This article first appeared in The Edge Malaysia Weekly on July 16, 2018 - July 22, 2018

AFTER the 1997/98 Asian financial crisis that wreaked havoc on Asian currencies and equities, the government created agencies like Danaharta and the Corporate Debt Restructuring Committee (CDRC) to rescue and restructure various companies that owned assets deemed to be of strategic and national importance.

The group of companies affected included the Renong/UEM conglomerate, the MAS/TRI/Celcom group and the trio of MRCB/TV3/NSTP. All were controlled by individual businessmen.

After their debts were restructured new capital was injected. The Employees Provident Fund (EPF) ended up in control of MRCB, TV 3 and NSTP.

The other assets, however, ended up with Khazanah Nasional Bhd, the country’s sovereign wealth fund.

Khazanah was started in 1993 under the Minister of Finance Inc (MoF Inc) to play a “ catalytic role in driving various strategic and national initiatives”. Its involvement in the economy and corporate sector was transformed in a major way when it was tasked to take over those assets whose ownership had to be shifted to the government after the AFC.

The term government-linked companies (GLCs) came into being in Malaysia after that. GLCs refer to privately incorporated companies (listed and unlisted) that are owned or controlled by the government.

Khazanah itself is deemed a government-linked investment company (GLIC), as are Permodalan Nasional Bhd (PNB), the EPF, Kumpulan Wang Amanah Pencen (KWAP), Lembaga Tabung Angkatan Tentera (LTAT) and Lembaga Tabung Haji (LUTH).

Collectively these GLICs control a large component of companies listed on Bursa Malaysia. PNB, EPF and Khazanah are the biggest GLICs.

The takeover of these companies and assets were not without issues and both Tan Sri Halim Saad (Renong/UEM) and Tan Sri Tajudin Ramli (MAS/TRI/Celcom) subsequently filed various lawsuits against the government and Khazanah, but lost.

With important assets under it, Khazanah modelled itself after Singapore’s Temasek Holdings and over the past 12 years, grew its portfolio of both listed and unlisted assets and equities.

Its realisable asset value as of Dec 31, 2017, was RM157.2 billion ringgit. After deducting debts and other liabilities, Khazanah’s net worth would be around RM116 billion.

The value of its stakes in various listed companies on Bursa Malaysia as at July 10 was RM84 billion (see Table 1).  These included controlling stakes in some of the country’s biggest companies like Axiata Group Bhd, CIMB Group Holdings Bhd, IHH Healthcare Bhd and Tenaga Nasional Bhd.

Given that the stock market has taken a pounding in the last two months, the value of these holdings could be worth much more.

Khazanah also fully owns unlisted UEM Group Bhd and Malaysia Airlines Bhd (MAS). It has a 51% stake in PLUS Malaysia Bhd, with the EPF owning the remaining 49%.

In 2017, Khazanah received RM2.367 billion in dividends from its core listed holdings, up from RM1.757 billion in 2016 (see Table 2).

Since 2004, Khazanah has made accumulated profit before tax of RM28 billion and paid RM10.11 billion in dividends to MoF Inc (see Table 3).

Another jewel is Khaznah’s 60% interest in the M+S joint venture with Singapore’s Temasek Holdings. The JV developed two projects — Marina One in Marina Bay and Duo in Bugis — that were the result of a 2010 land swap deal between the two governments.

According to an M+S statement in January, the two projects had a gross development value of S$11 billion or RM33 billion. The land cost and shareholders injection was around S$4.0 billion and after deducting development costs, it is estimated that the profit could be as much as S$3.0 billion

It is understood that M+S could generate around RM12 billion cash, including a profit of RM5.4 billion, for Khazanah if it sells the 60% stake.

Will Khazanah assets be sold to raise cash for the government?

In 2001, Khazanah was the vehicle used by the government to rehabilitate strategic assets back to good financial health.

Given that Khazanah is today sitting on assets easily worth more than RM120 billion, will the government again turn to its sovereign wealth fund for help? The difference now is that this means Khazanah selling its assets to raise cash for the government.

On paper, a sale of all Khazanah assets can raise over RM120 billion cash or around 12% of the governments RM1.0 trillion debt and contingent liabilities. This will certainly help shore up the government’s balance sheet.
 

Who will have the means to take over the Khazanah assets?

If the government does an open tender, there will be no shortage of tycoons who will be interested and who will say they can raise the money by gearing themselves up. After all, some of these companies are profit-making machines so banks will be prepared to provide loans.

But for individuals to borrow billions, the question of systemic risk to the banking system will arise. Do we want a repeat of what happened in 1997/98?

The better solution, however, is to turn to other GLICs like the EPF and PNB. They have the money and they are in fact also shareholders in some of the Khazanah companies (see Tables 4 and 5).

As at Dec 29, 2017, PNB had investments totalling RM198.9 billion on Bursa, including controlling interests in giants like Malayan Banking Bhd, Sime Darby Bhd and S P Setia Bhd. PNB also has shares in Khazanah-controlled GLCs like Axiata, Telekom and CIMB.

The EPF is probably the ideal GLICs to buy Khazanah’s assets, if it is the intention of the government for Khazanah to divest.

The EPF had RM302 billion invested in quoted equities as at Dec 31, 2017, of which RM158 billion was in domestic equities. It has controlling interests in RHB Bank Bhd, Malaysian Resources Corp Bhd and Malaysia Building Society Bhd (MBSB) with a total value of almost RM14.0 billion (see Table 5).

EPF’s total investment assets is almost RM800 billion (see Table 6), making it the largest pool of investment money in the country, and each month, it receives an estimated RM2.0 billion in contributions.

That is a whopping RM24 billion a year and EPF needs to continuously look for assets that can generate enough profits for it to pay its contributors dividends of at least 2.0 percentage points above inflation.

If indeed the government feels it has no choice but to pare down its debts by selling assets held by Khazanah, the best way to do it would be to sell them tothe  EPF, which has the money and has been a good money manager.

As the EPF is also a big holder of government debt, Malaysian Government Securities or MGS (see Table 6), the sale of, say RM120 billion worth of Khazanah assets can help retire an equivalent amount of MGS.

It should be noted, however, that should Khazanah sell its assets, it means that the government will no longer receive the sort of dividends it had been getting and will not benefit from any future increase in value of the GLCs that it sells.

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