Based on generally accepted accounting principles and current norms, these are more examples of flaws in EPU's apparent methodology in calculating bumiputera equity.

The fallacies clearly demonstrate that par value methodology cannot be meaningfully used to measure actual progress nor can it be used for target setting.

Example 6: Static and optional defects in par value

The par value capital of Ali Sdn Bhd is RM2 in 2006. It is awarded a long-term contract worth RM100 million up to 2020. It does not want to increase its par value capital for this duration of 14 years.

EPU Apparent Methodology:

The par value is RM2 in 2006 and is still RM2 in 2020. Ali Sdn Bhd has not progressed for this duration. Therefore, Ali Sdn Bhd needs more assistance.

Flaws:

  • The par value capital is a static figure. If it is static, how can EPU use it to benchmark actual progress? This example shows that Ali Sdn Bhd has not progressed at all despite receiving generously assistance - which obviously is wrong!

  • The par value capital is an optional figure i.e. it is up to Ali Sdn Bhd to increase its par value capital of its own free will. If it is optional, how can EPU use it as a target for the nation's growth? How can the 30% bumiputera equity target be ever reached?

    • Example 7: Distortion of true picture

    Ali started a shipping business called Ali Baba Sdn Bhd five years ago in 2000, with a par value capital of RM2. Shortly after, it was awarded several long-term contracts by major government-linked companies (GLCs) to ship their produce worldwide.

    In the same year, Ali also incorporated a company in Panama called Ali Baba & Sons (Panama) Ltd to provide shipping maintenance, advisory and logistic services to Ali Baba Sdn Bhd. With its political connections, Ali Baba Sdn Bhd secured a RM500 million loan from Bank Islam.

    In 2006, Ali Baba Sdn Bhd recorded a loss of RM500 million while Ali Baba & Sons (Panama) Ltd made a profit of RM200 million through deliberate transfer pricing policy. Unable to repay the loan and continue in business, Ali Baba Sdn Bhd folded up in 2006. The loan was written off as bad debt in Bank Islam.

    Bank Islam, adversely affected by this and other bad debts, was forced to seek a bailout of RM2 billion from the government to prevent going under.

    Ali remained relatively unscathed - his company's bank loan was in effect paid by Malaysians through the bailout of Bank Islam.

    EPU Apparent Methodology:

    Using a par value methodology, the capital of Ali Baba Sdn Bhd was extinguished to RM0 in 2006. It lost RM2 and was one of many companies adversely affected by the Asian financial crisis. Therefore, the company should be given special assistance to help it stand up on its feet again.

    After Ali Baba Sdn Bhd folded, Ali set up another company called Ali Nominees Sdn Bhd (using part of the monies from Ali Baba & Sons (Panama) Ltd). It was awarded several long-term contracts under a special scheme for companies affected by the financial crisis. It employed the same modus operandi except that, this time, it obtained a RM500 million loan from Bank Rakyat...

    Flaws:

    • Par value methodology distorts the situation of the company and the nation. As this example clearly shows, the loss in regard to Ali Baba Sdn is only RM2!

    In fact, the true situation is more dire than the RM2 par value loss. It conceals a RM500 million loss by Ali Baba Sdn Bhd and another RM2 billion bailout of Bank Islam using tax monies.

  • Notice how through transfer pricing, profits can be hived onto a foreign company, Ali Baba & Sons (Panama) Ltd, without being accounted for by both EPU and Bank Islam. In law, Ali Baba & Sons (Panama) Ltd is a foreign company and a separate company from Ali Baba Sdn Bhd.

    • By ignoring the true situation, EPU methodology provides fertile ground for cover-ups and mismanagement without accountability. If there are any lessons to be learnt or any remedial actions to be taken, it can only be done by seeing the true picture.

    Example 8: Flawed sampling methodology

    The wealth of all Malaysians can be categorised as:

    A) Wealth of entities or persons skewed towards bumiputeras

    • A large number of GLCs with a majority of bumiputera employees and awarding the majority of contracts to bumiputeras, e.g. Telekom, Tenaga, Proton, MAS, UEM, Bumiputra Commerce, Affin, Bank Islam

  • National petroleum company Petronas and its group of companies

  • Special land schemes such as Felda, with the world's largest planted acreage of oil palm and rubber

  • Special share schemes like ASB and PNB, offering shares in Amanah Saham Nasional, Amanah Saham Wawasan 2020, etc

  • Special co-operatives or bodies, e.g. MOCCIS, LTAT and Tabung Haji, which own a substantial amount of properties and shares in public-listed companies

  • Individuals owning a substantial and majority of landed properties in the Malay states like Perlis, Kedah, Kelantan, Terengganu, Pahang, Johor, Negri Sembilan, Sabah and Sarawak

    • B) Wealth of entities or persons not skewed towards any particular race

    • Partnerships, sole proprietorships, co-peratives, societies and other entities open to all races

  • Individuals of all races owning assets (landed properties, shares, bank savings, etc) outside Malaysia

  • Individuals of all races owning assets excluding shares in Malaysia

    • C) Wealth of entities or persons skewed towards non-bumiputeras

    • Small, medium and large companies

  • Individuals owning majority of landed properties in the non-Malay states like Penang, KL, Perak and Malacca

    • EPU Apparent Methodology:

    Of this spectrum of entities and persons, EPU only studies a sample of 600,000 companies in category C1. For unexplained reasons, it excludes the wealth of all those entities in categories A, B and C2.

    Flaws:

    1. The laws recognise that businesses can be operated not only through limited companies but also through partnerships, sole proprietorships, co-operatives, societies and other business entities. These generate wealth.

    In addition, wealth from properties, shares, bank savings, etc, can also be owned by private individuals through acquisition or inheritance. Wealth can be located inside and outside the country.

    Therefore, EPU's study of only category C1 is seriously flawed as it does not represent the whole spectrum of wealth of the entire population. Concentration of wealth in the categories of A, B and C2 are very substantial and collectively may even exceed the wealth of category C1. But why are they excluded?

  • The study of the 600,000 companies in category C1 is picked from a skewed sampling population (towards non-bumiputeras) and therefore, the results must also be skewed and not representative of the population.

  • Within the companies in category C1, EPU takes into consideration only the par value capital, and not the market value which would have been a more correct reflection of wealth. Par value capital does not and cannot be a reflection of wealth and therefore the result derived is meaningless.

  • The 600,000 companies studied are hardly representative of 26 million Malaysians, bearing in mind that one person can own 10 or perhaps 100 companies. The correctness of this statement is further supported by the exclusion of the wealth of all entities in categories A, B and C2.

  • Plantations form a vast part of Malaysia's land-mass. Malaysia is one of the world's top producers of palm oil, rubber and other agriculture produce. Its land value is humongous in relation to the quantification of wealth.

    • Yet ridiculously enough, the wealth of Felda and bumiputera-controlled plantation GLCs such as Guthrie, Boustead and Sime Darby is left out in the methodology.

    Instead, smaller non-bumiputera plantation companies such as Unico, Tanamas, Harn Len, Far East and many others may have been included in EPU calculation.

    If this is not selective manipulation of statistical data for an agenda, then what is?

    Part 1: Flaws in EPU's apparent methodology

    LJ WONG is a chartered accountant by profession. He worked in a tax consultancy firm and a public listed company before he retired. He is now involved in an Internet-based business.