Malaysia's commitment to reform under question

By J.S. Dhaliwall

KUALA LUMPUR (Reuters): The Malaysian government has rescued a string of debt-laden firms, setting back Prime Minister Mahathir Mohamad's ambitious privatization drive and raising questions about its commitment to corporate reform.

Asia's financial crisis landed many privatised projects in deep financial trouble, forcing their owners to turn to the government for help.

"It has gone a little awry and shows that all's not well with the country's privatization plan," said Mohamed Ariff, executive director of the Malaysian Institute of Economic Research.

The government involvement in the projects will lead to the conversion of private sector debt into public debt, a move that could put a strain on the state's budget, he said.

Mahathir last week defended a government move to buy into heavily-indebted Time Engineering Bhd.'s telecoms unit, in what many said was the latest rescue.

Time, part of a conglomerate with links to Mahathir's political party, said state investment arm Khazanah Nasional Bhd. was considering a crucial 30 percent stake in Time dotCom Bhd.

Khazanah's move came days after Time called off talks to sell a stake to Singapore Telecommunications Bhd. (SingTel).

Analysts said SingTel's offer was commercially superior to others and its entry would have served Time's interest well in expanding regionally, but political pressures scuppered the deal.

The head of Malaysia's corporate debt restructuring agency said government involvement in a few cases did not mean a reversal of its privatization plan.

"There is no reversal but a need for some government involvement to keep things on track," Corporate Debt Restructuring Committee chairman C. Rajandram told Reuters.

"The problem lay in funding structures for corporates which came mainly from the banking sector."

He said many privatised projects were funded from banking loans which did not match the revenue streams of the projects which had long gestation periods.

"We need to get our funding structures right and there's a lot to be done including improving our private debt market," Rajandram said.

Analysts said Malaysia still lagged some Asian countries in corporate reforms.

"Governments across Asia are divesting not only equity stakes in firms but also control," SG Securities group research director Manu Bhaskaran said.

"Malaysian policy makers also need to show greater resolve in improving corporate governance and put in place a clearer regulatory framework," Bhaskaran said.

Time is 47 percent-owned by Malaysia's largest conglomerate Renong Bhd., which has had its share of controversies.

Renong roiled markets in late 1997 when associate United Engineers bought a 32 percent stake in it for 2.3 billion ringgit (US$605 million), a deal which analysts said helped its politically well-connected boss Halim Saad but did little for minority shareholders.

"Investors have not forgotten that episode and will always be wary when putting money into Renong or related companies," said Ramesh Sidhu, a senior dealer at Prudential-Bache Securities Asia Pacific Ltd. in Singapore.

Criticisms grew a year later when state oil firm Petronas bought shipping assets from Konsortium Perkapalan, controlled by Mahathir's eldest son Mirzan Mahathir, for 220 million ringgit.

Mahathir has defended the use of public funds to rescue certain companies, saying they represent national assets which should not be unloaded at fire-sale prices.

The nation's ambitious national car maker project returned to state hands when cash-rich Petronas in March said it was buying a 27.2 percent stake in Proton Bhd. for one billion ringgit from debt-laden DRB-Hicom group .

Combined with Khazanah's existing 17.5 percent stake and 8.7 percent held by Employees Provident Fund, some 53.4 percent of the car maker, a brainchild of Mahathir, will be state-owned.

Petronas was reported in July 1998 to have reserves of 30 billion ringgit while Khazanah had 18 billion at end-1999.

In another recent case, the government took over a debt-laden sewerage firm that was privatised a few years ago, sparking an outcry from the opposition and rights groups.

Some analysts said it would be unrealistic for foreigners to rely on U.S.-style free market models, which advocate little or no government involvement, when making investment decisions.

"At one end it could be called a bail-out but on the other, it appears like governments have a noble duty to help large troubled companies especially in Asia which does not have safety nets," said Dennis See, fund manager with Singapore-based Pointworth Management.

Time shares closed last Friday two cents up at 4.28 ringgit while Renong firmed eight cents at 2.66 ringgit.