Preventing mega scandals

By Khairul Khalid

The never ending succession of financial mega scandals since the 1980s until now throws up the important question: what can be done to prevent them?

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Notorious mega scandals — past and present — involving huge companies and projects such as  BMF (Bumiputra Malaysia Finance), Bank Negara Malaysia’s foreign exchange (forex) trading, Bakun dam and PKFZ (Port Klang Free Zone) were characterised by massive loss of public funds, inadequate oversight, lack of transparency and accountability.

Many of these scandals were invariably linked to the government or government linked agencies, as well as top politicians. Not even a company like Petronas (Petroliam Nasional Bhd), perhaps Malaysia’s biggest multinational and renowned worldwide, is immune from scandal.

Is the pervasive presence of government and politics in huge projects at the heart of the problem?

No less an authority than Tengku Razaleigh Hamzah (Ku Li), former finance minister and former chairman of Petronas, seems to think so, citing Petronas as a prime example.

Political interference and abuse

“There has been consistent political interference (in Petronas), even though it is a professionally well-run corporation. It is being abused and treated as the piggy bank whenever the government needs cash in a hurry. Government has relied on Petronas to help outfits with strong linkages to the government get out of financial trouble since 1985,” said Ku Li earlier this year.

The Gua Musang MP (member of parliament) mentions several high profile cases where the federal government has utilised Petronas to finance or rescue troubled projects.

“In 1985, Bank Bumiputera was rescued with a RM2.5 billion bailout and again in 1991 when it coughed up another RM1 billion. In 1997, Petronas had to rescue the financially ailing Konsortium Perkapalan Bhd (KPB) for RM2 billion. The national oil company was also made to underwrite the construction of the Twin Towers in the heart of the KL golden triangle for RM6 billion and the building of the extravagant Putrajaya for RM22 billion,” said Ku Li.

Over 37 years from 1974 – 2011, the government had been paid approximately RM529 billion in dividends, taxes, petroleum proceeds and export duties from the national oil company.

According to Ong Kian Ming, Serdang MP, the involvement of the Malaysian government in big business has evolved rapidly over time.

“Previously, it was just the awarding of government contracts. Now, the government has been able to use more instruments at its disposal to influence and be involved in business,” said Ong to KiniBiz.

He cites the increasing use of Public Private Partnerships (PPP) in order to push through development projects without incurring more government debt.

“Projects like the MRT (Mass Rapid Transit) are considered off-budget items either as government investments or loans. Other examples include the increasing use of MOF (Ministry of Finance) incorporated companies who get involved in the private sector, like 1MDB (1Malaysia Development Bhd) in the power generation sector, the increasing use of GLCs (government linked companies) to push through ‘crony’ projects (e.g. PKFZ via PKA – Port Klang Authority) and the use of government funds in private equity to take over certain sectors of the economy (e.g. Ekuinas in education and F&B),” said Ong.

Loss of investors’ confidence

The Serdang MP says that one of the major concerns over the mega scandals is the loss of  investors’ confidence in the transparency of Malaysia’s financial market in the long term.

“There is uncertainty over how much the Malaysian public has had to pay for these scandals. For example, how much did the Malaysian government fork out to bail out Tajudin Ramli  from MAS (Malaysian Airlines)? How much did the Perwaja Steel scandal cost the government? The government’s financial statements still lists an outstanding loan of RM3 billion to Perwaja that has not yet been paid.

“How much will the PKFZ scandal cost the taxpayer? PKA’s debts to the government is currently more than RM3 billion after it was given a soft loan to pay the proceeds of the PKFZ bond payments. There’s also uncertainty over how much ongoing and future scandals will cost the Malaysian taxpayer. For example, how much will 1MDB ultimately cost the taxpayer if and when a bailout is needed?” Ong said.

Ong also adds that these mega scandals have persisted over the last decades because the underlying structure of these contracts haven’t changed.

“No open tender, no public debate on the Requests for Proposals (RfP). Most, if not all, are done via direct negotiations. It still allows for the use and abuse of the power of the Prime Minister (PM) and the Finance Minister in terms of awarding these contracts,” said Ong.

Yeah Kim Leng, Dean of the School of Business at Malaysia University of Science and Technology (Must) agrees with Ong, saying that these huge scandals persist mainly due to weak governance as well as ineffective enforcement.

“I scratch your back, you scratch my back”

“The ‘keep-one-eye-closed’ attitude for buddies, and warped self-beliefs such as “if I don’t do it, someone else will” and “I scratch your back, you scratch my back” could have fostered such scandals,” said Yeah to KiniBiz.

The dean also adds that although there may be cases to justify the use of public finances and GLCs such as Petronas to rescue financially distressed companies, there are obvious downsides too.

“The disadvantage is that such rescues create an implicit guarantee or moral hazard, whereby the principals will continue to engage in risky behaviour knowing well that the government will step in should they fail. Another negative consequence is the perpetuation of a ‘soft anti-corruption environment’ whereby if the stakeholders engage in illegal behaviour, they can expect either a ‘look-the-other-way’ or a lenient penalty should their illegal actions be discovered,” said Yeah.

He also adds that Malaysia was ranked 36th in 2000 but had since slipped to 53th position in Transparency International’s Corruption Perception Index in 2013.

“While the slide is consistent with the incidence of scandals, the current standing may not be alarming considering that there are more than 170 over countries. Relative to the country’s GDP (gross domestic product), the mega scandals may also appear to be small.

MACC should be “let loose”

“The critical concerns are the missed opportunities, high costs, negative externalities, and long term deleterious effects that corruption imposes on the economy. Investors turned off, businesses abandoned, domestic capital moved abroad are some of the difficult-to-measure-and-detect impacts of corruption. To the government’s credit, corruption had been incorporated as one of the seven National Key Results Areas (NKRA),” said Yeah.

So what does Malaysia need to do to prevent further mega scandals?

“The setting up of the MACC (Malaysian Anti-Corruption Commission) is a necessary condition but certainly not sufficient. It has to be ‘let loose’ i.e. completely independent to pursue corruption cases without fear or favour. Equally important for the society as a whole, the values system and incentives for businesses, regulators and politicians have to be aligned towards ‘good ethics and integrity pays’ and not ‘corruption pays as long as you’re not caught’,” said Yeah.

Similarly, Ku Li points to corruption as the root cause of the problem.

“The link between politics and wealth is quite plain for us to see,” Ku Li said. “The tendency is to grab a bigger slice of the pie rather than making that pie bigger. The consumer suffers in the end.”

The former finance minister admits that corruption is Malaysia’s number one problem. If the country can get rid of corruption, it can get rid of some if not most of the problems in the country, says Ku Li.

“A lot of money is wasted away. We are bearing the costs. Everything is inflated. Cost of projects, cost of doing things. Too expensive now. So much so that it’s passed on to the consumers.

“The people at the bottom have to bear the additional costs. The government has to grab the bull by its horns and go after corruption. There’s no two ways about it,” said Ku Li in an interview last year.