Cover Story: to catch a conman

This article first appeared in Enterprise, The Edge Malaysia Weekly, on January 8, 2018 - January 14, 2018.
-A +A

Grantpreneurs — a term coined by PlaTCOM Ventures Sdn Bhd CEO Dr Viraj Perera to refer to people who specialise in applying for government grants and misusing the money — are on the rise.

Perera, who was formerly with Isis Innovation Ltd, a technology and research commercialisation company wholly owned by the UK’s Oxford University, was used to a certain way of doing things. When he accepted a job as senior vice-president of Agensi Innovasi Malaysia (AIM) and nine month later, became CEO of PlaTCOM — the national commercialisation technology PlaTCOM — he found himself having to deal with opportunists who would try to exploit the various grant schemes in the country. They would present good proposals to get the grants, and then allow their projects to peter out.

He was horrified to find out that some of them simultaneously applied for — and were successful in getting — funding from different agencies. There was a lack of monitoring, and no centralised database, to curb this practice.

“They (the grantpreneurs) are like leeches, sucking the nutritious and valuable blood that could help promote real innovation out there,” Perera tells Enterprise.

After looking into the problem, it struck him that grantpreneurs were professionals and would probably do an outstanding job in sales. They knew the ins and outs of the funding system in Malaysia, what grants to apply for, exactly what to write in their applications and how to present themselves at interviews.

Perera recalls how imperturbable they were. They never flinched or showed any signs of hesitation or discomfort even when the toughest questions were thrown at them.

“They were really polished and would have excelled as salesmen. They came up with really good proposals which they knew how to sell,” he says.

That’s all good. The problem was, they didn’t intend to follow through on their proposals or actually carry out the projects.

Perera then started putting in place measures to weed out these conmen. His project managers would conduct site visits to ensure that equipment had actually been purchased, as stated in the invoice, and that a project was progressing according to the timeline given.

But as it became harder to game the system, at least where PlaTCOM was concerned, the grantpreneurs became smarter.

For instance, instead of purchasing a piece of equipment as required, machinery might be moved from an existing company to the new premises. Others colluded with the equipment suppliers, which would issue an invoice and deliver an expensive piece of equipment, only to buy it back a week or month later at a discount, after the project managers had carried out an inspection. Others would use a dormant company to issue an invoice. Both companies would make a profit and the only loser would be the government and the taxpayers who are indirectly paying for these grants.

Sometimes, however, the company in question may be innocent. “We once had a case where the invoice for the purchase of a supercomputer was issued by a dormant company. We were furious! We visited the company to ask them for an explanation. The company issuing the invoice had registered its business early and had only started operations. Unsatisfied, we dug deeper, but ultimately, found that the company was genuine.”

The whole concept of grantpreneurship disgusted Perera. He felt there were too many holes in the system that allowed these people to get through.

To others, however, this is just part and parcel of the business landscape in Malaysia.

Koong Lin Loong of the Associated Chinese Chambers of Commerce and Industry of Malaysia (ACCCIM) describes the grantpreneurs as a group of people who “know who” and “know how” to apply for a grant.

They know who are behind the grants and what kind of proposals these people are looking for, and also who to hire to write them, says Koong, who is chairman of SMEs at the association.

“Some may apply for one [grant] and set up another company to apply for another. There are many of these sorts of people out there and they are so good at these applications that it is hard for the officers to make their assessments,” he says.

Another tactic is to use nominees. For instance, a grantpreneur might apply for several loans using different companies registered under various names, all of which are linked to him.

This way, they manage to have a second bite at the cherry. “You cannot see that these companies are actually owned by the same person,” Koong says.

Cradle Fund Sdn Bhd (Cradle) group CEO Nazrin Hassan prefers to take a macro view. He says there will always be people up to no good who will abuse any system because it is there. This happens not only in the grant ecosystem, but in commercial banks as well.

He says most of the abuses in the grant ecosystem happened before 2008, at a time when the grant cup runneth over. “Grants were being given out in the millions... I remember brokers out there asking for details of the grants in the market.”

Nazrin is speaking from experience. “I used to be an entrepreneur and a group of brokers came to me and asked whether I would like to take a loan from a bank. They asked for a 10% fee and guaranteed that the loan would be approved. When I asked how they could be so sure, they told me that they had bought everyone in the credit committee.”

 

So, how did the grantpreneur come to be?

Koong explains that the grants are there for a purpose. The government has provided funds via various ministries over the years for specific purposes, such as helping SMEs start and grow their businesses. In this respect, Malaysia is probably one of the highest providers of grants globally.

These grants may be for R&D, prototype creation or product commercialisation, providing various channels for local businesses to gain access to financing.

However, many of the grants are loosely managed and given out without proper scrutiny and monitoring. Thus, there is little wonder that an industry developed around getting as much “free money” out of the system as possible.

“In technical terms, it is called a grant. In layman’s terms it is free money. And ‘grant’ is a magical word. It means no interest, no repayment and no collateral required,” says Koong.

He says it is not healthy when too many grants are dished out without a proper monitoring system. Indirectly, that encourages the parties entrusted with the job to disburse the grants as quickly as possible to show they have done their job.

For instance, if a pool of funds is allocated to be distributed as grants and much of it still remains after a year, it may appear as if the one doing the disbursement is sleeping on the job, Koong explains.

“Indirectly, it creates a situation where one of the key performance indicators of the agency is how fast it is able to distribute the money. This has an impact on prudence and good governance,” he says.

The Chinese SME commnity’s lack of knowledge about grant applications and the perception that the government is less generous to non-bumiputera entrepreneurs has indirectly contributed to the rise of the grantpreneur.

When Chinese businesses have their applications rejected, perhaps because of insufficient documentation, they tend to stop applying for the grants on their own. When a so-called expert shows up on their doorstep, they are only too happy to employ him and pay him a fee to ensure success.

“So these people, the middlemen, are the ones who ‘know who’ and ‘know how’. Not all of them are grantpreneurs; some merely recognise the opportunity and go for it,” says Koong.

Perera concurs that some middlemen are merely providing services to help SMEs apply for grants. But at times, the line can become blurred.

Not all of such middlemen are part of the con team, he says. He lumps them into several different categories. The first collects a nominal fee from businesses for helping them write proposals. You give them the information and they will write a proposal. The second category charges a nominal fee. If the grant is approved, they will take another 10% to 20% of it. This is still okay.

“The third category ... it’s hard to put a finger on whether they belong to the con team. There are some entities out there that claim to have relationships with different stakeholders in the ecosystem. What they do is, let’s say, they will tell you: ‘Okay, I know Viraj from PlaTCOM. I will work with him and get the grant approved. After that, you give me 10%.” This last group, he cautions, are grantpreneurs and should be avoided.

That is a key reason why Nazrin refers to grantpreneurs as “the middleman industry”. Among them are the brokers who approached him in earlier days for a bank loan and wanted to take a cut of the loan.

 

Grantpreneurs dwindling?

Nazrin believes that after 2008/09, the number of grantpreneurs dropped despite the perception in the market that the practice is still rampant.

He says this is because the number of grants has fallen while the number of applicants has increased. Competition is much fiercer, which discourages grantpreneurs from abusing the system. Basically, there is less easy money to be had.

Take Cradle, which received 1,157 grant applications last year. Of these, only 40 were approved, which translates into a success rate of about 4%. “The success rate of students applying for a Petronas scholarship could be higher,” Nazrin quips.

He says grantpreneurs only go for big sums, such as grants of RM1 million and above. Generally, the grants used to be managed on a “part-time” basis by government servants who did not have private sector experience or much exposure to the market. They lacked the business acumen to assess the quality of a business model or success of a product or service when it is rolled out.

“For instance, before 2008, there were some ministries providing grants that ran into RM1 million and above each. These funds were literally run by four civil servants who were in charge of the whole process from end-to-end, including application, processing, assessment and approval. They not only ran the fund, but also had other duties in their respective ministries, so they were managing the grants part-time. It was a recipe for disaster,” says Nazrin.

However, grants given out in this manner have dwindled over the years, he says. These days, more grants are being given to government-related agencies, such as PlaTCOM and Cradle, which hire players from the private sector with strong business acumen to manage the grants full-time.

These agencies have also reduced the total amount of each grant to discourage grantpreneurs. Cradle, for instance, gives out RM500,000 or less instead of RM1 million, says Nazrin.

“We always believe that if we give out a grant, the amount of funding should be at the lower end of the ceiling. It is meant to instil discipline in the entrepreneurs and make their business planning a lot sharper. If you are given a lot of money, you can just throw it about or put a downpayment for a BMW. More importantly, it is a deliberate move to discourage people from abusing the system,” he says.

Government-related agencies, including Cradle, have also gradually changed their funding model. For instance, instead of giving out a grant without imposing any criteria on the applicant, they have introduced a matching-grant model that requires applicants to fork out their own cash to “match’ the funding provided. For instance, a matching grant on a 1-to-2 ratio would require applicants to come up with RM100,000 for every RM200,000 in funds.

“In fact, all grants out there are matching grants now,” says Nazrin. Apart from that, Cradle has adopted the equity funding model, whereby half the funds provided is converted into equity in the company.

PlaTCOM, in the meantime, has implemented strict assessment and monitoring processes to check the grantpreneurs, says Perera.

A transparent and independent decision-making process is in place too to avoid any undue influence.

“The first step is for our project managers to do due diligence on some of the potential business proposals. They will then submit a thorough report to the PlaTCOM team members, and at least seven of us will vote on these proposals. The proposals that go past this stage will then be submitted to our steering committee, which consists of independent panellists over whom we have no influence.

“From here on, we have no control over the final decision. In fact, there have been proposals that I liked that were turned down by the committee members,” says Perera.

There were times when PlaTCOM’s project managers were proactively approached by grantpreneurs asking about the commission and trying to strike a deal with them on the sly.

“I know this is fertile ground for things like that to happen. This is also why as soon as I came in, I got our legal team to draft an anti-bribery and anti-corruption policy, which was later approved by the management and signed by everybody in the company,” he says.

 

What more needs to be done?

Despite the rigorous processes in place, government agencies still face challenges in differentiating between grantpreneurs and genuine grant applicants.

“Yes, it could be like a race between us and the grantpreneurs with one side trying to spot the bad apples and the other side trying to game the system. Whoever puts in more effort wins the game. It is a challenging task because our operations have to be profitable and there isn’t enough manpower to do all the monitoring work,” says Perera.

What would help is building a centralised data plaform, he stresses. Such a system would keep records of individuals and companies that apply for grants, how many they are applying for, and for what purpose. It would also provide information on how these grants are being utilised and build up a track record for the company or individual in question. More importantly, those caught trying to game the system can be blacklisted.

“All related parties can provide information and they can, in turn, get access to data to make a more informed decision. This is currently lacking in the system,” he says.

Nazrin agrees on the need for a centralised database. “Yes, we need something like that. We want to blacklist those who channel the money into other businesses or use it for their own benefit.”

At the same time, he says it is important to draw a distinction between failure and abuse. Those who genuinely fail after having done their best should not be penalised. “Bear in mind that there are genuine failures. One key reason is the lack of market validation, which means they built the prototype of a product and thought the market would buy, but they were wrong.”

ACCCIM’s Koong says the government is moving towards setting up a centralised system on the quiet. He says the National Small and Medium Enterprise Act (SME Act), which is expected to be tabled in Parliament this year, will allow such a system to be established.

“When it is fully enforced, the Act will allow SME Corp to collect relevant data from them. There could be a centralised system like the existing Credit Bureau Malaysia and Central Credit Reference Information System to keep track of SME business activities and credit history.

“A company that applies for a grant but does not put it to proper use could be blacklisted. It will also discourage other people from doing business with such companies,” he says.

As at Oct 31 last year, a check on the official portal of the Parliament of Malaysia showed that the SME Act had yet to be tabled.

In Koong’s opinion, the government should reduce the number of grants it awards and instead replace them with soft loans.

“If you are giving out a lot of free money, people will come forward and try to take it. If they can’t do it, they will ask middlemen to try, and the middlemen will be paid a high remuneration.

“That is what SME Corp has done. We reduced the number of grants and turned most of the assistance programmes into soft loans. Why soft loans? Because you have to pay back a loan. This will guarantee the money will be put into productive business activities and come back into the existing pool of funds so it can fund more businesses. It will reduce the defects in the ecosystem,” he says.

Koong says grants are still necessary but should be disbursed in a more prudent and sensitive manner. This means they should be given out to genuine businesses with potential that are deemed too risky to be granted a loan by the banks and which individual investors do not have the expertise to assess.

He cites the example of Cape No 7, one of the highest-grossing films in Taiwan, which was ws written, directed and produced by a Taiwanese. This success would not have been possible without a grant from a government-related agency.

“A business in the creative industry is hard to assess. But the Taiwanese agency — the equivalent of SME Corp — had the expertise to assess it and saw its potential. It funded the movie through a grant and it was wildly successful.”

Nazrin says funding via grants is not a bad thing. “Grab, ChristyNg.com, Piktochart — all these successful start-ups that have grown out of the local market started out with a grant. These people were not spoilt by what is deemed free money.”

Grants are still an important funding model to build the start-up ecosystem, instilling entrepreneurship in the younger generation and encouraging innovative businesses to sprout.

“Imagine if a group of university students came up with a concept for a good product. Who are they to approach? Certainly not the banks. And if they have no prototype, angel investors and venture capitalists won’t touch them. They don’t have money and they’re stuck. This is where grants come in. If not grants, then what?” Nazrin asks.

“Grants are vital to create the base of the pyramid of the private investment market. It helps to build up the ecosystem and creates new and innovative businesses. At the same time, the private investment community and market have to develop. These include angel investors, venture capitalists, private equity investors and equity crowdfunding.”

The key is for the government and the agencies involved to bring in more private sector players to manage their pool of funds in a more professional manner. These private players could be professionals, entrepreneurs or investors who have market exposure and strong business acumen.

Nazrin says they have to be resourceful not only in providing funding but also in sharing their experience, bringing in mentors and coaches and creating a community for start-ups and business founders to communicate and learn from each other. They have to create the right plaform for new businesses to grow and flourish.

 

How to spot a grantpreneur

How can you tell who is a grantpreneur and who is a genuine applicant? PlaTCOM Ventures Sdn Bhd CEO Viraj Perera Platcom provides some pointers.

Grantpreneurs tend to apply for maximum funding. “If the maximum grant is RM3 million, they will apply for that amount. Amazingly, their proposals will work out to exactly RM3 million.”

The proposals are skewed to rack up as many expenses as possible with the intention of getting as much money as possible. “When we start going through the breakdown of what they need and ask pointed questions, you can catch them out. They will go, ‘Oops, I didn’t think of that’ or ‘Let me get back to you’. It’s about constant questioning. Yes, you have all the information in the proposal. But you also have a right to call them and ask tough questions,” says Perera.

Another sign is if they apply for more than one grant. “Sometimes you catch them applying for a few funds at the same time. This could be discovered through questioning or working with other agencies. You ask why they need another grant and they will say the previous grant was to enhance the prototype and this one is for a new product. Then we ask, how many people are there on your team? And they say, ‘five’ (for instance). And we respond, ‘You’ve got two projects running with just five people? We don’t believe you.’”

A lot of it is simple common sense.

A conman looking to game the system usually refuses to put skin into the game. “Once you ask them to commit a certain amount of money, they will back off. They want 100% free money. They are freeloaders. That’s why, if it is a matching grant, it will discourage them.”

Another sign is when equipment and invoices are made out by a dormant company. In such cases, Perera and his team will be on high alert.

Sometimes, different companies turn out to have common shareholders. “One thing that can happen when we dig deeper is that they will tell us they need some technical expertise to work on their proposal. And they say they’re going to contract it out, which means this will involve another company as the service provider in the process. Surprisingly, when you look at the service provider and compare it with the applicant’s company, both have common shareholders. Or the people in both companies could be relatives. It’s left pocket, right pocket.”

At the end of the day, Perera says, the intention is not to make the life of genuine entrepreneurs more difficult but to weed out the people who are abusing the system. “We should be working towards this direction, make some noise and bring them to justice. Hopefully, people will behave better going forward.”