Bank Negara Malaysia: Why Dr. Sukhave Singh Resigned


December 10, 2017

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Thank you, Dr. Sukhave for your service to Bank Negara Malaysia. What you have done by resigning is just examplary. It took courage and firm moral conviction to do it. As a Bank Negara alumnus who was with the Bank in 1960s, I am proud of you and wish you all the best. –Din Merican

Letter from outgoing Deputy Governor BNM–Why Dr. Sukhave Singh Resigned

If you are in a position of leadership, remind yourself, and remind yourself often, that leadership is a responsibility and not a privilege. Remember that nothing shines a brighter light into the depths of your character than your behaviour when you believe that you have power over others. It is never leadership to try to make yourself look good by depriving your subordinates of opportunities to be their best. It is also never acceptable to use bullying as a means to exert your leadership. Respect yourself; respect those who work for you.– Dr. Sukhave Singh

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Last week a long-standing and respected official, the Deputy Governor, Bank Negara Malaysia Dr Sukhdave Singh, resigned and people ought to take that move as a heavy hint as to what is going on behind the scenes.

Dear Friends and Colleagues,

As you all know by now, I am leaving the Bank soon. Some of you have asked me why I am leaving and I must confess that I have evaded the question.

All I can say is that my life in the Bank has been based on certain professional expectations, and when I find myself put in circumstances where those expectations can no longer be met, there could have been no other decision for me.

This past week has been an emotional roller-coaster. The days have flown by so fast and saying goodbye has been harder than I had anticipated. Meeting many of you has brought back a flood of memories and emotions. But I am grateful for the opportunity to personally wish you goodbye, and I thank you for the kind wishes you have expressed to me.

In parting, I want to express my gratitude to those of you who have worked with me and helped me succeed in my job. No one gets to my position without the help of others. I am unable to thank each of you individually but I hope you know that I am referring to you and please accept my heartfelt thanks.

If I have contributed to your own professional success, I am glad; but you do not need to thank me. Pay it forward – be a part of someone else’s success.

If you are in a position of leadership, remind yourself, and remind yourself often, that leadership is a responsibility and not a privilege. Remember that nothing shines a brighter light into the depths of your character than your behaviour when you believe that you have power over others. It is never leadership to try to make yourself look good by depriving your subordinates of opportunities to be their best. It is also never acceptable to use bullying as a means to exert your leadership. Respect yourself; respect those who work for you.

Well, my journey with BNM has come to an end, but yours will continue. I wish you fair weather and good sailing.

Goodbye and God bless.

Sukhdave Singh

– http://www.sarawakreport.org

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Picture a Khazanah Nasional Berhad without Azman Mokhtar


December 8, 2017

Picture a Khazanah Nasional Berhad without the character,integrity and steady hand of Azman Mohktar

by P. Gunasegaram

http://www.malaysiakini.com

A QUESTION OF BUSINESS | Some one and half years before Azman Mokhtar steps down after a 15-year stint as managing director of Khazanah Nasional Bhd, the government’s wholly-owned strategic investment fund, it looks like the daggers are drawn to poke holes in what is by and large an impressive achievement.

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Unlike the other so-called strategic investment fund, the notorious 1MDB, which has already lost the country almost all the long-term money it borrowed with US$7 billion (some RM28 billion) unaccounted for, Khazanah has been transformed since 2004 into a solid entity which has strong controls, procedures, a chain of accountability, and a team of competent professionals managing over RM145 billion in investments.

It is not only extremely ironic but the height of ridiculousness that among the names being considered as Azman’s replacement is Arul Kanda Kandasamy, the chief executive of 1MDB since January 2015, who has done nothing to clarify the sad state of affairs at 1MDB or even to ensure the release of its long overdue annual report.

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Tengku Zafrul, 1MDB’s Arul Kanda Kandasamy –for Khazanah Nasional?

His appointment would make a mockery of Khazanah’s much stronger governance, good board representation, greater accountability, more transparency and much better performance than 1MDB which may be too much to make even for Prime Minister Najib Razak, who if he survives the elections, will make the final decision.

The major salvo against Khazanah, as with one or two other puzzling stories (see for instance, “Spinning 1MDB’s lopsided settlement”), came from across the Causeway from the Singapore Straits Times which made an unfair and ultimately wrong assessment of Khazanah’s performance over the years since 2004.

In a report titled “Khazanah feels the heat amid push to change its investment strategy”, the newspaper said: “Malaysia’s sovereign wealth fund Khazanah Nasional is under pressure to show higher returns to boost government coffers, with senior state officials lobbying for changes to its management and investment strategy.”

Then it went on to add: “The bulk of the government’s direct business investments is managed by Khazanah, which has returned an average of just RM825 million (S$270 million) in dividends annually over the past four years, from its RM145 billion worth of assets. This amounts to a less than 1 percent return a year between 2013 and last year.

“The Straits Times understands that there is a push by some within the Prime Minister Najib Razak’s vast circle of advisers to change Khazanah’s investment strategy, especially since the fund’s Managing Director, Tan Sri Azman Mokhtar, is due to leave in mid-2019, after a 15-year run at the helm.”

The best way to report a fund’s performance is its total return – this is accepted as the de facto measure of fund performance in investment analysis. This includes realised as well as unrealised gains on investments plus dividends. Khazanah calls this the net worth adjusted (NWA) value.

The other performance measure it uses is the realisable asset value (RAV), which is essentially the market value of all its investments. When you subtract the liabilities, mainly borrowings, from RAV, and make adjustments to account for dividends as well as realised investment gains through sales of investments, you obtain the NWA value.

Now, anyone who has the slightest knowledge of fund management should know that dividends alone is not the way to measure a fund’s return. You have to take into account the increase in the value of investments that it owns and gains from investments sold. And why choose just the period from 2013 to 2016? A fund is best assessed over a longer period.

Misleading analysis

The best way to report a fund’s performance is its total return – this is accepted as the de facto measure of fund performance in investment analysis. This includes realised as well as unrealised gains on investments plus dividends. Khazanah calls this the net worth adjusted (NWA) value.

The other performance measure it uses is the realisable asset value (RAV), which is essentially the market value of all its investments. When you subtract the liabilities, mainly borrowings, from RAV, and make adjustments to account for dividends as well as realised investment gains through sales of investments, you obtain the NWA value.

The Singapore Straits Times report pointed out that the NWA value actually declined eight percent over the last two years, but failed to point out that such fluctuations are normal and happen because of market and currency fluctuations amongst others.

Unlike many other sovereign wealth funds, Khazanah has many large core holdings such as Tenaga Nasional, Telekom Malaysia, Axiata, CIMB, IHH Healthcare, etc, which it holds through good and bad times and when the market rises or falls. Market volatility plays havoc with NWA.

In 2008 for instance, in the aftermath of the world financial crisis, its NWA value tanked nearly 50% as markets collapsed but recovered by 68% and 39% respectively in the following two years, 2009 and 2010, as markets recovered. It would be wrong to think that Khazanah did badly in 2008 and well in 2009 and 2010 – the events that led to the fall and rise were beyond its control.

To prevent that kind of misleading analysis, it is common to compare fund performance over a period of time and against a set benchmark – for Khazanah that benchmark, because most of its holdings are Malaysian, would be the Kuala Lumpur stock market which is measured by the FBM KLCI index.

As Khazanah pointed out in its retort to the Singapore Straits Times report, its NWA value increased annually by 9.3% on a compounded basis between 2004 and 2016 which is very much in line with the FBM KLCI index growth of 9.4% over the same period. During the period the NWA value of its investments rose over two times to RM102.1 billion from RM33.3 billion, creating value of RM68.9 billion. In contrast, 1MDB destroyed nearly half of the value Khazanah created over 12 years in less than a handful of years.

That 9.3% annual compounded growth of NWA over 2004-2016 – the best measure of Khazanah’s performance – was mentioned towards the end of the Singapore Straits Times article. And even then, the article mentioned it was lower than the performance of the broad market without actually giving the 9.4% figure.

This figure is pretty alright considering that many of Khazanah’s investments have long gestation periods such as the Iskandar corridor development and others may be historically making losses, for example, Proton, Malaysia Airlines and Silterra.

Erroneous comparison

Further, the article makes an erroneous comparison between Khazanah and the Employees Provident Fund.

It said: “The fund performs poorly when compared with the country’s Employees Provident Fund (EPF), which all private workers and employers must contribute to. Since Mr Azman took over Khazanah in 2004, it has returned a total of RM9 billion in dividends, which works out to an average annual return of below 1 percent of the fund size. Meanwhile, the EPF has added more than 5 percent annually to its members’ retirement savings.”

The EPF has a major part of its investments invested in government bonds, much of which give fixed returns over 4% per year. It supplements this by booking in realised profits from its equity trading and other businesses – it has no strategic holdings. Thus it can return close to 5% in dividends but the value of its funds don’t increase as much, if you take out increased contributions from members. The correct comparison should be between the 9.3% annual return and the EPF dividend rate of 5% plus any unrealised gains.

Also, the article makes a comparison, again erroneous, comparing pre-tax profit as a percentage of total asset size with other funds. It said: “Khazanah’s profit before tax – not including unrealised capital gains – also lags behind those of its peers, such as Singapore’s Temasek Holdings, China Investment Corporation (CIC), Alaska Permanent Fund Corporation (APFC) and the world’s largest sovereign fund, Norway’s Government Pension Fund Global (GPFG).”

But the key phrase there is “not including unrealised capital gains” – as a strategic investment fund, it holds stakes in sizeable companies that it does not sell off. The others play no such role and are free to take profits from their investments as and when they see fit.

Overall, the Singapore Straits Times article is rather unbalanced and lopsided, and looks very much like it was planted there via the provision of selective information by those who want to smear Khazanah’s name and have their own agendas in terms of lobbying for some people to take over when Azman’s term ends.

That article has been picked up and quoted widely among the press in Malaysia, both online and print, and has had its intended effect by those who may have planted it there. It is however lamentable that a respected publication in terms of reporting regional affairs has been so used.

Meantime, one hopes the powers-that-be don’t try to fix what isn’t broken and continue to give support for Khazanah to operate conservatively and competently with proper checks, balances and accountability, unlike what has happened at 1MDB.

To do anything otherwise is to rain down more suspicion and lack of confidence on a country already beleaguered by a plethora of governance ills and all that comes with it such as market and currency weakness. We simply can’t afford another fund debacle.

 

Forex RCI blames Ex-Khazanah Nasional Vice Chairman Nor Yakcop


December 1, 2017

Forex RCI blames  Ex-Khazanah Nasional Vice Chairman Nor Yakcop

by http://www.malaysiakini.com

Bank Negara suffered losses amounting to RM31.5 billion in foreign exchange (forex) trading between 1992 and 1994, the Royal Commission of Inquiry (RCI) into the matter said.

The RCI also established that Nor Mohamed Yakcop, who was part of Bank Negara’s management at the time, was the person in charge of the forex dealing operations. The commission is also of the opinion that this incident involved a criminal breach of trust under Sections 406 and 409 of the Penal Code.

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Nor Mohamed (pic above) was in charge of portfolios at Bank Negara between 1986 and 1993, including managing external reserves and regulation of domestic financial markets.

However, the RCI said, other parties had to share the blame as well.“Although he had dominion over BNM’s funds and seemed to have had a free hand in forex dealings, he could not have carried on for such a long time without the direct or tacit approval of his superiors and/or other persons in authority.

“Therefore, the commission assessed the joint liability of these persons, which could fall either under Section 34 or Section 107 of the Penal Code and explained as having the common intention or abetting,” the commission adds in its report, which was released today.

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A former deputy governor of Bank Negara Malaysia (BNM), Dr. Lin See Yan told the Royal Commission of Inquiry (RCI) that he was shocked at the scale of the foreign exchange (forex) losses suffered by the central bank 25 years ago.

These individuals, according to the RCI, are then Bank Negara governor Jaafar Hussein, his deputy Lin See Yan, Bank Negara’s board of directors, then Finance Minister Anwar Ibrahim and then Prime Minister Dr Mahathir Mohamad.

Dr M and Anwar’s role

Furthermore, the RCI said, the incident involved an element of cheating in violation of Sections 417 and/or 418 of the Penal Code.

“The possibility of joint liability was also examined. It could be proven that several persons from Bank Negara, the Finance Ministry, Auditor-General’s Department, including Bank Negara’s board of directors and the Finance Minister, had all the information on the forex losses and were involved in the concealment of actual losses in Bank Negara’s forex dealings.

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“Therefore, they should be jointly liable for the offence,” the report states. The RCI also accused Mahathir and Anwar of withholding information on the forex losses from the cabinet.

“The Finance Minister was also the main person responsible for withholding the facts and information of the forex losses to the cabinet.

“The Prime Minister, who also had knowledge of the forex losses, did not correct or offer more information when the losses informed to the cabinet were not the actual losses,” reads the report.

No further recommendations

The RCI also concluded that Bank Negara’s forex trading activities at the material time contravened Section 31(a) of the Central Bank Ordinance 1958 as the volume of transactions exceeded the reserves.

The RCI also opined that there was a deliberate concealment of the forex losses as it was not accurately reflected in the Bank Negara annual reports.

“The commission is of the opinion that the then Finance Minister had deliberately concealed facts and information and made misleading statements to the cabinet.

“The commission is also of the opinion that the then prime minister had condoned the actions of the Finance Minister,” the report states.

Apart from criminal investigations, the RCI said, no further enhancements to Bank Negara were necessary as substantial measures had been implemented to improve governance of reserves.

“No further enhancements are being recommended, as the various measures for improvement in the overall governance and internal controls of the bank have been adequately addressed in the Central Bank of Malaysia Act 2009,” the report says.

The RCI began its investigations on July 15 and was tasked with establishing whether Bank Negara made losses in the 1990s through forex speculation, whether laws governing Bank Negara were violated, whether there was concealment of facts, recommending action against those responsible and recommending action to prevent the incident from recurring.

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The five-member panel (pic above) comprised Mohd Sidek Hassan (chairperson), Justice Kamaludin Md Said, Tajuddin Atan, Saw Choo Boon and SAK Pushpanathan.

 

RELATED REPORTS

RCI brands Bank Negara’s forex activities ‘excessive’

RCI recommends Dr M and Anwar be probed, claims Daim abetted CBT

Malaysia’s national shipping line: The Robert Kuok Memoirs


November 27, 2017

How I launched Malaysia’s national shipping line (and what Genghis Khan had to do with it): the Robert Kuok memoirs

In the fifth extract from Robert Kuok’s memoir, the Malaysian-born tycoon reveals how patriotism drove him to launch the country’s national shipping line and how he drew inspiration from the Mongol warrior.

By Robert Kuok

http://www.scmp.com/week-asia/opinion/article/2121108/how-i-launched-malaysias-national-shipping-line-and-what-genghis

CUT THE APRON STRINGS AND CAST OFF

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Shipping Magnate Frank  WK Tsao

In 1967, word reached my ears that the Blue Funnel Group was coming to set up the national shipping line of Malaysia. Blue Funnel was probably the largest shipping conglomerate in Britain at that time. It owned Blue Funnel, Glen Line, Straits Steamship Co in Singapore, and many other lines. The Executive Chairman, a man whom I recall walked with a bad limp, was making frequent lobbying trips from London to Kuala Lumpur. I was interested in applying for the licence, so I chatted with a few of my Malay civil-servant friends. They agreed that I should put in a similar application to be considered for the right to establish the national shipping line.

My interest was partly patriotism … to help Malaysia not be tied to the apron string of the ex-colonial government

My interest was partly patriotism – a desire to help Malaysia to launch its own independent shipping line and not be tied to the apron strings of the ex-colonial government of Britain through Blue Funnel. I had become interested in shipping from about 1964, due to our large-scale buying of sugar for our refinery, wheat for our flourmill and our international commodities-trading activities. For example, we bought free-on-board sugar from India and delivered it to the Government of Indonesia on a cost-and-freight basis (sellers only wanted to sell on the basis of delivery at their own ports; buyers wanted the sugar delivered to their ports. Thus, covering the span of the ocean was my risk).

Robert Kuok

In those days, shipping was quite volatile and freight rates could sometimes shoot up 25-30 per cent. Since margins on sugar trading were small, you could easily make money on your trade, but lose on the freight. There was one problem: I knew nothing about shipping. I did know that in any business, unless you know the tricks of the trade, you can be badly burnt. I couldn’t even submit a decent memo for the application. So I looked for a partner.

A FRANK ADMISSION

On one trip to Hong Kong, I had been introduced by a Malay civil-servant friend to a man called Frank WK Tsao. I remembered that Tsao was a shipping man, Chairman of International Maritime Carriers, so I telephoned him. I said I would like to come and see him to discuss a business proposal. He gave me an appointment and I flew to Hong Kong. When I went to his office, Tsao was only mildly friendly. I was quite humble in my approach. I told him that we had met. He said, “Oh yes, we have met, we have met.” In business life, you learn early on that you must swallow your pride. I told him that some Malay civil servants, who wanted to stir up competition, were encouraging me to submit an application to set up a national shipping line.

There was one problem: I knew nothing about shipping. I did know that in any business, unless you know the tricks of the trade, you can be badly burnt.

I said, “I can’t differentiate between the front and rear ends of a ship,” which was a bit of an exaggeration, “so why don’t you come and help me to set up the Malaysian national shipping line? You’re well known in the shipping business. Are you willing to become my partner?” Without thinking for a second, he retorted, “Do you know, so and so and so and so have also approached me. They are Tan Sris, and I turned them all down.”

He was virtually saying “And who are you? I’ve turned down people way ahead of you in the pecking order in Malaysia.” When I heard these remarks and saw his body language, I said, “I’m sorry then. I thought I would give you first crack. I am going to go at it.” I didn’t tell him what a determined man I am in life.

I concluded, “Never mind, nothing has been lost by this little chat we’ve had. Thank you for receiving me.” I got up and was walking out when he shouted, “Oh, no, no. Please, Mr Kuok. Don’t go! Don’t go! Sit down, sit down.”

To this day I don’t know what made Frank change his mind. I had one shipping expert on staff, Tony Goh, a Singaporean- Chinese who was running my plywood factory. Tony had been a manager at Ben Line, a Scottish liner, before he joined me in 1964. So I sent Tony Goh to draft the memo with Frank Tsao.

I rewrote certain parts to suit the reading style of the Malaysian civil servants, and we submitted the memo in the joint names of Kuok Brothers and Frank’s International Maritime Carriers. A little later, I heard that we were one of the leading contenders. I asked Frank to meet me in Kuala Lumpur. I had made up my mind that we should pick one day to call on as many important ministers as possible. From eight in the morning we whipped around Kuala Lumpur at a furious pace, such as you can’t do today due to the traffic, and saw seven ministers by lunchtime. Some of them gave us good time and good hearings, and we told them the same story. In the afternoon, we visited one or two more.

I remember calling on the Prime Minister, the Deputy Prime Minister, Home Minister Tun Dr Ismail, Finance Minister Tan Siew Sin, Minister of Works Sambanthan and Minister of Transport Sardon Jubir.

Tun Dr Ismail, the former Malaysian interior minister.

OUR SHIP COMES IN

Within two or three weeks, we were picked at a cabinet meeting to start the national shipping line, Malaysian International Shipping Corporation (MISC). We were like a dark horse coming from behind in the last furlong and pipping the favourite at the post!

I was Chairman of the Board and provided business management guidance. Frank Tsao’s side provided the shipping expertise. Just around the time of MISC’s formation in 1968, my dear friend Tun Dr Ismail resigned from government when he found that he had cancer. I immediately invited him to be the first Chairman of MISC.

I was inspired by the example of Genghis Khan, who, when he conquered cities, usually turned the spoils over to his generals and soldiers

Frank Tsao already knew Tun Dr Ismail through a textile-mill investment Frank had made in Johor (Dr Ismail resigned from MISC after the May 13, 1969, riots to return to the Cabinet. I then took over the chairmanship until the 1980s). Our first two ships came from the Japanese. Simultaneous with our moves to start the shipping line, there was an initiative by the Malayan Chinese Association (MCA) to demand war reparations from Japan.

The Chinese community was angry about the Japanese massacre of innocent Chinese and was seeking compensation for this blood debt. Tunku Abdul Rahman, the Malaysian Prime Minister, supported the demand and raised the issue during official trips to Japan. The Japanese finally agreed to give two blood-debt ships to Malaysia, which the Japanese called “goodwill ships”. MISC started with these two cargo ships and paid for them on a monthly bare-boat, hire-charter basis. Frank’s ship architects and engineers in Hong Kong supervised the design and construction in Japan. Tunku Abdul Rahman made some very cogent suggestions about the design of the flag for this new national flag carrier.

Malaysia’s first prime minister Tunku Abdul Rahman, left, and finance minister Tan Siew Sin in 1969.

MISC had an initial paid-up capital of 10 million ringgit. Since Kuok Brothers led the show, we took 20 per cent; Frank Tsao took 15 per cent. As the ships were reparation from the Japanese to the Malayan Chinese Association, not to the Malaysian nation, the vessels were assessed a reasonable value and the MCA was given MISC shares in lieu of payment.

MCA and other Chinese associations, combined, took 20-30 per cent, so in the beginning the holding of Kuok Brothers, Frank and the MCA group together was easily over 50 per cent. We had a fairly united board in the beginning. MISC started business in the second half of 1969 and quickly flourished. Much of the credit must go to Frank, the deputy chairman, who recommended capable managers such as Eddie Shih. Shih, another Shanghainese who had settled in Hong Kong, ran the show with Tony Goh. Very early on,

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MISC Managing Director Leslie Eu Peng Meng

Tony recommended his one-time colleague in Ben Line, Leslie Eu, who at the time was manager of Ben Line Bangkok. Leslie, the son of Burmese Chinese who had settled in Malaysia, quit Ben Line and came in as Managing Director of MISC.

YES, PRIME MINISTER

Within a year of our launching MISC, Tun Razak, who by then was prime minister, sent for me. Razak said, “I want you to make a fresh issue of 20 per cent of new shares. I’m under pressure because there is not a high enough Malay percentage of shareholding.” I said, “Tun, are you quite serious about this request?” He answered, “Yes, Robert.” So I replied that I would do it. I went back and, with a little bit of arm-twisting, persuaded the board to pass a resolution waiving the rights of existing shareholders to a rights issue (MISC was not yet a public company). Razak allocated all the new shares to government agencies. So, I was diluted to 20 upon 120 – the enlarged base – and Frank became 15 upon 120.

Tun Razak.

One or two years later, Razak again sent for me. He said, “I’m under a lot of pressure at Cabinet meetings. You know, Robert, it’s just the price of your success. MISC is doing well, people are getting envious. But now, instead of giving in to those factions, what I’ve decided is this: Issue another twenty per cent, five per cent to each of four port cities in Malaysia.”

I have always believed in some degree of socialism when you have made money

This entailed enlarging the capital base to 140 from the original 100, making the Malaysian Government the largest single shareholder and relegating Kuok Brothers to second position. And he again wanted the shares issued at par – the original issue price.

I said, “Tun, I have always cooperated with you, but it’s getting very difficult. Three, four years have elapsed from formation, but I would be loath to ask you for a premium since we are a growing company. So I will go back and ask the board again to issue shares at par to you. But Tun, can you please promise me that this is the last time?” He smiled and very gently signified his agreement, without saying the words.

GIVING LIKE GENGHIS

Then Frank and I decided that we should go public. Before we listed in 1987, I made quite a radical move, adopting a practice that I had used within Kuok Brothers. I explained to my Kuok Brothers senior directors that the MISC shares were now worth a lot of money, but only because of the great effort put in by other members of the board and many of the very deserving staff. I wanted to take about 15 per cent of our shareholding and sell the shares at par to deserving directors, staff and ship captains. Quite a number of people benefited from this move. I have always believed in some degree of socialism when you have made money. You know very well that you alone didn’t make it; it was a joint effort.

I was inspired by the example of Genghis Khan, who, when he conquered cities, usually turned the spoils over to his generals and soldiers. He was not selfish, and that is why he became the greatest general the world has ever seen.

Robert Kuok, A Memoir will be available in Hong Kong exclusively at Bookazine and in Singapore at all major bookshops from November 25. It will be released in Malaysia on Dec 1 and in Indonesia on Jan 1, 2018

Malaysia Sdn Berhad: Book Review


August 11, 2017

Malaysia Sdn Berhad: Fox guarding the henhouse?

BOOK REVIEW | Minister of Finance Incorporated: Ownership and Control of Corporate Malaysia. Edmund T Gomez et al. Institute for Democracy and Economic Affairs (IDEAS), Kuala Lumpur.

by Prof. Dr. Jomo Kwame Sundaram

http://www.malaysiakini.com

In the late 1980s, the young Terence Gomez proved himself to be the worthy successor to a Malaysian research tradition begun by James Puthucheary in Singapore’s Changi Prison almost three decades earlier. Gomez single-handedly transformed our understanding of the role of politics in the ownership and control of the Malaysian corporate sector.

Employing novel methods as needed and appropriate, the auto-didact researcher showed how official policies and institutions had enabled an earlier generation of selected Malay business professionals to take over some commanding heights of the Malaysian economy.

Change and continuity

In their new book, Gomez and his team of researchers chart developments over the last three decades since he began his pioneering work, paying particular attention to developments following the 1997-1998 crisis. That crisis exposed the vulnerability of the earlier expansion closely associated with the Umno leadership then.

The corporate restructuring and refinancing institutions and processes that followed were not simply bailouts at the public expense, as alleged by some critics then. Instead, as the book shows, most major assets are now under new management, ultimately controlled by the current prime minister cum finance minister.

The authors focus on seven government-linked investment companies (GLICs), namely Khazanah Nasional, Permodalan Nasional (PNB), both under MoF Inc, Kumpulan Wang Simpanan Pekerja (KWSP or EPF), Kumpulan Wang Persaraan (KWAP), Lembaga Tabung Angkatan Tentera (LTAT) and Tabung Haji.

Malaysians may be comforted to learn that of the seven, only Tabung Haji is run by politicians, and the others by professionals. But after all, 1MDB too has been run by professionals (Jho Low is a Wharton graduate) while Felda Global Venture’s previous boss claimed to have a doctorate. The not-so-magnificent seven covered do not include others, such as those in the Felda group, controlled directly by the PM since 2004.

Most bumiputera entrepreneurs who emerged in the dozen years or so before the 1997 crisis also had impressive professional credentials. The apparently better performance of the more recent crop of professional managers may have less to do with their qualifications, than the ethos, checks and balances of the new institutional arrangements introduced and enforced by some GLICs.

Government control

The range of activities undertaken by government-linked companies (GLCs) overseen by the GLICs includes familiar ones from the 1980s such as utilities, finance, plantations, property and construction. Media, previously controlled by the ruling party and its trustees, are now held by GLCs, while investments in hospitals and other services have also grown. With development finance institutions now under GLCs, their original objectives and rationales have been undermined by commercial considerations.

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The Gomez team has done Malaysians a great service by describing how things have changed, tracing the bewildering variety of new arrangements. However, how to interpret this variety remains moot, and some informed readers will have their own bones to pick with what is considered most significant in their analysis.

Protracted crisis

Two economic developments help us better understand the recent growing unrest, especially among informed Malays. First, the Saudi-initiated oil price collapse in late 2014 precipitated a more general commodity price collapse. Meanwhile, lacklustre growth in Malaysia since 1998 has been exacerbated by premature deindustrialisation unconvincingly presented as inevitable in achieving developed country status.

Second, despite heavy censorship, news has been leaking out of corporate abuses involving not only 1MDB, but also FGV and other corporations associated with the legendary ‘Malaysian Official 1’. Easy money from China may have helped the regime with its immediate financing problems, but a generation familiar with mounting personal debt senses that this is at the public’s, taxpayers’ and future generations’ expense.

This ‘double whammy’ has been reflected in the much-weakened ringgit and by other indicators. Meanwhile, there have been heightened concerns about the recent foreign investor resurgence, especially with official non-disclosure of ownership data since 2008. Recent erosion of public faith in the state and ruling coalition has been accelerated by unprecedented recent abuses for personal gain and nepotism.

Don’t shoot the messenger

Even if successfully challenged on some details, this important book should open an important new debate on how Malaysia is to progress. Gomez offers some proposals, apparently at odds with the book’s sponsor. Others, especially participants in and observers of Malaysia’s corporate sector and political economy, will promote their own alternative purported solutions. The ensuing debate can only benefit the nation, as Gomez’s first decade of publications shaped the earlier debate and reforms, even if most outcomes may have disappointed him.

While this regime is undoubtedly associated with unprecedented abuses, there is little in the study to support the publisher’s faith in leaving things to the market and simplistic insistence on government withdrawal from the economy as a universal panacea to the myriad problems the nation faces. In the face of the wide-ranging and complex issues involved, this would be tantamount to throwing the baby out with the bathwater.

Unsurprisingly, this publication on the regime’s role in ownership and control of contemporary corporate Malaysia is silent on the current political crisis as the nation approaches the next general election. Nevertheless, IDEAs must be congratulated for sponsoring and publishing this important work.

Image result for prof jomo kwame sundaram

JOMO KS received the 2007 Wassily Leontief Prize for Advancing the Frontiers of Economic Thought. The views expressed here are entirely his own.

 

 

Whither MAS (Malaysia Airlines) in a Political Blame Game


July 18, 2017

Whither MAS (Malaysia Airlines) in a Political Blame Game

by P. Gunasegaram@www.malaysiakini.com

But the way it is going, it may be that Malaysia Airlines may eventually become somewhere between a low-cost and full-service airline, neither here nor there, floundering between small profits and losses – an inconsequential airline in other words. What a comedown for a once proud brand!–P. Gunasegaram

During electioneering, it is common to make political capital out of everything. Malaysia Airlines Bhd was not spared when Prime Minister Najib Abdul Razak blamed one of his “predecessors” at a Hari Raya open house earlier this month for “horrendous decisions”.

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Malaysia Airlines (MAS)An Inconsequential  National Carrier

He was very obviously referring to former Prime Minister Dr Mahathir Mohamad, although he did not name him. But to be fair, Mahathir was not responsible for the latest disaster at Malaysia Airlines. Paradoxically this happened largely during Najib’s time.

This latest disaster which resulted in losses of billions of ringgit and required a RM6 billion injection of capital and privatisation in 2014 by Khazanah Nasional Bhd, the previous major shareholder and now sole shareholder, resulted after Malaysia Airlines was turned around in 2007.

What Najib was referring to was the previous disastrous privatisation of Malaysia Airlines, to a Mahathir-Daim crony Tajudin Ramli who bought a controlling near 30% stake in the airline in 1994 for RM1.8 billion. After mismanaging the airline into the ground, he sold back his stake in the airline to the government – at the same price – in 2000. The market price was less than half that.

Turned around in 2007

Najib’s immediate predecessor Abdullah Ahmad Badawi brought in Idris Jala from Shell to turn around Malaysia Airlines in 2005, the same Idris who would head the Performance Management and Delivery Unit or Pemandu at the PM’s Department in 2009 and join the cabinet.

Two years later, in 2007, Malaysia Airlines had turned around. In Idris’ first year on the job, he reduced the losses to RM133 million and turned the company back into the black with a record profit of RM853 million in 2007, according to this letter written by a former investor relations manager at Malaysia Airlines, Song Eu Jin, to Malaysiakini.

“The profit in 2007 was the highest in MAS’ corporate history and was earned through a massive operational cost reduction of RM745 million as well as on the back of record revenues of RM9.4 billion. The profit numbers were real as reflected in the cash balance at that time of RM5.3 billion which had grown from RM1.5 billion at the end of 2005, when Idris joined MAS (Malaysia Airline’s forerunner),” the letter said.

But in 2009, Idris left Malaysia Airlines to join Najib’s cabinet and head Pemandu. A succession of CEOs after him proved to be incapable and sent the airline down back into losses of billions of ringgit yet again. And no mistake about it, this happened during Najib’s time.

Horrendous decisions but by whom?

This is what Najib said at the open house: “The history of MAS was fraught with, I would say, horrendous decisions in the past. I’m not going down that road but that was a nightmare that was inflicted upon MAS that was done by one of my predecessors.

“But I will put it right. I will make sure MAS recovers and becomes one of the leading airlines in the world,” said Najib to applause from thousands in the audience present at the event. How ironic that is when the latest problems occurred during his time entirely.

I have followed the Malaysia Airlines saga over the years – from the 80s onwards and read up its history before that. Idris did turn the airline around solidly although it incurred a huge hedging loss of RM557 million in 2009 on fuel when fuel prices fell. The contracts had to be marked to market.

The way he did this was to focus on two things – yield and load factor. Yield represents the unit amount that the airline got from selling tickets and load factor is a measure of how much aircraft are filled. The right pricing of seats results in the best combination in terms of unit revenues from seats sold and load factor to maximise revenue.

In practice, this revenue management system is extremely complicated and uses sophisticated computer modelling which critically requires right inputs. That focus helped Malaysia Airlines increase revenues, helped along by an important fact – the airlines’ services were among the best in the world, as measured by Skytrax, the industry standard by which airlines are measured. Skytrax gave five-star status to Malaysia Airlines, with less than two handfuls among hundreds of airlines in the world qualifying.

Meantime, on the cost side, Malaysia Airlines’ was among the lowest in the world for full-service carriers but still advances were made here as well. The combined reduction in costs with an accompanying increase in revenues was what turned Malaysia Airlines around under Idris.

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AirAsia–The Award Winning Low Cost Carrier 9x in a row and Global Brand

Subsequent CEOs lost focus. They thought budget carrier AirAsia was the competition when Malaysia Airlines was a full-service, five-star airline. Yield dropped, load factors went up too much but still revenues were not enough. Fuel prices continued to climb, exerting further pressure. Revenue management deteriorated. And then came the two unfortunate crashes of 2014 (MH 370 and MH 17) which depressed revenues even further.

When Khazanah Nasional came in with their recovery programme during and post privatisation in 2014, I was flummoxed – nothing about revenue management, it was about cutting costs. But with unit costs for Malaysia Airlines still among the lowest in the full-service industry, revenue management was the key.

Enter Mueller

Khazanah Nasional went on a worldwide search for a CEO and found Christoph Mueller, a German, who reputedly turned around Ireland’s Aer Lingus. He joined in May 2015. He continued with extreme cost-cutting, shrunk the airline to a regional one, maintaining one flight to Europe, London. He made a deal with Emirates (the airline) for code sharing, all but killing Malaysia Airlines’ more international routes.

I was not impressed with him – turnaround means making unprofitable routes profitable, not cutting them and keeping only profitable ones – any fool can do that and show a profit, albeit a shrunken one which will never recover to the levels seen before. It meant that Malaysia Airlines’ main competitors would be the low-cost airlines – yes, AirAsia again.

Mueller’s cost-cutting would lose Malaysia Airlines five-star rating, one of its main assets. Because of the drop in level of service as a result of severe cutbacks, Malaysia Airlines asked not to be rated anymore. Insiders maintain to me that he was scathing about that rating, saying that many airlines had better service than Malaysia Airlines.

That and the frequent reference to Malaysia Airlines’ previous two crashes – both of which could not be pinned on the airline itself – made me wonder whether he was the best person to be running Malaysia Airlines. On the one hand, he runs down highly-rated services, on the other he makes frequent references to crashes to show his difficult position, both not in the interests of the airline itself.

Barely a year into his three-year tenure, Mueller announced his intention to resign “for personal reasons” but six months later in September 2016, he joined Emirates as chief digital officer, the same airline with which he negotiated the code-share agreement as CEO of Malaysia Airlines. What a conflict of interest!

On balance, my opinion is that Mueller was bad for Malaysia Airlines and I find it difficult to understand why his hiring did not have stringent conditions attached about joining competitor airlines.

His successor Irishman Peter Bellew, who took over in July 2016, was then chief operations officer at Malaysia Airlines. He was hired from low-cost airline Ryanair and had no experience in a full-service airline before that. However, he has said that Malaysia Airlines is trying to regain its 5-star status.

Recently I travelled to and fro London on Malaysia Airlines and the service and quality of food have indeed improved, a good sign. But it will take more than that to successfully turn around Malaysia Airlines.

An inconsequential airline

A targeted profit only in 2018 is rather late in the day given that most airlines made good profits recently because of the sharp drop in fuel prices. Despite all that cost-cutting and low fuel prices, Malaysia Airlines is bleeding. Why?

The answer lies in revenue management – how come Malaysia Airlines fares can be lower than AirAsia’s which is a low-cost airline. Surely that is indication that prices have been too low, especially since load factors remain high? Malaysia Airlines has got revenue management wrong and it still remains suspect.

And then strategy – how can you expect to succeed regionally as a full-service airline when there are so many low-cost airlines in the space? Surely you must try the longer international routes and make them profitable instead.

The times I have flown to London on the airline, the flights were full on the A380s. Yet Malaysia Airlines has plans to downgrade this route using lower capacity, smaller A350s. This will substantially reduce its competitiveness in terms of comfort relative to other major full-service carriers.

One more thing, since privatisation nobody knows how much money Malaysia Airlines is losing and what are its yields and load factors. Its performance has become rather opaque because the quarterly reports are not anything like what it was before when it was publicly listed. That makes it more difficult to make conclusions.

But the way it is going, it may be that Malaysia Airlines may eventually become somewhere between a low-cost and full-service airline, neither here nor there, floundering between small profits and losses – an inconsequential airline in other words.

What a comedown for a once proud brand!


P GUNASEGARAM says that Malaysia Airlines has been repeatedly grounded by poor management, not by the alleged inefficiency of its staff. E-mail: t.p.guna@gmail.com.