EPF – please exercise better governance

Shareholders of MMC Corporation Berhad (MMC) recently approved its proposal to acquire Senai Airport Terminal Services Sdn Bhd (SATS). MMC will pay RM1,700,000,000 CASH to parties related to its substantial shareholder. This deal had attracted substantial criticism from the start. Here are some facts and figures from a very unhappy fund manager with a large chunk of retirement money under EPF’s stewardship:

1) SATS’ main asset is Senai Airport and 2,718 acres of land held under Enigma Harmoni Sdn Bhd (EHSB).
2) The airport operations, which have made losses for the past 5 years, are being bought for RM580m CASH, based on discounted cash flow. Of course, I agree that discounted cash flow is a relevant metric, but the RM420-620m discounted cash flow valuation by Ernst & Young (EY) beggars belief:
a. The airport operations have been loss-making for the past five years. To arrive at its very high discounted cash flow valuation, EY makes some heroic assumptions, including forecasting passenger traffic growth more than 30 years away – up to 2053!
b. By that time, it assumes Senai Airport will handle almost 22 flights per hour, or one flight every 3 minutes and 21m passengers! Do you consider that achievable?
3) MMC is paying RM1.12bn CASH for 2,718 acres of land valued at RM2.0-2.2bn by valuers Knight Frank Ooi & Zaharin Sdn Bhd and IPC Island Property Consultants Sdn Bhd (IPC). A bargain? Hmmm … For a start, consider that EHSB itself acquired the land for just RM332m in December 2007.
a. Now, barely two years later, Knight Frank and IPC say the land value has gone up 6-7x! Again, discounted cash flow (in the guise of potential development value) is brought in to justify the valuation.
b. Note that SATS, as of June 2008, had already booked in a RM264m revaluation surplus, and its total net book value (including the airport) was RM185m. The assumptions Knight Frank and IPC used to come up with such a massive gain over SATS previous valuation is a very good question.
c. Using this RM2.0-2.2bn valuation, MMC claims the land is being bought at 0.83-0.95x net asset value. This is utter rubbish. The standard method when evaluating listed companies is based on the net asset value of the land bank as it is today, not on prospective profits from the future development of that landbank.
d. Using SATS own RM185m book value, MMC is paying 9x the book value based on normal valuation methodology. Over on Bursa Malaysia, the listed companies are in fact trading at 0.4-1.6x book. MMC is paying well over the range.
4) Finally, MMC is advancing RM417m to EHSB to repay advances made by its outgoing shareholders. No mention here is made of when and how MMC will get back that RM417m, nor the interest rate that MMC is charging. Is MMC offering an interest-free loan?

EPF owns about 7% of MMC, and while EPF has not disclosed whether it voted for or against the deal, I also note it has not taken a public stance either way. In the meantime, MMC’s share price tanked as investors hated the deal. Its share price fell 61 sen on 5 Aug 2008 when the deal was first announced, wiping out RM2.6bn of market capitalization in one day. Since then, the share price has collapsed further to about RM1.40, wiping out RM4.05bn of market capitalization – our EPFs share of that loss is RM0.3bn! True, markets overall have fallen – the KLCI itself was down 26% in that period, but MMC’s share price collapsed by nearly half (49%)!

Let’s see what happens with the new, incoming CIO (Chief Investment Officer), now that no-nonsense Johari Muid has been moved to other duties. Dare we hope for a more activist EPF that will protect our retirement money?

Keep a close eye on your EPF money

So, after months of waiting and speculation, including the tantalizing prospect of getting our dividend in cash, EPF (Employees’ Provident Fund) has finally declared a 4.5% dividend for 2008, to be credited into our accounts as usual. The small amount will disappoint many while others will suggest it is fair given the horrendous equity market performance last year. What is an appropriate benchmark for EPF can be the subject of a long piece at another time.

There are more pressing immediate issues. I was in Penang last week, with a contingent of fund managers and analysts there to see for themselves what the economic situation is like. For me, it was a good opportunity to catch up on goings on in the investment world, and the news on stewardship of my retirement money was extremely disconcerting:
1) EPF now has no Chief Investment Officer (CIO);
2) The RM10bn for Khazanah to deploy under the 2nd stimulus plan will come from EPF.

I am told Mr Johari Muid, CIO, has been redeployed to other duties within EPF. I have met Johari during my investment analyst days. I am sure his brusque, abrupt manner has made him many enemies, but I believe he is intelligent, competent and capable. The personality aspects are immaterial – what is important is I felt my retirement money was in good hands under Johari’s stewardship. Now, just month before his contract expires, he has been moved to other duties.

Why the rush? And why now when there is no immediate successor? Surely these turbulent times call for a smooth transition, if one is necessary in the first place. We contributors are owed an explanation.

Correlation is not causation is a principle drummed into me by my statistics teacher. But coinciding with Johari’s removal is widespread speculation that EPF will be lending RM10bn to Khazanah to fund investments under the 2nd stimulus package. This comes on top of EPF lending RM5bn to Valuecap to invest in stocks.

I’ve already blogged on how irrational it is for EPF to lend money to a competitor, Valuecap. Now we find EPF potentially lending money to another competitor with a chequered record, Khazanah.

Watch the news flow!

Trouble for SMEs in mini-budget

Overshadowed by the crowing RM60bn headlines surrounding the mini-budget announced last Tuesday is a measure imposing double levies on foreign workers. This applies to both new and existing foreign workers.

The intentions behind this move are good - to raise employment opportunities for Malaysians, but the timing is terrible. Implementing this could actually lead to even greater unemployment for Malaysians and fewer job opportunities as our businesses, including small-and-medium enterprises (SMEs) have become addicted to cheap labour.

The Barisan Nasional government has for too long now pandered to the business community's lobby for cheap labour and paid too little attention to productivity. Businesses kept asking for cheap labour, which the government obligingly delivered by freely granting work permits for lowly skilled Indonesians, Bangladeshis, Myanmese ...As many as 2,000 approvals PER DAY were granted at the peak, according to Sunday Star report (Mar 15)! The result: no incentive for Malaysian employers and employees to invest in productivity-enhancing measures and low incomes and low standards of living for working-class Malaysians.

The right time to move up the value-added curve is when times are good and companies have extra profits to invest. The worst time is now when businesses are struggling with collapsing revenues. It is a business fact - costs are stickier than revenues. Customers can stop buying your product overnight. But you can't turn around and reduce your capacity overnight. It also works in reverse - if sales go up 10%, your costs don't go up by 10% immediately. So in good times, profit grows quickly; but in bad times, profits can quickly turn into losses as revenues plunge faster than costs.

This double-levy initiative serves to increase business costs at a time when businesses are struggling. It could well tip barely-afloat enterprises into bankruptcy. And that would mean Malaysians would also be thrown out of work, along with the cheap foreign labour. Of course there would be far more cheap foreign workers affected than Malaysians, but this is akin to throwing the baby out along with the bath water. We need to keep whatever employment opportunities we have.

Here's a better idea. Khazanah, despite its miserable execution record, has been given RM10bn to spend under the latest stimulus package. Instead of giving it to Khazanah to fritter away on various projects of 'long-term' benefit (by which time we are all dead, as Keynes astutely observed), let's help small and medium enterprises (SMEs) support Malaysians by offering them a cash payment for each Malaysian employed instead.

It could work this way: For each Malaysian employed, who earns less than RM2,500/month, the government will pay RM1,000 of the wages. This will narrow the gap between the cheap foreign labour and Malaysians, encouraging SMEs to employ locals while still keeping their costs competitive. RM10bn will be enough to cover 420,000 Malaysians for 2 years! After that, the government can slowly reduce this support, say to RM800 per year, then RM500, then zero. This will give both employers and employees time to reinvest in productivity enhancements which result in higher wages AND higher profits.

Before anyone accuses me of plagiarism - let me say here that Singapore is implementing a similar move.

Public briefing on Selangor Water Takeover this Friday (tomorrow)

There will be a public briefing for Selangor residents on the proposed takeover of water concessionaires by the Selangor Government.

Do come and listen to the facts and figures, and show your support for the Selangor Government which is doing its best to stave off the Federal Government interference. The Federal Government is offering much more favourable terms which will lead to much higher water charges for Selangor consumers.

PUBLIC BRIEFING
Issue: Restructuring of Water Services Industry in Selangor
Date: 13 March 2009 (Friday)
Time: 8.30pm
Venue: Lecture Room, Civic Hall, MBPJ

PLEASE SPREAD THIS MESSAGE!

For further information, contact:
Erica Hew Li Huang
Special Assistant to MP for Petaling Jaya Utara (Tony Pua)
0162208867

RM60bn stimulus – includes RM0.5bn for toll concessionaires!

Extract from Point 32 of the speech by Finance Minister YAB Dato' Sri Najib yesterday:
“The Government will also provide RM480 million to ensure that toll rates are not increased.”

Bear in mind this is just the additional amount of compensation to avert further increases in toll rates. The government is already compensating the concessionaires for past toll rate hikes which were not implemented. I estimate compensation to PLUS alone is RM700m per year. That will go up to RM1.5bn in 2011, if PLUS is not allowed to increase rates.

There is no need for this. The DAP has presented a concrete, viable proposal for a toll-free PLUS by 2016, at no additional cost to the government.

Hmm. Here's a thought. Khazanah has a RM10bn allocation, and a chequered execution record. I'd be very happy if it spent that RM10bn on buying out the rest of PLUS and making it toll-free even earlier!

RM60bn? Not!

The newspapers today headline the RM60bn total 'package'.

It's not really that big. First of all, RM7bn of that RM60bn is due to “off-budget projects” and private finance initiatives (PFIs). “Off-budget” projects by definition are not undertaken by the government. What it did was corral certain projects done by GLCs (government-linked corporations), such as the RM2bn LCCT, into this package to help create the nice big headline number. Similarly, PFIs are led by the private sector. They are not new spending.

That leaves us with RM53bn. Still a fairly large number. But really, only a small fraction of that is likely to benefit the rakyat directly and immediately. Here's where the big money goes:

1)RM10bn to Khazanah to fund investments “over a two year period”. This is not going to help the rakyat today. Khazanah's record, by the way, is hardly exemplary. I challenge you to name 3 successes at Khazanah under its much-vaunted new leadership since 2004. Telekom continues to burn money overseas while providing Malaysians with sub-par services; Proton is still dependent on protectionist policies, consider the losses at Silterra; Malaysia Airports' LCCT is a disgrace …
2)RM25bn for guarantee funds, under which the government guarantees loans to encourage banks to lend. A good idea, which I had blogged on. But here is the rub. SME (small and medium-scale enterprises) get only RM5bn worth of guarantees. That's not even 4% of the total c. RM130bn loans outstanding. Bonds, ie debt issued by large corporations, get the largest chunk - RM15bn in total. And the balance RM5bn goes to loans for “Industry Restructuring”. Also, bear in mind this is not real spending – the government is liable only if the borrowers default.

Which takes us down to the real, direct government spend totalling RM18b (60-7-10-25=18). Bear in mind though – that's over two years. So it's only RM9bn per year. A drop in the ocean. But we're in trouble and we'll take whatever there is. Transparent and fast execution will help.

But the government did did not break down in detail how the monies will be spent. The record isn't comforting. As of to-date, just RM1bn of the RM7bn first stimulus package announced in Nov has been spent, according to our Finance Minister.

We are in a recession. Speed is of the essence. And so is maximising the effectiveness of government spending. How hard can it be for the BN government to put on a website the details of the various projects? For example, if it is a bridge project, please name the description of the bridge, the location, the person awarded to, the contract sum, the contract period and henceforth ...

Click here for more from Tony Pua and Jeff Ooi.

2nd stimulus package will be most effective in the rakyat's hands

Not even 10% of the RM7bn 1st stimulus package announced in November last year has been delivered. The Second Finance Minister confessed in Parliament that just RM568m, 8%, of the total had been spent as of February.

Even as we wonder how, where and when the balance of that first RM7bn will be spent, the BN is set to present in Parliament this Tuesday its 2nd stimulus package.

I expect the usual slew of various projects totalling billions and talk of improving government efficiency, with little to show after the media ink has dried on the subsequent approving comments by sycophants.

Given the slow pace and leakages in BN government implementation that we have grown accustomed to, there will be far quicker and greater impact if the funds are put directly into the rakyat’s hands instead. Here are two proposals from me:

1. Support payments to the poorest households. I suggest RM1,000 per month be paid to the 30% of EPF contributors with the lowest incomes. 30% of 5.4m active contributors = 1.6m workers * RM12,000 for one year = RM19.5bn. The multiplier effect from this will be substantial as these contributors will be spending primarily on local products and services, helping to support the domestic economy.

2. Banks have been cutting credit lines, exacerbating the downturn as even good businesses have to curtail activities due to the lack of financing. The government can help with a Special Risk-sharing Initiative (SRI) similar to that proposed by Singapore in its budget. Under this SRI, the government will share the risk of these loans should they turn sour. Banks will still be responsible for assessing credit and sourcing the customers, but if the government agrees to share 50% of the risk of these loans, banks will be more willing to grant credit. SMEs account for c. RM130bn of total loans. Total exposure would perhaps be RM16bn, assuming the government takes 25% of the total and in the unlikely event they all go sour. But in the meantime, this may just be the tonic to alleviate the credit crunch faced by Malaysian SMEs.

Financing the spending is where we run into difficulties, and which is why we have the headline number being bandied about now sharply reduced to just RM10bn, instead of the RM30bn or so being touted earlier. The profligate spending by the BN government during the years of plenty is haunting us now. Unlike, say, the governments of Singapore and Australia which ran budget surpluses during those years, which they are now using to mitigate the recession, the BN government has been incurring deficits and growing our national debt.

The prospect of larger deficits has prompted ratings agencies to cut their credit ratings for Malaysia, and is a part of the reason for the slide in our ringgit's value. So, as a first step, instead of just spending more money, we must look to at least 10% of savings from current government procurement. The 2008 government budget called for c. RM190bn of total spending. Save just 10%, for example from better procurement practices without using consultants and agents, and we would have RM19bn – enough for the EPF support payments!