BAILOUT BLUES
State welfare for the rich and market capitalism for the poor

By Dr S Subrmaniam

Those of us who contibute to the Employees Provident Fund (EPF) are by now aware that the 6.7 per cent dividend credited for 1997 is the lowest in more than two decades.  It is all the more disheartening to see this happen in a period when interest rates are rising.  One of the reasons given for this drop in the dividend is the sharply reduced income from EPF’s investments in the stock market.  In the last issue of Aliran Monthly, some of the questionable investments of EPF were highlighted.  In this article, we want to discuss the larger ques tion of the use of funds from public and quasi-public institutions to bail out companies that are well connected to important groups or individuals in the ruling party.  In particular, we want to focus on the bailout of the Prime Minister’s eldest son, Mirzan Mahathir, through the use of Petronas funds in the Petronas-MISC-KPB deal.

The Petronas-MISC-KPB Deal
In early March, cash-rich Petroliam Nasional Bhd (Petronas), wholly owned by the Ma lay sian government, announced two separate but related transactions.

First, national shipping carrier Malaysian International Shipping Corporation Berhad (MISC), would acquire Petronas Tankers Sdn Bhd, a wholly owned Petronas subsidiary that is involved in the transportation of liquified natural gas (LNG).  MISC would pay for this acquisiion by issuing new MISC shares to Petronas, raising the oil company’s stake in the shipper to more than 50 per cent from the current 29.3 per cent stake.

In the second and more controversial transaction, MISC would acquire the entire shipping assets of Konsortium Perkapalan Berhad (KPB), a debt-laden company that is 51 per cent owned by Mirzan.  These assets include the Hong Kong-based Pacific Basin Bulk Shipping Ltd (a shipping company that KPB acquired for US$240 million in July 1996) and several LNG vessels held by KPB’s wholly-owned subsidiary, PNSL Bhd.  What is interesting is that, unlike the first acquisition above for which Petronas is to be paid in the form of new MISC shares, in this case KPB is going to be paid in cash.

What this means is that by the end of both these transactions, Mirzan’s KPB would have vir tu al ly zero debt; now, KPB’s debt stands at more than triple the value of its capital, or RM1.6 billion at the end of 1996. Meanwhile, Petronas, the government’s cash cow would virtually own most of Malaysia’s shipping vessels through its controlling stake in MISC and would have paid a hefty sum for this dubious privilege.  To ordinary Malaysians, this trans ac tion definitely appears to be a selective rescue or bailout of an ailing private company owned by the Prime Minister’s son using state funds.  It is interesting to note that Petronas comes directly under the jurisdiction of the Prime Minister’s department.

Now imagine a situation in which a young entrepreuner (we will call him Ahmad) bought a shophouse in 1995 with a bank loan on the assumption that his business’ revenues would con tin ue expanding to enable him to repay the loan.  Come the second half of 1997 and Ahmad’s business is badly hit by the economic crisis over which he has no control.  The mortgage payment has been increased due to higher interest rates while his sales and cashflow have slumped due to the economic slowdown.  Ahmad is now unable to pay his loan instalments.

What happens to him and thousands of other honest and hardworking Malaysians who took similar normal business risks based on a vision of Malaysia that was propagated for the past few years?  Ahmad’s bank will eventually repossess his shophouse and auction it off to recover its loan to him; meanwhile, Ahmad will lose his entire savings and, in all likelihood, go bankrupt.  No, Petronas is not going to come and bail him out.  They are not going to buy over his shophouse in cash at a fair market value so that Ahmad ends up debt-free!

What’s the difference between Mirzan Mahathir and our imaginary entrepreuner Ahmad?  The former, needless to say, is well connected to the powers-that-be while the latter is not.  Of course, Petronas and Mirzan have already denied that these transactions amount to a bail out.  But no amount of denial is going to hide the obvious.  Does every Malaysian whose financial position has been affected by the collapse of the stock market and ringgit get the same op por tu ni ty to liquidate their assets for cash as Mirzan’s KPB?

Let us step back for a moment and look at the larger issues.  First, it is obvious that in this 150th anniversary year of Karl Marx’s publication of the famous Communist Manifesto, the welfare state is strong and alive in Malaysia albeit in a unique format.  Welfare here entails state aid for the rich, famous and well-connected while the rest of us Malaysians have to face the vagaries of the sacred “market forces”.  In short, state welfare for the rich and mar ket capitalism for the poor!

Second, the gap between the words and deeds of many of our politicians and regulators is so big that it undermines all credibility.  For example, the MISC-KPB deal was announced short ly after both the government economic advisor Daim Zainuddin and the Finance Min is ter Anwar Ibrahim pledged that the Malaysian government would not bailout troubled pri vate firms.  The Prime Minister made an even more ridiculous statement when he said all Malaysian busi ness men are his cronies.  If that’s the case, then has he come to the rescue of all of them, both small and big  regardless of political affiliation?  How many businessmen from PAS have been rescued by government agencies?  If this is how the government plans to re-instil confidence in the market, then we have a long way to go!

Third, Prime Minister and other government leaders have argued that if the government did not rescue these companies, they would go bankrupt and close down, thus putting many employees out of work.  This argument is not wholly true.  If Mirzan’s KPB had not been bailed out by government-owned Petronas and eventually went bankrupt, what would have happened?  KPB’s haulage business would have been sold to a new owner or a rival firm - which would mean that KPB employees such as the drivers, mechanics, clerks and supervisors would keep their jobs.  Only a small number of senior staff possibly including Mirzan, would lose their jobs!  The foreign shipping assets would also have been sold and employees in that subsidiary, who are mostly foreigners, would also have continued their employment under new owners.  Let us be clear:  If a business operation is economically viable, it will carry on regardless of who owns it and thus continue providing employment.

Fourth, another justification for government bailouts has been that it safeguards the bumiputras’ stake in the corporate sector.  The recent controversy over non-bumiputra ty coons bailing out their bumiputra counterparts is a non-issue that diverts the attention of the ordinary public from the real issue: the use of public funds to save the rich and well con nect ed.  Public funds should be used to help the poorer majority of Malaysians overcome the difficulties they are facing due to the recession.  Instead, Petronas is using billions of ringgit to save the Prime Minister’s son while the government’s budget for basic needs such as healthcare and education is being cut.