Government Losing Concerns – GLCs

By Syed Akbar Ali

Folks, we had an ineffective Prime Minister who literally slept on the job for five years. Because he was such a weak leader, too many people around him started getting funny ideas and doing things their own way. We the taxpayers and the country as a whole did not benefit much from their actions.

Whether these folks had the best interests of the nation in mind has to be assessed carefully. Looking at the way money is being thrown (or burnt up as the case may be) it does not bode very well for everyone. And it is not good for the Government too.

Unfortunately despite the ex PM being shown the exit, there has been not enough thorough housecleaning or cleansing to get rid of the unsavory, unworkable and ruining remnants leftover from the old regime.

This includes “proven to be unworkable ideas” which came onboard during the old regime. Why are they still in place and still burning up billions of Ringgit of taxpayers funds?

We need a house cleaning now, not in another three or five years. The cutoff is not the next GE but long before the next GE. We really need to be serious about this. We are continuously seeing the GLCs losing money by the billions and the hundreds of millions of Ringgit. Most of these GLCs are monopolies. Even Sime is a monopoly, of sorts.

They are Government linked and have access to much Government support. But Sime was put into a merger with Golden Hope and Guthrie which resulted in about RM40.0 Billion of market value being wiped out. An RM80.0 Billion company now has a post merger market value of just over RM40.0 billion. This is quite perplexing.

Proton has announced quarterly losses of RM342 million. They are a monopoly almost, enjoy all sorts of protection and even get cash handouts from the Government (RM81 million for the last quarter alone).

For the 1st quarter ended Nov 30th, TNB suffered “FOREX loss” of RM1.439bil, which ended up in a net loss of RM944.1mil for the period. Almost RM1 billion loss for the quarter. What is wrong with the GLCs?

Then State monopoly Telekom Malaysia was told to spinoff TMI (what became known as Axiata). One company became two companies. Again – after the split - the share prices went down and about RM17.0 Billion in market value was lost.

Maybank, the stalwart of the Malaysian banking system bought Bank Dagang Indonesia for about USD2.7 Billion (RM9.0 Billion) from Singapore’s Temasek Holdings. This purchase has not been accepted well by the market, Maybank’s share prices have taken a hit after the buy.

The Singapore equation does surface frequently when the GLCs go shopping with billions of Ringgit of our taxpayers money. (Recall the Parkway and Pantai Medical Centre buy back?) And these are the long established, public listed corporations some of which have been around for almost a century now. Sime, TNB, Telekom and Maybank are the flagbearers of our economy.

Then in 2005 Khazanah Nasional Berhad, the mother of all GLCs bought a 52 per cent stake in Indonesia's Bank Lippo for about USD338.0 million (over RM1.1 Billion at that time).

Khazanah bought this stake from an Austrian financial house who had themselves purchased the 52.1% in Bank Lippo in February 2004 from the Indonesian Bank Restructuring Agency (IBRA) for $142 million (about RM525 million). This means the Austrians made a profit of over RM575 million (doubled their money) in just one year from selling the 52% in Lippo Bank to Khazanah Nasional !

In 2008, through CIMB Bank, Lippo Bank was merged with Bank Niaga in a RM8.0+ billion merger to create CIMB Niaga Bank. For the 1st quarter of 2009, the merged bank made 262 Billion Rupiah profit, down 18% from 323 Billion Rupiah for the same period in 2008.

Then there are also the less well known acquisitions and jaunts by the GLCs which also cost hundreds of millions of Ringgits with little or not much positive results to show.

One such creature is ACR or Asian Capital Reinsurance - a reinsurance firm that was bought from its Singaporean founders (Singaporeans again). This firm had a staff of about 40 people only in Singapore. What is more interesting is that it was only established in Singapore in November 2006
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Khazanah decided to buy this reinsurer (circa 2007) to create new Islamic takaful businesses. (Takaful is halal arab talk for insurance). Their website (http://www.acrretakaful.com/) is bombastic. It says :

ACR ReTakaful is the world’s highest-capitalised Islamic reinsurance entity serving the requirements of our Asian and international partners. It is poised to grow the capacity of takaful and retakaful operations in Asia, particularly the Middle East and Southeast Asia.

But the performance of the business in Malaysia has since been lackluster. In 2007 Asia Capital Reinsurance Malaysia Sdn Bhd made a loss of RM7.7 million. In 2008 the loss was RM5.0 million. They also have JV offices with the Dubai Group in Dubai, the Arab “city” state which has now ground to an economic halt.

ACR ReTakaful Holdings Limited of Dubai is “the world's largest reinsurance company with a paid-up capital of US$300m (RM1.0 Bill). Oh well. But where is the beef ya maulana? Where are the profits?

Then in April 09, the takaful CEO said, “the firm was in talks to enter into a strategic alliance with an Islamic reinsurer in Malaysia, which would likely take place in September, but declined to give further details.” Another strategic alliance? What happened to ‘world’s highest capitalized Islamic reinsurance’ bla bla bla.

Market talk is Khazanah is now ‘encouraging’ the other GLCs under its stable to take their insurance requirements from ACR. I think that is fine. Business is business. Do something, do anything but just turn a profit, ok?

But what irks me is the price Khazanah paid to the Singaporeans to buy over ACR. Would anyone like to guess? It’s a reinsurance company, established in Singapore in November 2006. Not much physical assets (maybe computers and fax machines) with about 40 employees. How much would this company be worth? RM10 million? Wrong. RM20 million. No. Lets try three digits : RM100 million? Wrong again.

Folks, Khazanah Nasional Bhd paid close to RM900 Million to buy over this Singaporean reinsurance company ! That’s RM900 million ! Market talk is a senior Khazanah executive (appointed from the time of Tun Dr Mahathir) resigned after this deal was signed. I really want to know who and how initial contact, proposal etc were made to Khazanah to buy this Singaporean company? Who made the initial contact?

Then there is also Malaysian Agri Food Corporation or MAFC. Please visit their website here http://www.mafc.com.my/

To digress a little, I think all these ventures are just great. Whether its reinsurance, agri-food, tuna fishing, semiconductors or banks in Indonesia, they are all good.

But we need to be clear about some things : we must NOT pay anything more than market price for these businesses. Secondly they must also generate profits, not just make losses.

Then there must also be other benefits like giving employment to Malaysians and creating spinoff benefits inside our country (and not in Dubai or Indonesia). Why? Because this is taxpayers money lah. Not private capital. That’s why.

Back to MAFC – Khazanah wanted to grow water melons, bananas, papayas etc. This is Muniandy’s business. Muniandy is the fellow who grows bananas along the commuter railtracks near Klang and sells his fruits in the local market.

You may ask why does Khazanah want to compete with Muniandy? Good question. Maybe they want to take water melons and bananas to corporate levels – make juices, jams etc. How much is the investment in this fruit business? Guess lah. RM5 million? No. RM10 million? No. Folks say it is closer to RM200.0 million.

Here is their mission statement : Malaysian Agrifood Corporation Berhad (MAFC) is a wholly owned subsidiary of Khazanah Nasional Berhad (KNB) set up for the purpose of reinventing the Malaysian agricultural food distribution system and increase Malaysia’s competitiveness in providing reliable and quality supply of fresh produce. Our main thrust of activity involves the food supply chain management and logistics. We develop comprehensive supply chain strategies and commit to introduce the best practices in the food supply.

To reinvent the Malaysian agri food distribution system ? I say Bang, what was wrong with our system in the first place? Why try to fix something that is not broken? But the braders were unfazed. To reinvent the distribution system they needed trucks, cold rooms and distribution wharehouses. No problem. They went and bought a logistics company. Its called Cold Chain Network Sdn Bhd. Here is the website : http://www.coldchain.com.my/. Its really canggih.

I think this is where the money went. OK great. But where are the melons and tomatoes? Where are the pumpkins and the zucchinis? Where is the produce? Talk is MAFC has started planting papayas on a large scale in Lanchang, Pahang. Corporate papayas ? I get my papayas now from my backyard. We have two papaya trees and we cannot eat all the fruit that ripens on the trees. So we share it with the birds.

My view is that the old “GLC”s like Sime Darby, TNB, Maybank etc who have been around for so long should be allowed the freedom to do their business without any interference. They know their businesses well. Leave them alone. Put in good managers, good accountability and transparency and let them loose. They will do well.

This was what Dr Mahathir did. During the time of Dr Mahathir you would hardly hear negative reports about well established companies like Sime Darby, Golden Hope, Telekom or Maybank (except for Sime’s short foray into banking). They all grew very large during Dr Mahathir’s tenure.

The other newer GLCs like Khazanah have lost touch with their real purpose. Khazanah was set up to explore new businesses and new technologies that were not found in Malaysia. They have lost sight of this objective. Hence their forays into papaya farming, reinsurance, tuna farming, udang farming etc which competes with the private sector.

Muniandy already plants papayas, there are numerous insurance companies, there are numerous tuna fishermen and also udang farms. Why does Khazanah want to use its huge corporate muscle to crowd out the local boys? And they do not know how to do it.

So Khazanah ends up paying millions of Ringgit to consultants. Folks say Khazanah spends over RM50.0 million per year paying consultants fees. Their favorite consultants are McKinsey, Boston Consulting Group and Ernst & Young. What is the outcome? How much sales and profits has Khazanah generated for every Ringgit spent on the consultants?

Has anyone done a simple ratio analysis? (Returns from a project recommended by a consultant) divided by (Fees paid to that consultant). Ada ratio tak?

Then the average CEO in Khazanah is paid about RM40,000 to RM50,000 per month. Even in startup companies like the agri-food business. That’s RM600,000 per year. That’s a lot of money. Then on top of that, they also pay the consultants. So what do the CEO’s do? And where is the product? Where are the profits?

Some of these investments are pretty recent. ACR was bought in 2007. MAFC too is new. There is a gestation period. If they screw up, it will usually take a few years before the full stuff hits the fan. The timing can really suck. There is a General Election coming up in three years.

To be advised is to be forewarned. This is free advise. No need for consultancy fees.

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Whatever this particular writer's opinion about pas, tgna, ulamak, pr etc etc, i believe that we must always be able to discern grain from chaff when we see one. and secondly, i too believe that the interests of the whole surpasses its components'.