Bailout in Malaysia Signals Policy Failure

Thomas Fuller International Herald Tribune


December 26, 2000

Government Pays $1.6 Billion for Rail Lines KUALA LUMPUR. The national government plans to take over key parts of Kuala Lumpur's unprofitable mass transit system in a $1.6 billion bailout, another blow to Malaysia's hopes of using private funds to build a 21st-century public infrastructure. The rescue has been criticized by opposition leaders, who call it the latest in a series of attempts to help prop up politically well-connected businessmen.

The cost of the bailout is the equivalent of about 7 percent of the entire government budget for next year. The Finance Ministry said it would pay for the bailout with bonds. The announcement was made late Friday, two days after a separate agreement in which the government agreed to pay a politically linked businessman $470 million for his controlling stake in Malaysian Airlines, the debt-ridden and unprofitable national carrier.

The airline buyout deal, which has also been heavily criticized, was done at twice the price at which Malaysia Airlines is trading on the local stock exchange. Taken together, analysts say the twin bailouts and others risk straining the country's finances when Malaysia is running an annual budget deficit of more than $4 billion and when its economy is projected to slow down. Critics of such bailouts have become increasingly vocal in recent months.

They include some members of the governing party, who say they reflect the failure of Malaysia's privatization policy of the past two decades. "From Day 1, we knew it wasn't going to be a profitable project," said Shahrir Samad, a former government minister, referring to the mass-transit rail lines built for Kuala Lumpur. "In the end it will be the government that will assume the debts," said Mr. Shahrir, who holds a top post in the governing party but has become increasingly critical of government policies.

The administration of Prime Minister Mahathir bin Mohamad built its reputation on an economic model in which such things as roads, ports, light rail systems and stadiums were built - and paid for - by a hand-picked group of tycoons. Now, most of those businessmen are mired in debt, and economists say many will require government assistance. The scale of future bailouts is difficult to calculate, but unless their businesses are broken up, the total rescue package is likely to run into billions of dollars.

The government blames residual effects of the 1997 economic crisis in Asia for the failure of the rail project to make a profit. "The economic crisis has made it difficult for them to inject new capital or to pay back their loans, as the development and upgrading costs for a light rail system are very high," the Finance Ministry said.

The $1.6 billion bailout of the mass transit system includes just two of the light-rail lines. There are at least two others under construction. What has angered many Malaysians is not only the fact that failed projects are being renationalized but that the government seems to be paying top dollar to the failed business tycoons.

In the case of Malaysian Airlines, for instance, the government bought back a controlling stake in the airline last week at the same price for which it sold it in 1994. But the carrier, which had a light debt load then, is now nearly $2.5 billion in debt and headed for a fourth straight year of losses.

The airline's chairman, Tajudin Ramli, a protégé of Finance Minister Daim Zainuddin, had no experience in the airline business before he took over the company and is widely blamed for running it into the ground. "It is clearly the general public opinion that the government is paying too high a premium for the shares, and there is a sense of national outrage," said Lim Kit Siang, chairman of the Democratic Action Party, the second-largest in the opposition.

Mr. Tajudin last week defended the fact that he had received double the current market price for his stake. "You cannot look at it from the point of view of the stock market only," he told AFX News. "You have to work on the airline's value." The government is currently seeking a foreign buyer for the airline and has reportedly had talks with Qantas Airways Ltd., Swissair and KLM Royal Dutch Airlines.

Analysts say they are skeptical the government will get the same price it paid Mr. Tajudin for his stake.