Source: The Far Eastern Economic Review

Issue cover-dated 25th January 2001

Malaysian Privatization : National Burden

Malaysia's public rescues of troubled privatization projects are fuelling criticism of the government

By S. Jayasankaran/KUALA LUMPUR

MALAYSIA'S PRIVATIZATION DRIVE of the past two decades has been the centrepiece of its effort to leapfrog to a First World status from a Third World one. But since the Asian Crisis, several troubled high-profile privatization projects have been renationalized at a cost of billions of ringgit to taxpayers.

In December alone, the government pledged 7.8 billion ringgit ($2.1 billion) to buy back two ailing light-rail transit systems and a 29% stake in Malaysia Airlines, the loss-making national carrier. The buy-backs, though widely expected, have raised moral-hazard concerns over Malaysia's privatization model. "The implicit assumption here is that it's OK to fail in a big project because the government will always carry the can," says a chief executive of a large company. "So there is little downside risk."

Critics charge that Malaysia's privatization effort, first launched in 1983, got off on the wrong foot because many projects were awarded to political favourites without competitive bidding. What's more, in the go-go 1990s, project evaluations were seriously flawed, with over-optimistic estimates and easy credit from banks.

Kuala Lumpur pledged to do things differently in the aftermath of the economic crisis of 1997. Yet the government has continued to give lucrative projects to companies with strong political links but little experience in related businesses. And officials haven't paid as much heed to public opinion as they had promised.

Take Splash, which last May received the first big-ticket project awarded since the crisis. Splash is a 30-year concession to operate and build two water-treatment plants and a dam on the Selangor River to supply water to the Klang Valley, the country's most industrialized hub. Conservationists had bitterly opposed the 2.1-billion-ringgit project because it will submerge 600 hectares of pristine valley, famed for white-water rafting and lush nature trails. Nevertheless, it went ahead without a tender and was awarded to a consortium led by a protégé of Finance Minister Daim Zainuddin. Work on the project has already commenced.

Many Malaysians as well as foreigners are increasingly critical of what they see as an economic policy--long a cornerstone of Prime Minister Mahathir Mohamad's administration--that has failed to change as promised by officials. Looking ahead, what the critics see as a business-as-usual approach could become a political hot potato: Privatization awards and alleged rescues of politically connected individuals were a popular opposition issue in the 1999 general elections. The issue could also raise questions among foreign investors about Malaysia's desirability as an investment haven.

"There seems to be little change in the opacity of privatization awards," says Yeoh Keat Seng, head of on-line investment research firm Malaysiastreet.com. "So people conclude there has been no change" since the Asian financial crisis.

During the economic boom of the past decade, critics of privatization were silenced because its upside seemed huge. Private businessmen built and paid for highways, ports, airports, stadiums, urban light-rail systems and telecoms networks. By not having to build all this infrastructure itself, the government says it has saved 7 billion ringgit in annual operating costs and 132 billion ringgit in development costs since 1983. That has allowed Kuala Lumpur to cut corporate taxes to 28% from more than 40% in the mid-1980s. Moreover, though the privatized entities form only 5% of the total number of companies listed on the local stock market, they make up 25% of its total capitalization.

Perhaps more importantly, privatization was also an effective tool for redistributing wealth to indigenous Malays. True, the handpicked elite who got the big awards may have been linked to Mahathir's ruling United Malays National Organization. But that was how Kuala Lumpur created a Malay commercial and industrial class on a par with their better-placed Chinese counterparts. As famously recounted by Daim, that was how it would create "Malay billionaires who not only could compete with the Chinese but with the world."

COUNTING ON THE GOVERNMENT

But some businessmen saw such government policies as an instant ticket to riches. Companies proposed huge infrastructure projects, unsure of their long-term viability but confident about financing and up-front construction profits. They took out short-term loans to fund long-term projects, with stock as collateral. They also banked on property development as a panacea, counting on the government to give them free land to develop in return for, say, building a bridge. Consumers, for their part, rarely saw privatization's touted increases in efficiency translated into falling prices.

The recession, however, showed that banks could pull credit lines and that everything could collapse at once. Alas, Kuala Lumpur's eagerness to assist the companies that took on privatization schemes but later ran aground has deprived them of an invaluable learning experience in business survival. Since the outbreak of the economic crisis, government help has come thick and fast.

In 1998, Kuala Lumpur paid at least 200 million ringgit to Ekran, the company behind the suspended 12.6-billion-ringgit Bakun hydroelectric dam project, for "work already done," it was revealed in parliamentary debate. And last December, wholly state-owned oil company Petronas stepped into the fray, taking over national car maker Proton and paying DRB-Hicom, its private owners, 981 million ringgit for the privilege.

Meanwhile, Kuala Lumpur paid out more than 60 million ringgit in 1999 to highway concessionaires who had built new toll roads only to lose money because of low traffic. And in early 2000, the federal government took over the country's hugely indebted sewerage system, paying almost 200 million ringgit to the private firm that had been running it. "We're obliged to help companies which face such problems because we licensed them," said Works Minister Samy Vellu.

Rescuing all the projects, albeit for such moral and social reasons, will add to the soaring potential costs of privatization. And it can't do much good for the government's balance sheet. The cost of saving Malaysia Airlines and the two light-rail transit systems alone is almost 8% of the federal government's 2001 budget. Most of the money will have to be raised through issues of government bonds.

Still, the businessmen in these cases aren't being held accountable for their failures. For instance, the people who built the urban rail systems and are now being aided are the same ones who are being proposed to manage them. And Tajudin Ramli's company, which bought Malaysia Airlines' shares for 8 ringgit each in 1992, was paid the same amount in 2000 to exit, in the name of "fairness." Analysts say this makes no sense: It ignores the dividends Malaysia Airlines paid during its profitable years, its more than 1 billion ringgit in losses between 1998 and 2000, its 8-billion-ringgit debt and its current share price of around 3 ringgit.

Malaysia Airlines' rescue has aroused widespread criticism even in the country's normally docile media. As a result, the government has become "defensive," argues economist Jomo Sundaram, a long-time critic of privatization. He thinks this is a significant development. "They realize that there is no longer placid acceptance of the policy," he says. "They will tread more carefully."

Government ministers, in fact, say future awards would be made more "circumspectly." In December, a senior government executive told the REVIEW that several privatization awards that had been pending--including an information-technology project--had been shelved because of public criticism.

But so far, there's little evidence of change. Recent privatization awards haven't been particularly more transparent. In October, little-known Diligent Network was awarded a 1-billion-ringgit job to computerize all government hospitals. And in late December, Works Minister Samy Vellu announced that the maintenance of the nation's roads would go to three companies, at least one of which was previously unheard of.

Analysts estimate that more than 70 billion ringgit-worth of projects will be up for grabs over the next 10 years. But where Malaysia's privatization is concerned, it could be back to the future.

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