Cap on govt guarantee needed — AG

This article first appeared in The Edge Financial Daily, on October 15, 2019.
-A +A

KUALA LUMPUR: Auditor-General (AG) Datuk Nik Azman Nik Abdul Majid has urged Putrajaya to impose a ceiling on guarantees the government is allowed to provide.

“My advice, as an auditor, is that on top of the 55% debt-to-GDP (gross domestic product) ceiling, we could add another 10 percentage points of ceiling for government guarantees to viable projects, and another five percentage points of ceiling for riskier debts from government-owned companies. Because currently, we have no limit to cap government guarantees.

“So the overall debt-to-GDP ceiling would be 70%, but this includes the guarantees provided by the government,” he told a press conference yesterday after briefing the Public Accounts Committee (PAC) on the 2018 Auditor General’s Report — Federal Government Financial Statement.

While the government is authorised to provide loan guarantees under the Loan Guarantee (Corporation) Act 1965, Nik Azman said a policy must be set up to fix a ceiling on such guarantees, by taking into account the country’s financial position, and the financial and project viability of the company that applies for such guarantees.

Asked what the overall debt-to-GDP ratio is now, he said: “We don’t know, because nobody has made that calculation yet.”

As at end-2018, federal government debt stood at RM741.049 billion, representing a debt-to-GDP ratio of 51.8%. Total government guaranteed loans, which has been steadily rising since 2014 — when it was at RM172.019 billion — was at RM266.468 billion.

 

First Emphasis of Matter issued on govt financial statement

Nik Azman also said this is the first time the AG issued an Emphasis of Matter (EOM) to the government’s account, though the financial statement remains true and fair.

“The EOM is a way for us to bring the attention of readers to certain parts of the financial statements. Our opinion for them is still unqualified,” he said.

Nik Azman said the National Audit Department was able to highlight this for the first time because of a more transparent disclosure in the 2018 federal government financial statement that was prepared by the Accountant-General.

In the EOM included in the AG’s report, it was highlighted that the government paid RM2.84 billion for guaranteeing loans of five Minister of Finance Inc companies, whose ability to repay the advances was uncertain. The guarantees were on RM76.075 billion worth of loans obtained by the five, which were approved before 2018 by the previous administration, the AG said.

“As of Dec 31, 2018, the outstanding [amount] of these loans stood at RM66.34 billion, which will mature by 2041, except for a loan of RM94.38 million that will expire in 2019.

“In 2018, the government advanced RM2.839 billion on a secured and mature loan repayment on behalf of one of these companies. Of this, RM1.753 billion was paid by the previous administration while RM1.086 billion was paid by the current administration,” the report noted.

“The current administration has continued such commitment to avoid the event of default, which could result in the government’s overall repayment of loans. Pursuant to Section 8 of the Loan Guarantee (Corporation) Act 1965, the company has the obligation to repay the government for all the payments it made. However, the ability of these five companies to repay the advances is uncertain,” the report added.

The five companies are: KL International Airport Bhd — which was set up to raise funds for the construction of the Kuala Lumpur International Airport —  GovCo Holdings Bhd, Asset Global Network Sdn Bhd, Jambatan Kedua Sdn Bhd and DanaInfra Nasional Bhd.

GovCo is a special-purpose vehicle (SPV) that, among others, injected RM1.25 billion into Proton Holdings Bhd in June 2016 in exchange for 1.25 billion units of new redeemable convertible cumulative preference shares. Asset Global Network is also an SPV and was set up to buy  Malaysia Airlines assets and lease it back to the airline under the latter’s widespread assets unbundling programme, which started in 2001. As for Jambatan Kedua, it operates the second Penang bridge, while DanaInfra Nasional was set up in June 2010 as the infrastructure financing entity to advise and undertake funding for the proposed Mass Rapid Transit project.

After the AG’s briefing, PAC chairman Datuk Dr Noraini Ahmad (Barisan Nasional-Parit Sulong), who was also present at the press conference, said the committee is of the view that the government should tighten rules in establishing SPVs in the future.