Speech (4)
- Royal Address '98
by Lim Kit Siang 

'When is a bail-out not a bail-out?'

(Dewan Rakyat, Wednesday): As NEAC Executive Director Tun Daim Zainuddin had told the foreign press that the "greatest challenge is to bring back the confidence of Malaysians first and then, the world economic community" in dealing with what he described as the "worst economic crisis" facing the country since the Second World War, Parliament is entitled to an explanation as to why it had allowed another battering of confidence arising from widespread impression that politically-connected companies are getting bail-outs despite solemn government promises of "no bail-outs" and "no corporate restructurings".

The five bail-outs of UEM, Sime Bank, KUB, Bank Bumiputra and Konsortium Perkapalan Bhd (KPB) have been mentioned as among the "new danger points" in "Asia’s battered economies….that could put at risk still-fragile investor confidence in the region".

What is even more distressing to Malaysians and the nine million Employees Provident Fund (EPF) contributors is the lack of responsibility, accountability and transparency of the EPF especially as it has been widely reported that the RM130 billion EPF funds would be raided to finance three of these five bail-outs.

The government must fully satisfy Malaysians as a whole as well as national and international investors that there has been no backtracking of government assurances of "no bail-outs" and "no corporate restructuring" at public expense in all these five cases - particularly involving the EPF monies.

Anwar has confirmed that the EPF is planning to buy a stake in Projek Lebuhraya Utara-Selatan Bhd. (PLUS) reportedly for 20% equity for RM1.5 billion, which is generally regarded as a EPF bail-out of UEM for its highly-controversial RM2.34 billion acquisition of 723 million Renong shares or 32.6 per cent stake.

UEM had initially financed the Renong acquisition with borrowings and is seeking to raise funds by selling 20 per cent stake of PLUS for RM1.5 billion. The cash from the sale would reduce UEM’s gearing to 2.5 to three times debt-to-equity from four to five times.

The nine million EPF contributors are entitled to full, proper and satisfactory answers to three questions about the use of RM1.5 billion to buy 20% stake in PLUS before any policy decision is taken by the EPF Board.

Firstly, why should EPF be involved in the bail-out of UEM or any troubled company as a result of the economic crisis? Between Sept. 30 and October 1 last year, just before the outrageous RM2.34 billion Renong acquisition, EPF bought 65.91 million shares in UEM.

It has been calculated that at RM10.50 apiece, EPF would have forked out a total of RM645.53 million for these UEM shares. At the end of trading at the Kuala Lumpur Stock Exchange yesterday, UEM counter ended at RM438 per share. This would mean that EPF would have lost close to RM400 million from this acquisition.

In acquiring the 65.91 million UEM shares, was EPF involved in an exercise to bail out and prop up UEM, so that it could in turn bail out and prop up Renong?

The second question is whether the RM1.5 billion price tag for 20 per cent of PLUS was reasonable and fair to the nine million EPF contributors, as there is considerable uneasiness caused by recent corporate restructurings, for instance, in the RHB buy-up of Sime Bank where KUB, which owns only 30 per cent of Sime Bank, would be getting RM670 million while Sime Darby gets only RM100 million for 60.35 per cent of Sime Bank.

There are market analysts who are of the view that for RM1.5 billion, EPF should get at least 25 per cent of PLUS.

The third question is even more fundamental. Should EPF acquire a major stake in PLUS, the toll operator of the North-South Expressway, when there is growing nation-wide opposition from the people to the North-South Expressway Concession Agreement which allows the toll operator to increase toll rates every year for the next 22 years?

Is this part of a larger design to disarm public opposition to the annual toll rate increase for the North-South Expressway, by giving the public through the EPF a stake in PLUS and therefore have a vested interest in the annual toll rate increases in the hope of getting higher EPF dividends?

The nine million EPF contributors should be given a say as to whether EPF monies should be invested in PLUS, in view of the increasingly widespread opposition to the exorbitant concession agreement on the privatisation of the North-South Expressway and demand that the Concession Agreement be reviewed.

The Malaysian Trades Union Congress has declared its opposition to EPF buying a stake in PLUS as it regards the EPF-PLUS deal as a rescue plan for UEM Bhd, which wholly owns PLUS.

Five trade union leaders, including two top MTUC leaders, namely MTUC President Zainal Rampak and CUEPACS Secretary-General N. Siva Subramaniam are members of the EPF Board.

It is true that under the Employees Provident Fund Act 1991, the seven-member EPF Investment Panel does not provide for any trade union representative, and the DAP had strongly objected to this omission in Parliament when the new EPF Bill was debated in Parliament on 12th February, 1991.

However, the EPF Investment Panel is not an independent body but is answerable to the EPF Board. Section 18(2) of the EPF Act provides: "The Investment Panel shall be subject to such directions issued by the Board and approved by the Minister, from time to time."

Has EPF, with its RM130 billion EPF monies, been picked to be the main vehicle in a new policy of "deprivatisation", where public funds have to be used to bail out beneficiaries of the privatisation process, like UEM, because of astronomical borrowings?

The trade union representatives on the EPF Board should be fully conscious of their powers and responsibilities as EPF Board members and their relationship with the EPF Investment Panel, and be vigilant in their duty to monitor investment decisions by the EPF Investment Panel through the issue of directions and review as to whether such directions had been adhered to.

They should get the EPF Board to take a policy decision on three matters:

Such a EPF Board policy decision is important as EPF appears to be involved in three of the five bail-outs. There is strong market speculation that EPF would provide RM1.5 billion of funds to enable RHB to carry out the merger of RHB and Sime Bank through the issue of RHB Holdings shares to Sime Darby and KUB Bhd.

Anwar had said that earlier skepticism of the decision by KUB Malaysia Bhd to divest its 30.01% stake in ailing Sime Bank Bhd. to purchase a 32 per cent stake in Malaysia Mining Corporation (MMC) from Permodalan Nasional Bhd alleging it was a bailout had been proven wrong and baseless once again as KUB made the purchase at RM2.50 per share which is actually higher than MMC’s last quoted price of RM2.30 per share.

Public dismay over the bailout of KUB cannot be so easily dispelled. It has been reported that KUB is likely to be involved in a share swap with Permodalan Nasional Bhd. over the acquisition of the 32 per cent stake in MMC for M668.91 million.

Instead of paying the RM668.91 million in cash for the shares, KUB will pay PNB in the form of new shares in RHB Holdings Bhd. which Rashid Hussain Bank would issue to it for its 30.01 stake in Sime Bank.

If the whole KUB exercise is not a bailout, a proper and satisfactory explanation should be given as to why in the RHB buy-up of Sime Bank, KUB, which owns only 30 per cent of Sime Bank, would be getting RM670 million while Sime Darby gets only RM100 million for 60.35 per cent of Sime Bank.

It serves no purpose to blame the foreign media for regarding these corporate exercises as bail-outs, as they are also regarded by Malaysians as bailouts. What is important is to present a convincing case to all, local as well as foreigners, that the government has not reneged on its assurance that there would be no bail-out or corporate restructuring in its effort to restore confidence.

It has been reported that Commerce Asset-Holdings Bhd (CAHB) subsidiary Bank of Commerce (BOC) has proposed to buy a 37.5% stake in MBf Finance Bhd. BOC had itself previously been the target of a potential merger when Rashid Hussein Bhd announced its intention and began negotiations with CAHB.

It has been said that one reason why the merger negotiations between RHB and BOC fell through was because CAHB wanted cash which RHB was unable to provide. If so, the question is why EPF should fund RHB to the tune of RM1.5 billion for the bailout of Sime Bank and KUB?

If EPF is suddenly interested in banking, would it not be cheaper for EPF to directly acquire Sime Bank with an NTA of RM588.9 million as at Dec 31, 1997 instead of having to take up RM1.5 billion new shares to enable RHB to acquire Sime Bank?

Zanial Rampak says he does not know until last week about the proposal for EPF to pay UEM RM1.5 billion for a stake in PLUS. It is safe to assume that he and the other trade union representatives on the EPF Board also know nothing about the proposal for EPF to pay RM1.5 billion to fund RHB in the acquisition of Sime Bank.

The question is who is making these strategic decisions about the deployment and investment of EPF funds - is it the EPF Board, the EPF Investment Panel, or someone completely outside the EPF who first decide how EPF monies are to be used in a series of bailouts, with the EPF Investment Panel executing these instructions?

Is the NEAC Executive Council the real seat where powers lies as to how the RM130 billion EPF funds are to be disbursed, deployed and invested - and if so, is this legal and constitutional?

The government had been making inconsistent statements about the banking crisis in the country.

Firstly, how could Bank Negara allow the development of a situation where Sime Bank could incur an astounding pre-tax loss of RM1.57 billion in the six months to December 31 last year as to require a fresh capital injection of RM1.2 billion when it had repeatedly given assurances about the soundness of the Malaysian banking and financial system and stressed its responsibility to ensure that there is a prudent banking sector?

Secondly, Anwar had said that that he has given the greenlight to Bank Negara to investigate Sime Bank Berhad’s losses of RM1.8 billion to serve as a warning to other banks to rectify problems, mismanagement or weaknesses. Mahathir however defended the banks, saying that borrowers should not be blamed for the losses suffered by banks, as they are at the mercy of the currency crisis to settle loans. He said the problem would not have surfaced if the country had not been hit by the currency problem.

Earlier, commenting on the Bank Negara revelation that Sime Bank and Bank Bumiputra would need capital injection of RM1.2 billion and RM750 million respectively, Mahathir blamed their problems on the devaluation of the ringgit and their share value, stating: "They were very sound institutions before but when you knock off their financial strength, then naturally they will suffer".

If the Prime Minister has already decided that the causes of the losses of Sime Bank and Bank Bumiputra were external, and nothing to do with banking mismanagement or imprudent banking practices, then what is the purpose of Bank Negara investigations into the Sime Bank losses.

The government is also sending out a wrong and undesirable message when Bank Negara is investigating into Sime Bank losses but not the losses of Bank Bumiputra, Abrar Finance and Cempaka Finance, especially as this would be the third bail-out for Bank Bumiputra in 12 years at public expense.

The first time Bank Bumiputra had to be bailed out was in in 1986 when Petronas had to pump in RM2.5 billion to bail it out of insolvency as the result of the RM2.5 billion Bumiputra Malaysia Finance (BMF) scandal, the second time in 1989, when Petronas pumped in another RM982 million after BBMB chalked up losses of RM1.06 billion that year largely due to a monumental provision of RM1.23 billion for non-performing loans.

There had been no proper accounting as to who were the persons responsible for the astronomical non-performing loans, and now Bank Bumiputra has to be rescued a third time. This is completely unacceptable. Is the Government prepared to table a White Paper in Parliament on "The Three Bail-outs of Bank Bumiputra in 12 years"?

The fifth bail-out underway is the Petronas bail-out of the debt-ridden companies of Mirzan Mahathir and the listed company Konsortium Perkapalan Bhd in buying all of Mirzan’s shipping operations and liquefied-natural gas transportation interests in a complex deal involving Malaysian International Shipping Corp. (MISC) for an undisclosed sum. It is most significant that following the announcement of the bail-out, when MISC shares were requoted on the Kuala Lumpur Stock Exchange on March 12, MISC dropped 15 sen to RM5.20 on that day while Konsortium Perkapalan Bhd. rose 24 sen to RM3.86 in a weak market - indicating who is the real beneficiary in the entire operation.

Asiaweek asked a teasing question, "When is a bailout not really a bailout?" and gave the answer: "When top officials say it is not".

Asiaweek said that recent transactions to help businessmen in distress cannot be described as anyting but bailouts, as they may not have relied on state funds, but they have involved state-controlled agencies and regulatory bodies.

It said:

The government must honour and adhere to its repeated public assurances that there would be no bailouts of troubled companies and individuals, whether involving public expense or state-controlled agencies and regulatory bodies like EPF, Petronas and Khazanah. One way to ensure that there is only a national bail-out and no bail-out of troubled companies or individuals is to set up an all-party Parliamentary Review Committee with the power to examine any particular rescue which smacks of a bailout of a troubled company or individual at public expense.

Is the government prepared to establish such a Parliamentary Review Committee?

DAP will consider the possibility of taking legal action to block EPF using EPF funds to bail out UEM, Sime Bank and KUB if EPF keeps an obstinate silence and refuses to be accountable and transparent on its investment policy and decisions concerning RM130 billion EPF funds

Since the shock announcement of the 6.7 per cent Employees Provident Fund (EPF) dividend for last year two weeks ago, the EPF Executive Chairman Tan Sri Sallehuddin Mohamed and the 19-member EPF Board had kept an obstinate silence, refusing to enlighten the nine million EPF contributors the full reasons for the lowest EPF dividend in 22 years, lower than 1985 when the GDP growth was -1 per cent but yet EPF could declare a dividend of 8.5 per cent.

The EPF Executive Chairman and the EPF Board turned completely deaf ears to the outrage of the EPF contributors, who want to know why the EPF dividend is such a historic low, when Amanah Saham Bumiputera could declare a dividend of 11.5 per cent for 1997, and when loan interest is going up as high as 14% in some banks and Fixed Deposit goes up as high as 11 per cent.

They also decline to set an example of good corporate governance by living up to the principles of openness, accountability and transparency and refuse to respond to important queries about EPF investment policy and decisions, in particular:

All in all, the EPF Executive Chairman and the EPF Board acted as if they are a law unto themselves, who are not accountable or responsible to the nine million EPF contributors whose RM130 billion provident fund they had been appointed to manage and be responsible.

The position of the EPF contributors seems to be worse than those of company shareholders who have recourse to ordinary general meetings or extraordinary general meetings to hold the company board of directors to account, but EPF contributors seems to be completely helpless in having no channel or avenue whatsoever to get the EPF Board and management to account for their stewardship of the RM130 billion EPF funds.

Since the shock announcement of the 6.7 per dividend by EPF, I had issued several statements reflecting the concerns and demands of the nine million EPF contributors for answers from the EPF, but they had been completely ignored. DAP will consider the possibility of taking legal action to block EPF using EPF funds to bail out UEM, Sime Bank and KUB if EPF keeps an obstinate silence and refuses to be accountable and transparent on its investment policy and decisions concerning RM130 billion EPF funds.

Was there any conflict of interest in EPF purchase of Sime Darby shares when Sime Bank CEO was a member of the EPF Investment Panel?

The time has come for the EPF Executive Chairman and the EPF Board to be reminded that their salaries and allowances are paid from the EPF funds and that they are trustees and employees of the nine million EPF contributors, and not EPF bureaucrats who are answerable to no one.

The EPF Executive Chairman and EPF Board must devise a mechanism whereby the EPF contributors can give their inputs and express their concerns and receive appropriate responses.

For instance, the EPF contributors are entitled to know whether there was any conflict of interest when EPF purchased Sime Darby shares last year when the Sime Bank Chief Executive Officer at the time, Datuk Ismail Zakaria was a member of the EPF Investment Panel.

On 31st October 1997, EPF bought 128 million shares of Sime Darby. This was after the gravity of the Sime Bank had been fully revealed to top Sime Darby management as it was recently reported that a Price Waterhouse investigation into Sime Securities, the stockbroking arm of Sime Bank, had concluded on September 26 that Sime Securities "consistently breached" trading limits for single customers, with exposures reaching RM980 million in May when the approved trading limit was only RM150 million.

This resulted in Sime Darby reporting a group pre-tax loss of RM1.8 billion for the half year ended December 31, 1997, primarily because Sime Bank incurred an astounding pre-tax loss of RM1.57 billion in the six months to December 31 1997 which required it to have a fresh capital injection of RM1.2 billion.

(25/3/98)


*Lim Kit Siang - Malaysian Parliamentary Opposition Leader, Democratic Action Party Secretary-General & Member of Parliament for Tanjong