Q&A;

To be sold to the government to the tune of RM4 billion, Renong's UEM is not going for a song. In a two-part interview, political economist Prof KS Jomo gives malaysiakini the lowdown on the deal and the ramifications of the Mahathir-Daim falling-out.

Malaysiakini: The government's latest bid to take over United Engineers (Malaysia) Bhd has created a controversy. It is being viewed as another 'crony bailout'. Can you give your thoughts on this?

Jomo: We must remember that prior to this there had been at least five efforts involving tens of billions - to 'help' the Renong group and its chief executive Halim Saad, widely viewed as an Umno trustee while Daim Zainuddin (former finance minister) was treasurer.

First, there was the reverse takeover of Renong by UEM in November 1997, which caused the stock market to collapse by RM70 billion - or 20 percent - in three days.

Then, the extension of the North-South Highway toll concession period for another five years, which has increased future profits and income flows for UEM. This increased the value of UEM, enabling it to raise money on the bond market to restructure and reduce its debt burden. This would also reduce future government revenue which will have to be replaced by heavier taxes on the people.

Third, several personal debts involving Halim associates, such as the RM3 billion or more debt from four Malaysian banks, were taken over by Danaharta (the government's debt restructuring company) with no discount. This loan was apparently to enable Halim to take over National Steel Corporation in the Philippines from Joseph Chong. The unusual conditions for this NPL (non-performing loan) takeover seem to confirm the market view that the deal was upon Prime Minister Dr Mahathir Mohamad's instructions.

Fourthly, two LRT (light rail transit) systems including one belonging to the Renong group - are to be taken over by the government on a generous cost-plus basis, defeating the entire rationale for its original privatisation. During Daim's tenure as finance minister, there were more generous offers for the Putra and Star LRT, well above what it cost them to build the systems.

They were promised generous prices that Halim must have hoped for. Since Daim's resignation, the prime minister has called for a review of the very generous terms for this 'nationalisation' and has indicated that he will lower the offer prices. But if the government is taking over the Renong group anyway, it does not make much difference.

Fifth, was the utilisation of the Pension Fund and Employees Provident Fund (EPF) money to underwrite and buy the 75 percent unsubscribed Time dotCom IPO (initial public offering) shares at the inflated offer price in order to reduce Time Engineering and thus the Renong group's total debt.

There are rumours that there is growing friction between Mahathir and Daim due to these bailout problems. Do you think that these problems contributed to the perceived gap between the two?

What is clear now is that several Daim men and women can no longer be relied upon to look after Mahathir and Umno's interests, and they will be replaced by others or by different arrangements.

But one should not exaggerate the significance of the UEM takeover. As mentioned earlier, the government and the public have already spent billions to try to save the group. But after all that has been done, there still did not seem to be any light at the end of the tunnel.

And the market perception was that with the Renong group's huge share of total Malaysian corporate debt, failure to resolve its problems was standing in the way of everything else, both on the banking as well as the corporate side. And in so far as perceptions influence investor sentiment, one can well argue that the government had little choice.

It is not as if it is leaving poor Halim in abject poverty. As long as he behaves himself, he will still be a very rich man by any standards. Two indicators will be whether he will be required to honour his personal put option undertaking and what price if any - is offered by the government for Renong.

Much depends on the price. Danasaham is offering more than 20 times the value of UEM's net tangible assets per share (22 sen), and even if the government pays only five times Renong's NTA (net tangible asset) value per share (65 sen), he will make a killing, according to an analyst.

Already, Renong which Halim still controls is making deals with Universal Studios to develop a theme park on its Pro-Link land near Singapore. And with about RM1.5 billion from the UEM share sales, Renong will be more liquid than ever before. It is still not clear what the government's designs on the entire Renong group are.

The cost of bailing out the Renong group will be very high. Even at this early stage, the cost of the UEM takeover is more than RM4 billion. Even though the Renong group has quite a number of profitable assets, it is still more than RM20 billion in debt, even though the debt is now lower than the RM25 billion to RM30 billion previously owed. And the UEM share of the debt is huge too.

Remember, they have given Halim and company several breaks and a lot of time, and by taking over the group through UEM, they will be taking over not only assets, but also huge debts and other liabilities.

By dropping Halim, the Mahathir regime without Daim can give the impression that it is serious about dealing with cronyism and corporate governance. As someone put it the other day, it's a matter of getting rid of Rasputin to try to save the Tsar. So, this disassociation may well provide a new lease of life to the regime, or so it hopes.

There are several signs of disagreement between Mahathir and Daim, and this friction can grow as those previously marginalised by Daim bring all their complaints and stories to Mahathir to take revenge. But at the same time, Daim has been careful not to criticise Mahathir in public, and Mahathir may still need Daim to retrieve Umno's assets as well as to protect their various shared interests.

After what happened to (former deputy premier) Anwar (Ibrahim), there is a tendency for many to expect a similar conflict, but I see little evidence of this thus far, though, of course, things might change.

But was it necessary to rescue Renong-UEM?

Many say "Oh, this is an excellent step and shows that the economy will be better handled according to normal market rules".

Actually, what has happened clearly indicates that the executive has ultimate power over business in this country, which is hardly going to improve investor sentiment. What is being reported in the local media is rather naive and seems to have forgotten history and does not seem to understand reality.

Those who applaud the government's moves to bail out the Renong group do not seem to know history. The reasons why Renong has incurred so much corporate debt has been due to the approaches taken and approved by Mahathir and Daim all this while.

The RM30 billion debt did not fall from the sky. It was due to the kind of business practices approved by Mahathir, as CEO of 'Malaysia Inc', perhaps advised by Daim, but Mahathir had always approved of doing business that way.

It is difficult to carefully evaluate the takeover of Renong-UEM due to limited transparency and information, and there are others more competent to do that. There are many points that can be raised, but I wish to mention only one. Must the Renong group be rescued in order to prevent its employees from losing their jobs?

Let's take, for example, a company that has many subsidiaries, just like UEM has Plus and so on. Maybe a big loss for one of the companies (say due to no more demand for its products, e.g. a drug is banned) will result in it being bankrupt, whereas the other companies are still profitable and there is no reason for them to be closed down. When the drug company is bankrupt, there is no reason why the other subsidiaries must shut down.

In fact, proper procedures to deal with bankruptcy enable even the bankrupted company to continue operating while the overall situation is resolved, usually through takeover by others who can run the enterprise better.

The assets will go up for sale, usually auctioned, and can be bought by the government or any other persons or companies. For example, the North-South Highway was half built, and used to be owned, by LLM, the Malaysian Highway Authority (contrary to the media impression that it was all Halim's idea). Why is it that the LLM cannot buy over the highway? And if it did, it would still need workers to manage it.

In the unlikely event that UEM is bankrupt, its assets will be taken over by others. There is no reason for ordinary employees to be sacked. For example, certainly not the staff of PLUS, many of whom are earning very modest salaries. They will still be required.

Hence, if UEM is bankrupt, it does not mean that PLUS' North-South Highway will disappear, or that the road cannot be used or its workers must be terminated. This is a ruse merely to scare the public into believing that all the bailouts were necessary to save jobs. A malaysiakini reader claims that it will cost RM555,555 for each job supposedly saved.

The ones who are afraid of bankruptcy are the owner-employers earning six- to seven-figure salaries plus various perks they have given themselves such as executive jets and the like. Their penthouses and personal jets will probably have to be auctioned off. They fear losing all the icing on the cake which they have enjoyed thus far.