My Say: Lessons unlearned

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IN the mid-1980s, one assignment often given by news editors to rookie reporters was to cover the meetings of the country’s various chambers of commerce. I was then with the Business Times, the country’s only financial daily. (It was folded into the New Straits Times as a business section in June 2002.)

Covering these meetings was good training for young business reporters as it gave them an opportunity to get to know a lot of entrepreneurs, both the big and small-timers, expand their network of business contacts and understand some of the problems faced by local and international businesses.

The mid-1980s were sort of troubled years, economically, for Malaysia. The country was facing recession in 1985/86 resulting from the collapse of commodity prices, a fall in property prices due to a glut and a sluggish investment environment. Banks were facing problems over non-performing loans, companies had cash-flow problems and the government was forced to initiate rehabilitation programmes for troubled sectors.

Each of the chambers of commerce had a different list of wants and worries. The Associated Chinese Chambers of Commerce and Industry of Malaysia (ACCIM) would always highlight the needs and problems faced by small and medium enterprises, which still represent the majority of its members.

Often, they would want the government and regulatory bodies to ease the ways of doing business and reduce red tape. The ACCIM was critical of the Industrial Coordination Act (ICA) (1975) that was introduced to “provide for the coordination and orderly development of manufacturing activities in Malaysia”.

It was worried the ICA would be used by the government to push through the bumiputera agenda under the New Economic Policy (NEP) and that the ICA’s licensing powers would be used to curb their business activities and expansion plans.

The foreign companies and multinationals, represented by the Malaysian International Chambers of Commerce and Industry (MICCI), had their concerns about the ICA, too, notably that it might be used to force them to sell 30% of their stake to bumiputera companies or partners that were not of their choice and less competent, but were politically connected.

MICCI meetings would often be dominated by calls to make Malaysia an attractive hub for foreign investors. They too wanted less red tape, more tax incentives and lower corporate tax. They wanted the government to consider the extension of pioneer status for some companies and industries and tackle the problem of tariff and non-tariff barriers.

One of the favourite mantras of MICCI and ACCIM was that for a free market economy to thrive, it was “not the business of the government to be in business”.
For the bumiputera business community dominated by small enterprises and new and growing companies, their set of concerns centred around survival in a challenging business world.

The Malay Chamber of Commerce and Industry Malaysia (MCCIM) would present to the government the needs of its members for specific financial assistance, soft loans, the expediting of technology transfer from research centres, and for aid in expanding existing markets and finding new ones.

MCCIM was also a strong advocate of meeting the 30% equity share of the NEP by 1990. To achieve this target, it wanted the government to sell its stable of companies to able bumiputera entrepreneurs who were ready to manage these companies and grow their businesses.

But they were often reminded by ministers, government officials and business trainers that many of them were not yet resilient enough in the face of difficulties. In short, they were not ready to take over government companies. They were told they needed to beef up their modal berbayar (paid-up capital), ensure there was enough modal kerja or pusing (working capital) and know how to manage aliran tunai (cash flow).

They were told not to rely too much on debt to expand their businesses, that they needed to learn how to grow their business secara organik (organically) and concentrate on their fields of expertise. They were, time and again, reminded that their participation in the business world was a long-term journey with prolonged spells of inclement weather. There were no shortcuts to success and building a sustainable, resilient business.

After the recession of mid-1980s, the economy grew steadier and the stock market entered the super bull run of 1993-94 when certain counters were even traded above RM100. Many investors and punters then believed the bull run would last forever.

Companies expanded beyond their means and expertise in rushing to become conglomerates, mostly on borrowed money. When the storm clouds of the Asian Financial Crisis (AFC) gathered in 1997-98, many would be forced out of the Malaysian corporate scene, and those left standing were in dire need of rehabilitation. The government was forced to set up rescue mechanisms to nurse the corporate and banking sectors back to health.

Many lessons were learned, and the economy and corporate sector did move on to a steadier growth path. Many companies would choose to grow organically and expand wisely, according to their core businesses and expertise. They borrowed prudently, while the banks became financially stronger. The country also built up substantial foreign reserves to counter another potential AFC.

The country’s stronger economic fundamentals and its rehabilitated corporate and banking sectors were fully tested during the global financial crisis of 2008-09, when they proved resilient enough to overcome global setbacks with a quick turnaround time.

Sadly, lessons learned can be forgotten. 1MDB is a textbook example of the very same lessons taught by ministers and government officials to the members of the MCCIM in the mid-1980s on how to put your business in order by managing cash flow, not accumulating too much debt, growing your business organically and expanding wisely by focusing on your areas of expertise.

The chambers had reminded the government then it was not the business of the latter to be in business. In 1MDB’s case, why must the government, via the Ministry of Finance, buy power assets from the private sector? And at inflated prices, using borrowed money, without the expertise needed to manage the business?

Why was there a need to borrow heavily in short time frame of five years to accumulate assets and not grow the business organically? It does not take a financial expert to know that overleveraging renders a business unsustainable, which the government now admits is the case with 1MDB.

Why go to all this trouble when after the initial public offering of its energy assets, 1MDB is likely to end up with only 20% of the equity? And now it seems that the MoF is also considering selling these assets as an alternative to the IPO. If that is the case, then why buy them in the first place?

Why invest in PetroSaudi in the first place? Why wasn’t there thorough due diligence? Why take the Cayman Islands route? And there’s a host of other whys raised by many people and the media, including this weekly.

The audit by the Auditor General will provide some answers but the biggest disappointment in this whole 1MDB affair is the failure of the board to play its role as an effective check and balance mechanism, the MoF as the owner, and the Cabinet as the guardian of the government’s investments.

Too many questions, including the obvious ones, were not asked by them. In short, they let the nation down.

Azam Aris is senior managing editor at The Edge

This article first appeared in The Edge Malaysia Weekly, on March 23-29, 2015.