% of the plant's total production capacity of 1.3
million tons annually. Despite cost cuts, the plant loses about 35
million ringgit a month through operations, according to people familiar
with its operations.
Meanwhile, Malaysian taxpayers are paying a big bill for the country's
steel ambitions. Perwaja is the single-largest borrower among all
state-controlled enterprises with outstanding government-provided
advances of four billion ringgit at the end of 1998. It carries another
5.1 billion ringgit in government-guaranteed loans taken by Perwaja from
local and foreign creditors.
According to officials familiar with the situation, government
guarantees on domestic loans taken by Perwaja stood at 2.75 billion
ringgit at the end of 1998. The loans, which carry interest charges
ranging between 7% and 9.5% annually and varying maturity dates between
2000 and 2007, were taken to repay earlier loans owed by the steelmaker.
Government guarantees on overseas loans totaled 2.38 billion ringgit
during the same period. That foreign debt load, which carries varying
interest charges of 0.2% to 0.45% over the London interbank offered
rate, was mainly raised from Japanese banks and will mature in 2003.
The government's exposure to Perwaja's liabilities is also becoming a
political headache for Dr. Mahathir. The Terengganu state government,
which owns a 19% stake in Perwaja, is controlled by Parti Islam
Se-Malaysia, a Muslim-based opposition party. The state is conducting
its own investigation into what went wrong at Perwaja, and some
political analysts say the opposition party could try to embarra#s Dr.
Mahathir's government by making public its findings.
"The state government has put in one billion ringgit into the steel project, and we don't plan to spend another cent more," vows Mustafa Ali, a senior party leader in Terengganu, who oversees the state government's investments.