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Taking aim at crony capitalism

   

International Herald Tribune, Sunday, October 10, 2004

By Andy Mukherjee Bloomberg

Azman Mokhtar, head of the Malaysian government's investment unit, says he is behaving like a body snatcher. In the five months since the 43-year-old became managing director of Khazanah Nasional, he has poached a banker from UBS, hired a consultant from McKinsey and bagged a Columbia University online-education expert.

"I'm grabbing any talent that comes my way," says the former equity analyst, himself hand-picked by Prime Minister Abdullah Ahmad Badawi to make the investment house an agent of change in state companies, including the carmaker Proton Holdings, the power producer Tenaga Nasional and the telephone company Telekom Malaysia.

Investors are watching Azman's moves closely, and for good reason. The three companies alone account for 19 percent of the Kuala Lumpur Composite index. If you add Malayan Banking, Commerce Asset-Holding and RHB Capital - the country's biggest state-backed lenders - that Khazanah counts as either investments or associates, the figure rises to about 32 percent of the equity benchmark.

So far, investors have backed Azman's moves. Since May, when Abdullah announced his vision for "sweeping reform" of the inefficient public sector, the market value of Khazanah's publicly traded investment has risen 18 percent, outstripping the 8 percent gain in the benchmark index.

Azman's hiring binge anticipates next year's push by Khazanah - an Arabic word for "treasury" - to raise money and buy companies outside of Malaysia. At the same time, domestic companies owned by Khazanah will be encouraged to "spread their wings," Azman says.

"The mandate is basically to turn Khazanah from a more custodial, passive investment holding company to a more active macro-manager of the country's assets," says Azman, his can-do spirit reflecting Malaysia's newfound vigor.

This is a good time for Abdullah and Azman to drive their agenda. The $104 billion economy is doing well. Gross domestic product grew 8 percent in the three months to June, accelerating from 7.6 percent expansion in the first quarter.

A big boost to confidence came last month when Anwar Ibrahim's sodomy conviction was overturned by the highest court. The former deputy prime minister is a free man after spending six years in prison.

Foreign investors associated the jailing of Anwar and Malaysia's 1998 capital controls with other draconian measures introduced by former Prime Minister Mahathir bin Mohamad. That era is fading faster than they could predict late last year when Abdullah, a mild-mannered Islamic scholar, took the nation's top job.

By appointing Azman to transform the public sector, Abdullah is tackling another long-pending concern: inefficiencies in the 40 listed state-run companies that had a combined $61 billion market value in June.

Abdullah's move to put the public sector under professional management - starting with Khazanah, the top of the pyramid - shows a resolve to end crony capitalism in which politically connected businesspeople enjoy state patronage, often leading to a public bailout for ventures that fail.

In 2001, Time Engineering sold 30 percent of its cellphone company, Time dotCom, to Khazanah for 2.3 billion ringgit, or $605 million. Other investors were not so generous, subscribing to only a quarter of the company's initial share sale. Time dotCom shares have lost almost three-fourths of their value after Khazanah bought the stake. Also in 2001, Khazanah spent $1 billion to buy United Engineers (Malaysia), which in turn owned part of Renong, once the nation's biggest industrial group.

By vowing to judge the public sector on a performance index, Abdullah has raised the bar as much for Khazanah and the companies it controls as for himself. Efficiency, which is what the prime minister is emphasizing, won't be enough. Transparency and accountability will have to follow soon.

"For the entire past decade, there has been no parliamentary accountability for Khazanah," the opposition leader Lim Kit Siang of the Democratic Action Party said in a recent speech. "Parliament has been kept completely in the dark about its operations and investments, including the disastrous bailouts of UEM-Renong and Time dotCom."

Why should Malaysia bother to clean the Augean stables? Why not simply sell the state assets?

For a start, Malaysia's aspiration to have a functioning, performance-oriented public sector isn't unique in Asia. Temasek Holdings, a state-owned agency, controls seven of Singapore's 10 biggest companies by sales. Temasek, too, is driving the companies under its control to improve performance and deliver superior shareholder returns.

Even if a smaller public sector were the ultimate objective, Malaysia's medium-term goal has to be a "culture for higher performance for government-linked companies," as Abdullah described the thrust of his plan in May.

Azman Mokhtar may be knocking on your door.

Bloomberg News





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