Frankly Speaking: Apr 5-11, 2010

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Reinventing MalaysiaThe unveiling of the New Economic Model (NEM) last week starts the ball rolling for the great economic transformation that Malaysia urgently needs to make. While the NEM Report clearly identifies the symptoms of the country’s economic malaise, the most challenging part of the job remains to be embraced.
That is promised by June, after public feedback on the areas for reform that have been identified. It is not difficult to identify what needs to be done to turn the country around. The problem lies in the fact that the remedies will put a stop to current regressive practices.
Take the plan to develop 3,000 acres of land in Sungai Buloh as a future hub for the Klang Valley. The way forward is to open the field for the best proposals, instead of pushing the Employees Provident Fund into a joint venture with Malaysian Resources Corp Bhd, as is believed. Implementing the open tender process for such major undertakings will work wonders for improving investor interest in the country’s growth prospects.
In this regard, the move to upload the names of successful bidders for government procurement contracts on the Finance Ministry’s portal MyProcurement is a long overdue measure towards greater transparency. Adhering to openness in the entire tender process in accordance with Treasury rules must become the norm in the public sector.
Another crucial factor for business growth is the availability of adequate and competent human resources. This is especially vital for sectors that are ready to move up the value chain. To move Malaysia forward, people with the right skills must be brought in by offering appropriate incentives, until enough locals can be trained.
A third area concerns the certainty of judicial review, in particular, where contractual issues are concerned. The rehabilitation of the judiciary can begin with the insulation of the courts from influences that can undermine public confidence in this institution. The importance of this measure is obvious and cannot be overstated.
The free flow of information is another core principle that can ensure the country’s attractiveness to both domestic and foreign capital. These areas can be built upon to reinvent the Malaysian story.

Does Kencana really need Danajamin?Two weeks ago, Danajamin, Malaysia’s first financial guarantee institution, said it would provide an Al-Kafalah guarantee for Kencana’s seven-year RM250 million sukuk mudhrabah medium term note programme.
With Danajamin’s guarantee, the issue will get an AAA-rating and help Kencana raise funds at a competitive rate.
Danajamin is part of the second stimulus package announced in March last year to ensure companies continue to have access to the bond market. Established two months later in May, it has the capacity to provide financial guarantee insurance of up to RM15 billion in private debt and Islamic securities issued by investment-grade companies. According to Danajamin, any issue it insures will enjoy an AAA-rating.
But does a company like Kencana Petroleum Bhd really need a guarantee from Danajamin Nasional Bhd? Shouldn’t priority be given to companies that have fewer fund-raising avenues? Firstly, Kencana is a listed company that has the option of going to shareholders for funds, aside from going to the debt market. By right, it should be able to raise funds without having to go to Danajamin for a guarantee.
Does this mean that on its own it would not get a AAA rating? By enhancing the credit rating of issuers, would it lead to the efficient allocation of financial resources? Does it also mean that the risks attached to the issuer will not be priced correctly just because it has arranged a guarantee with Danajamin?
Incorrect pricing of risks could lead to dire consequences. Examples of this can be easily found in the recent financial crisis. The US subprime mortgage crisis has been blamed on credit rating agencies which failed to accurately price the risks attached to mortgage-related financial products.
Hypothetically, if all companies arrange for financial guarantee insurance with Danajamin and receive AAA rating on their issues, it would create a shallow bond market with only AAA-rated papers. This wouldn’t augur well for the development of the local bond market.

Little downside for MPHBTelecommunications was not a sexy business seven months ago for investors of Multi-Purpose Holdings Bhd (MPHB). That was when the gaming-cum-property company entered into an agreement with Tan Sri Vincent Tan’s U Television Sdn Bhd to stand as guarantor for a loan which if it sours will see MPHB end up with 41.63% of U Mobile Sdn Bhd.
The amount in question was RM280 million, which effectively valued U Mobile — the fourth and smallest 3G operator in the country — at about RM673 million. MPHB came under selling pressure from the investing community for venturing into a struggling telco.
Last month, Singapore Technologies Telemedia Pte Ltd (STT) paid RM1 billion for a 33% stake in an enlarged U Mobile via the acquisition of existing and new shares. The deal immediately valued U Mobile at RM3 billion.
In the latest development, MPHB revealed last week that it had invested a total of RM144 million for a 6.3% stake in U Mobile through the acquisition of shares from U Television, Detik Ria Sdn Bhd and the subscription of a rights issue.
The sum may look big for such a small stake in a loss-making telco, but MPHB’s cost of investment in U Mobile is still lower than STT’s entry price.
The key to the entire transaction is the entry of STT into U Mobile, without which U Mobile would be valueless. With STT on board, the downside for MPHB, and more so for Tan’s U Television, is limited.
While MPHB is increasing its interest in U Mobile, it should be noted that Detik Ria is reducing its interest. The company, directors of which are Tan Sri Abdul Rahim Din and Tunku Datuk Seri Shahabuddin Tunku Besar Burhanuddin, would get paid RM54 million for disposing of its 2.37% stake in U Mobile to MPHB. On paper, that does not sound like a bad deal!

This article appeared in Corporate page of The Edge Malaysia, Issue 800, Apr 5 - 11, 2010