Sept 23-24, 2000

Missing the boat on restructuring
Kim Quek

The stunning revelation of business tycoon Halim Saad's RM3 billion bad debt by the Asian Wall Street Journal (AWSJ) on Sept 19 gives a clear example of a massive bailout of political cronies by Dr Mahathir Mohamad's government.

It is a really a slap on the face for Mahathir, who has cheekily denied time and again that his government is involved in any bailout of cronies.

Pengurusan Danaharta Nasional (Danaharta), Malaysia's national debt restructuring agency, has now taken over the billion ringgit loan of Hong Kong's Hottick Investment, a company used by Halim as a vehicle to take over Philippines' National Steel Corp (NSC).

This steel company is on the brink of liquidation now, rendering the RM3 billion loan to near scrap value, as the lending banks had only the worthless scrips of NSC but not its assets as security. The lending banks are Malayan Banking, RHB Bank, Bank Bumiputra and Commerce Asset-holding Bhd.

What is most disturbing is not so much the enormousness of the loss by Halim, who is generally regarded as a proxy for the financial fortunes of the ruling clique, but that the taxpayers as well as shareholders of these banks (many of whom are ordinary citizens) are made to pay for the folly and greed of politicians.

In the light of Mahathir's latest move to deprive the Terengganu state government of its traditional oil royalty, the news of this bailout rattles the country.

It riles Malaysians to realise that while Mahathir does not bat an eyelid over the government arranged write-off of this billion-ringgit losses by favourite "son" Halim, Mahathir should have found the payment of RM810 million oil royalty to the newly PAS-controlled Terengganu so unbearable that he decided to tear up an agreement that has been honoured by Petronas (owned by the federal government) for the past 25 years.

The AWSJ revelations have thrown up a whole lot of questionable practices by the Barisan Nasional (BN) government, which strike at the root of the ills that have plagued the Malaysian economy. Among others, they show up Mahathir as ever determined to protect and promote his crony "entrepreneurs" who have failed, no matter how high the salvaging bill to the country amounts to, and no matter how reckless and inefficient these "entrepreneurs" have been.

They also indicate the presence of political manipulations in the dishing out of MCGA-loans to investments of dubious viability, the prevailing practice of which nearly caused the collapse of the country's financial system in the recent Asian crisis.

In carrying out imprudent bailout of failed crony entrepreneurs, Mahathir has missed a vital lesson from the recent financial crisis. It is that in a competitive economy, the inefficient and the scum must be allowed to make way for the new and vigorous, so that the process of self-cleansing and self-renewal can take place in the economy.

Blanket protection

By providing blanket protection to the failed weaklings, particularly when these are captains of industries dominating major sectors of the economy, the stifling effect on the economy is stupendous as large sectors of the economy would then continue to be manned by the incompetents as happened in the past, while new entrepreneurship is restrained from emerging to re-invigorate the economy.

Worse, this policy of maintaining the status quo vis-à-vis the last failure is an open invitation to a recurrence of the previous crisis.

Agreed that many of these entrepreneurs in jeopardy are Bumiputras, and therein arises an important racial dimension, should nature be allowed to run its full course in the weeding out of the weak; surely, even among the Bumiputra entrepreneurs in distress, there is a distinction between those who are worthy and those who are not worthy, having amassed assets illegitimately (through improper political conduits) and having managed them recklessly.

Has the BN government been exercising prudence and impartiality even among its rescue of Bumiputras? Public perception is that the entire debt restructuring exercise is heavily weighted (in ringgit terms) in favour of crony enterprises, with scant regard to sound management criteria.

It is a pity that Malaysia has missed the golden opportunity to carry out meaningful corporate restructuring through such an exercise. Instead, it has been abused into an instrument to perpetuate BN's past tradition of corruption and cronyism.

Mahathir often justifies government bailout of conglomerates by saying that when a big company falls, many people will lose their jobs, hence these big companies must be rescued. But this argument is only an excuse to cover up his extensive plan to bail out his cronies, as shown in the case of Halim's multi-billion ringgit bad debt.

If Danaharta had not stepped in to take over the bad loans, the lending banks would be bound by law to pursue Halim to recover the debts, as the latter would have been customarily a personal guarantor to these loans. And that would deplete or bankrupt Halim but would not cause the collapse of his conglomerate Renong. So, how would that cause mass unemployment as alleged by Mahathir? Then, in the Mahathir logic, Danaharta would have lost the justification to intervene in the debt recovering process on Halim.

By buying over Halim's loans at nominal values from the lending banks, Danaharta has saved Halim's skin by transferring his RM3 billion losses to the lending banks which are owned by the government (meaning the taxpayers) and the public investors. This means that the ordinary people of this country have been made to carry an unnecessary loss of assets to the staggering amount of RM3 billion through an unjustified act by Danaharta in freeing one Halim Saad from the liability of the same amount.

Danaharta would not have either the justification or the courage to have acted as it did. This act of intervention by Danaharta must have originated from the top leadership of this country.

Grave criminal implications

Mindful that Halim is but a proxy to the powers that be, this scandal takes on grave criminal implications. As former deputy prime minister Anwar Ibrahim was accused of and later jailed for corruption for allegedly having interfered with police investigation, so too must the ultimate culprit of the present Halim bailout scandal be subjected to the same legal process, except the crime this time is many times more serious.

Keeping in view the present lethargy of our economy, particularly in respect of new foreign and domestic investment, it is imperative that an independent inquiry must now be carried out to cleanse this country of corrupt political manipulations in our financial system, as exemplified by the current Halim loan scandal, so that investor confidence can be regained and our economic health restored.

Starting with the Halim loan scandal, there are many serious ethical questions crying out for answers, in respect of the conduct of Danaharta as well as the conduct of the lending banks in issuing these dubious loans in the first place. Here they are:

On Danaharta

What is Danaharta's rationale for taking over the RM3 billion loan?

Who has given the directive or the authority for taking over this loan?

What are the criteria and guiding principles on which Danaharta makes its selection of loans to be taken over?

Who are the real decision makers in the taking over of very large bad loans?

What is the scope of freedom given to Danaharta to conduct its tasks professionally?

On lending banks

Calculating from the figures published by AWSJ, it seems Halim has paid a price four times the net asset of National Steel at the time of his takeover in 1997. And this company, which had been making marginal profits in the preceding years, was then an ailing concern, facing serious financial difficulties.

Why should the banks lend out such enormous sums to a customer to buy a company of doubtful prospects, at a price several times its real worth, and accepting such grossly overvalued shares as the only collaterals?

These huge lendings were obviously made in serious violation of all fundamental banking practices and banking rules, if AWSJ figures are correct.

Who authorised these lendings?

Were there any directive from the ruling politicians to give out such atrocious loans, keeping in mind that these banks are wholly or partly owned by the government, and hence subject to direct or indirect control by the government?

Was there any monetary impropriety in these transactions, in view of the fact that these loans are grotesquely prejudicial to the banks' interests and immensely favourable to the borrower?