From The Asian Wall Street Journal 27th December 2000

By CRIS PRYSTAY

KUALA LUMPUR, Malaysia -- Malaysia's ambitious privatization program, once a cornerstone of Prime Minister Mahathir Mohamad's economic development policy, is unraveling.

On Friday, the government announced it will raise six billion ringgit ($1.58 billion) in a bond issue to buy back the assets of two unprofitable privatized light-rail projects in Kuala Lumpur. Two key beneficiaries of the bailout: debt-laden conglomerate Renong Bhd., which owns one of the rail projects, and Renong's controlling shareholder, Halim Saad.

The move comes days after the Finance Ministry agreed to repurchase a 29% interest in ailing Malaysian Airlines System from businessman Tajudin Ramli for 1.79 billion ringgit -- the same price he paid the government for the MAS stake in 1994.

The latest deals follow the government's acquisition of stakes in several other high-profile ventures that were privatized during Malaysia's decade-long economic boom that ended with Asia's 1997-98 financial crisis.

Earlier this year, Kuala Lumpur renationalized the country's sewer system after three different private-sector concessionaires failed to make the system work commercially. And in early December, state oil company Petroliam Nasional Bhd. propped up publicly listed national car company Perusahaan Otomobil Nasional Bhd. by acquiring a controlling stake from DRB-Hicom Bhd. for 981 million ringgit.

The government blames Asia's financial crisis for the privatized ventures' woes. But critics say the privatization program itself was riddled with flaws that have now become apparent. Many of the privatized projects or companies were awarded or sold without competitive bidding to politically well-connected groups or individuals.

Critics charge that some of the companies involved in these projects submitted unrealistic estimates of costs and user demand in pursuing concessions from the government. Also, the government encouraged other concerns to buy state companies or take on projects as a kind of "national service" and rewarded them with rights to develop state-owned property or other commercial privileges not otherwise available to private investors.

During the boom years, these privatized ventures easily tapped local and international capital markets and banks to fund their operations. But when the 1997 crisis hit, many were left saddled with debt and poor cash flow.

The government is now in the awkward position of having to renationalize ventures at a critical time for Malaysia, which needs to attract fresh foreign investment and as well as restore confidence in its flaccid stock market as economic growth slows.

On Tuesday, Dr. Mahathir reduced the government's economic growth forecast to 5.8% for next year, from the 7% predicted in October's 2001 budget. Opposition politicians said this latest development will only make matters worse for Malaysia.

The government's purchase of privatized assets from Tan Sri Halim and Tan Sri Tajudin, in particular, has drawn fire. The two men built their business careers as proteges of Malaysia's wealthiest ethnic-Malay tycoon Daim Zainuddin, who currently serves as finance minister and treasurer of the country's dominant political party, the United Malays National Organization. Once billionaires on paper, Tan Sri Halim and Tan Sri Tajudin have seen their companies sink deep into debt in recent years.

"It's yet another bailout of a failed privatization project, which were given out without proper criteria and mostly on a crony basis," complains Lim Kit Siang, chairman of the opposition Democratic Action Party, referring to the light-rail deal. "It's the public who will foot the bill of such a failure -- and it reflects very poorly on the transparency and the efficiency of the government."

One beneficiary of the light-rail projects' renationalization is loss-ridden Projek Usahasama Transit Ringan Automatik Sdn. Bhd, or Putra, a wholly owned subsidiary of Tan Sri Halim's Renong, which has historical ties to UMNO. Renong won several other major privatized infrastructure concessions in the late 1980s and early 1990s, and initially prospered from subcontracting construction work out to companies within its own stable, including United Engineers Malaysia Bhd., securities analysts say.

Under the government's rescue plan, Putra, which had debts of 4.17 billion ringgit as of June, and a second light-rail operator -- Sistem Transit Aliran Ringan Sdn. Bhd. -- run by a separate private consortium will be able to repay their debts. Kuala Lumpur plans to issue five- to 15-year bonds to finance the light-rail purchase.

The light-rail projects -- privatized in the 1990s without an open bidding process -- have been plagued by high operating costs and underuse because of competition from buses and a poorly integrated service network that doesn't reach large sections of Kuala Lumpur and its suburbs. To try to attract more users, Putra cut fares by 66% in July.

While the government's intervention to rescue the projects offers some relief to the Malaysian banking system, it passes the burden to Malaysian taxpayers, critics say. "Any realistic feasibility study should have been able to predict actual usage," says K.S. Jomo, an economist at the University of Malaya, and a longtime critic of the government's privatization program. "To hide behind [Asia's] crisis is really obscuring the problem. It's not as if there were no crisis, everyone would be using the light-rail system."

Opposition politicians have also criticized the Malaysian Airlines deal. The government last week agreed to buy a 29% stake in MAS held by a Tan Sri Tajudin-controlled company, Naluri Bhd., at the same eight ringgit-a-share price Naluri paid for the stock in mid-1994.

That represents a 177% premium over the closing price of MAS shares on the Kuala Lumpur Stock Exchange on Dec. 20 when the deal was signed. In contrast, Brunei Investment Agency sold its 9% shareholding in MAS to a Malaysian government pension fund for four ringgit a share earlier this month.

The government says it eventually plans to sell part of MAS, which reported a loss of 258 million ringgit for the year ended March 2000 and a net loss of 700 million ringgit in the preceding year, to a foreign airline.

Meanwhile, the battered stock market, which is down 19% this year, has hardly reacted to the government's renationalization moves.

"Local investors are growing immune to it," says Yeoh Keat Seng, head of research for online research concern Malaysiastreet.com. "But a lot of foreign investors are not too comfortable in this kind of setting. "It would be very healthy to have a precedent where a guy who wins a project that doesn't work takes a loss. We haven't had that precedent yet."

Write to Cris Prystay at cris.prystay@awsj.com