Corporate: Frankly Speaking

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The wrath of Philip Morris It’s another flip-flop. And this time it is not going down well with the private sector. The decision to defer the banning of 14-stick cigarette packs that was supposed to take effect from June 1 will have serious implications.Since early this year, the message sent out to cigaratte manufacturers has been clear — after June 1, no more 14-stick packs can be put on sale.

Just a few days before the implementation, the government decides to backtrack its decision. It sounded like a broken record when Health Minister Datuk Seri Liow Tiong Lai said the government felt further studies were needed on the impact of banning the smaller cigarette packs.

Attempting to justify the deferment, Liow said it will only be until end-2010, after which the ban will take effect. Why then was this decision not conveyed to the industry much earlier? Even as recently as May 12, the ministry had sent out a circular reminding players of the impending June 1 ban.

Smokers may like the move, but tobacco players have a different tale to tell. Time, money and effort have been spent to comply with the ruling to phase out the small packs. Machines have been decommissioned and packaging has been changed. All this costs money.

More importantly, the 14-stick packs sell better than the 20-stick packs. So companies that did not rush to comply with the ruling will have better margins. One wonders if this was the reason why the ban was deferred.

Under the circumstances, it is no surprise that Philip Morris (M) Sdn Bhd is mulling legal action against the government.

“How can any corporation plan for its future and maintain its viability in an environment of such legal uncertainty, where decisions supposedly set in stone can be overturned so rapidly and without any consultation?” asks Philip Morris’ managing director Richard Morgan.

Such sentiments are the last thing the government needs now, especially when foreign direct investment is so hard to come by.
Let go of the pastWill the New Economic Model (NEM), which is halfway through its gestation period, change the way Malaysia works? The answer depends on who you ask.

For those at a public lecture last week by Barry Wain, the author of Malaysian Maverick: Mahathir Mohamad in Turbulent Times, the issues that have blighted the former prime minister’s record are not so easily fixed.

In Wain’s words, Mahathir comes from a group of leaders in the region who had a profound impact, for better or for worse, on their young countries. In the author’s assessment, Mahathir emphasised the hardware rather than the software in the pursuit of the nation’s development. All said though, as a politician he has few equals, Wain acknowledges.

Professor Edmund Terence Gomez of the University of Malaya finds Mahathir a paradox. It is a puzzle that his noble vision, drawn from a mixture of development policies from East and West, has produced such poor outcomes, says Gomez.

He notes that the rentier state grew strong on Mahathir’s watch, as did the nexus between politics and business. After all his efforts to develop a class of top Malay entrepreneurs, most of the biggest companies on Bursa Malaysia are government-linked, says Gomez.

Wain holds that Dr M’s legacy continues to weigh heavily on Malaysia. This poses a challenge to Prime Minister Datuk Seri Najib Razak, who as an Umno insider is an unlikely reformer.

For Najib to win this battle, he will need to cut free of the baggage of the past. That will mean stepping away from racism, embracing transparency and accountability and adopting merit-based policies for a start. Although the NEM is pointed in this general direction, it would be prudent to wait for the new policy to show results before patting ourselves on the back.
Compensation poserPuncak Niaga Holdings Bhd’s financials will generate considerable scrutiny in the near term, especially how the auditors treat the water tariff compensation on its books.

For the first three months of 2010, Puncak’s 70% unit Syarikat Bekalan Air Selangor Sdn Bhd (Syabas) included in its revenue RM109 million for water tariff compensation arising from the delay in revising the rates. Syabas has the mandate to supply treated water to Kuala Lumpur, Selangor and the federal capital Putrajaya. 

Thanks to this entry of “compensation” on its books, Puncak Niaga’s profits got a boost, resulting in the company posting a net profit of RM38.3 million on the back of RM478.3 million in revenue for the first three months of FY2010.

What is interesting is that this figure is being booked in, even though it is common knowledge the Selangor government will not pay compensation to Puncak and also not allow a tariff hike. The state government, controlled by the opposition Pakatan Rakyat, has opposed the payment of such compensation to Syabas since coming into power in March 2008.

In its 4Q2009 ended December, Puncak received a loan facility of RM320.8 million from the federal government to help it settle its debts with water treatment players such as Syarikat Pengeluar Air Selangor Holdings Bhd and Konsortium Abass Sdn Bhd. This was because the state refused to compensate Puncak and its unit Syabas for not allowing tariff hikes.

The state has its reasons. But the key issue is that federal government compensation is not a regular feature that would warrant treating compensation as a normal course of business for Puncak. This is something that Puncak is well aware of.

But considering that the compensation payments are still booked in, Puncak’s message is that it has not and will not give up staking its claim to the compensation. So again, how auditors treat it will be interesting to see.
This article appeared in Corporate page of The Edge Malaysia, Issue 808, May 31-June 6, 2010