Malaysia's newfangled privatization fudge

Malaysia's newfangled privatization fudge

Malaysia is poised to experiment with the next phase of its privatization process through the initiation of so-called private finance initiatives (PFIs). But the Malaysian version of the internationally recognized investment vehicles will be unique in that it will be the public rather than the private sector that takes the risks.

This year, Prime Minister Abdullah Badawi announced some 220 billion ringgit (US$60 billion) worth of new spending projects, including huge construction contracts (budgeted under the government's 2006-2010 Ninth Malaysia Plan. Out of that amount, 20 billion ringgit will for the first time be financed using PFIs, including projects related to transport, housing, health care and education.

Most of the successful bidders, however, are widely expected to be ethnic Malay-owned business consortiums, which are given preferential treatment under Malaysia's controversial race-based affirmative action policies. Former premier Mahathir Mohamad first embarked on privatization in the 1980s, not long after then British premier Margaret Thatcher created a global stir with her state enterprise divestment program.

In the Malaysian context, however, privatization has often been plagued by complaints of patronage, cronyism, unfair monopolistic advantages and lack of competitive bidding - particularly during Mahathir's tenure. At the same time, the process has often maintained rather than improved poor services, and lopsided fixed contracts have sometimes allowed new private owners to pass on excessive rates and tariffs to the government and general public.

Needless to say, that record has given privatization a bad name with many Malaysians. Now, Abdullah has embraced PFIs as part of his government's bid to reduce its budget deficit and tap a new source of off-balance sheet financing.

PFIs, often criticized as unregulated back-door privatization, were first introduced globally in 1992 under the United Kingdom's Tory-led government of John Major and have since been continued. Through March 2006, a total of 749 projects worth over US$89 billion had been assigned under PFIs in the UK, where the government locates a private sector partner to carry out government-initiated projects, transferring detailed control - and the risk - to the private partner.

PFIs are usually funded through the sale of corporate bonds or directly by banks. Although PFI borrowing costs may be higher than government borrowing costs, the investment vehicle's advocates argue that the transfer of risk to the private sector, along with the supposed greater efficiencies from private management skills, in the end outweigh the extra funding costs. Moreover, they say that PFIs create a structure to enhance value for money through superior private-sector innovation and management skills.

Because many PFI projects are ultimately more expensive than if they were government-initiated, public-sector budgets could be burdened in the medium term. Under a typical PFI, the private-sector partner will be paid for work over the period of the contract and if it fails to meet certain specifications, it will lose out on payments until standards are improved. PFI projects in the UK have generally been delivered within budget and on schedule.

Attractive proposition
From Kuala Lumpur's perspective, this all makes PFIs an exceptionally attractive investment proposition. Government-initiated construction projects in Malaysia have long been plagued by delays, cost-overruns and shoddy work, including well-reported recent cases of cracks on a newly built highway overpass and substandard construction work on a number of public school computer laboratories.

But there will be a new twist to Malaysia's version of PFIs. A special-purpose firm called PFI Sdn Bhd will soon be established by the Finance Ministry and will be tasked with implementing the new investment vehicles. On the plus side, officials argue that PFI Sdn Bhd will use the benchmarks of a "public-sector comparator" (PSC) - that is, cost estimates if the government undertook the project. Moreover, the capital expenditure and the maintenance costs of the project must be less than the PSC benchmark before a PFI project is awarded to a private partner.

So who will actually finance the PFIs? Enter the Employers Provident Fund (EPF), the opaquely-managed, state-run pension scheme, to which both private-sector employees and their employers are required to make regular contributions from their salaries. The EPF is tipped to provide the funding for the initial 20 billion ringgit worth of projects through PFI Sdn Bhd. In short, the financing will come from the EBF's public coffers - rather than from private financing - channeled via PFI Sdn Bhd to the builders and construction contractors. The EPF, however, is covered from lending exposure as it will deal directly with the government-owned firm, PFI Sdn Bhd.

PFI Sdn Bhd, in turn, will use the money to provide financing to successful project bidders, which are expected to be privately-held ethnic Malay consortiums, which will manage all aspects of the project. That means Malaysia's version of PFIs will differ greatly from those initiated elsewhere in that the construction and investment risk will remain with the government via PFI Sdn Bhd and not the private contractors.

''This is not really a true PFI,'' says Subramaniam Pillay, a Kuala Lumpur-based economist and senior lecturer specializing in international finance. "Under a true PFI, private investors will provide the financing and take the risks of the project. And if anything goes wrong with the project, they have to take a 'haircut'." As for the Malaysian version, he asked, "What is so private about this?"

The government's PFIs could face serious problems if they are overtly designed to help contractors who would otherwise likely not get access to commercial funding, said P Gunasegaram, group executive editor of the business weekly, The Edge, in a commentary.

"The [ethnic Malay] contracting community is a strong lobby group within UMNO [United Malays National Organization, the dominant party in the ruling coalition] but that does not mean the government has to cater to them by putting together a scheme that will benefit them and give them access to funds when many of them may not deserve it," he said

Anil Netto ( a freelance writer based in Penang. )


Dr Mahathir Has No Conditions For Proposed Meeting With Abdullah

Tun Dr Mahathir Mohamad is not setting any conditions for the proposed meeting with Datuk Seri Abdullah Ahmad Badawi before Aidilfitri.

"I have no conditions for the meeting with Pak Lah, but please let me know two days beforehand. Don't let me know the same day the meeting is to be held, and also there are only about five days left," he told reporters when commenting on the Prime Minister's readiness to meet him.

Dr Mahathir was met after breaking fast with the people at the Kampung Naga Mosque near here Wednesday.

The former prime minister was accompanied by his wife, Tun Dr Siti Hasmah Mohd Ali and son, Datuk Mukhriz

Dr Mahathir set the ball rolling in Langkawi yesterday when he expressed his willingness to meet Abdullah to resolve their strained relationship over issues he had raised, including the scrapping of the scenic bridge project to replace the Johor causeway.

"If I'm informed late it would be difficult because I have my own programmes which are quite difficult to cancel at the eleventh hour. I will be here for the rest of this Ramadan, I am not going anywhere," he said.

Dr Mahathir said that he would inform the Prime Minister what he had told the Malaysian Council of Former State Assemblymen (Mubarak), but was not ready to disclose them.

"Let's wait. Who knows, I might be afraid to talk about it then," he said amidst laughter from the people mingling around him.

Asked whether he would attend the Umno General Assembly in November, he said he would if he was invited by the party president.

Dr Mahathir also gave out rice, batik and pelikat sarongs, clothing and cash to 40 needy people at the mosque.

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Bush Warns North Korea Against Sharing Nuclear Weapons

U.S. President George Bush says there will be grave consequences for North Korea if it tries to export nuclear weapons. The United States and Japan say they will work together to enforce U.N. sanctions against North Korea.

President Bush says he will use all means necessary to hold North Korea to account if it attempts to transfer nuclear weapons.

"If we get intelligence that they are about to transfer a nuclear weapon, we would stop the transfer. We would deal with the ships that were taking or the airplane that was dealing with taking the material to somebody," he said.

In an interview with the American television network ABC, President Bush said North Korean leader Kim Jung Il should understand that the United States is serious about preventing Pyongyang from sharing nuclear technology.

"I want the leader of North Korea to understand that he will be held to account, just like he is being held to account now for having run a test," he said.

Last week's nuclear test by North Korea brought United Nations sanctions against the country. Russia and China had previously resisted such a move. Asked if China was now fully committed to enforcing those sanctions, President Bush said he is confident that Beijing shares the goal of a nuclear-free Korean peninsula.

"They don't particularly want to board ships, but on the other hand, if there is good intelligence, they will work with us on that intelligence. They are inspecting cargo that is coming across their border," he said.

President Bush says he does not know if those sanctions will work but he says he knows the international community must try.

North Korea's nuclear test has become an issue in next month's U.S. congressional elections.

Some Republicans say former Democratic President Bill Clinton failed to address that threat and instead enabled North Korea by agreeing to economic incentives in 1994 in exchange for a promise to stop developing nuclear weapons that Pyongyang broke.

Opposition Democrats say North Korea's nuclear advances show that President Bush has focused too much on the war in Iraq and not enough on North Korea and Iran.

A public opinion poll by the television network CNN says 72 percent of Americans believe the war in Iraq makes it harder to deal with North Korea.

U.S. Secretary of State Condoleezza Rice is in the region to consult with allies.

She says Washington is not trying to escalate the crisis but the U.N. Security Council has acted firmly and resolutely to say that North Korea's nuclear test is unacceptable.

North Korea says the sanctions are a declaration of war.


Back to What Was Working with North Korea

The reported nuclear test by North Korea escalates an already dangerous situation. Diplomatic aftershock throughout the world highlights the test’s alarming message: we are one step closer to nuclear weapons on the Korean peninsula. A potentially catastrophic arms race in Northeast Asia will likely ensue.

U.S. foreign policy has failed. When historians turn their gaze to this period, the Bush administration’s refusal to engage in meaningful negotiation will rank as one of the greatest foreign policy blunders. How did this happen, and what can be done?

When Bush first took office, North Korea — a member of the Nuclear Non-Proliferation Treaty — had halted all missile tests and had its nuclear facilities under the watch of inspectors from the International Atomic Energy Agency (IAEA). It was broadening diplomatic ties, beginning a series of economic reform measures, and expanding personal and professional exchanges with Europe, South Korea, and China.

Instead of building on this hopeful trend, the president refused to negotiate with North Korea and declared the country part of an “Axis of Evil.”

The current crisis erupted in October, 2002, when U.S. envoy James Kelly reported North Korea had admitted to secretly enriching uranium. Heavy oil shipments were cut off and the issue went to the UN Security Council. North Korea responded by expelling all nuclear inspectors, restarting its nuclear reactor, and pulling out of the Nuclear Non-Proliferation Treaty.

In repeated rounds of talks in Beijing designed to resolve this standoff, the Bush administration refused to offer meaningful trade-offs to the North Koreans or to even sit down to negotiate. Instead, Bush administration policy has been: “first you disarm, then we’ll talk.” Given the security anxieties of North Korea, this policy was a clear no-starter.

Just when negotiations appeared to have reached a potential breakthrough point in last October, the U.S. Treasury Department froze North Korean financial assets abroad. The North Koreans refused to return to the negotiating table in protest.

With the diplomatic process was stalled, North Korea moved rapidly to build nuclear capability. They tested six short and mid-range missiles earlier this year and now apparently have conducted a nuclear test.

Although the North Koreans most likely do not have the capacity to actually deliver a viable nuclear warhead at this point, the reported explosion of a nuclear device on the Korean peninsula marks a watershed in the failure of denuclearization efforts in Northeast Asia.

To stop this dangerous trend, the U.S. and all countries in the region must return to the negotiating table in earnest, prepared to offer meaningful trade-offs in return for a North Korean pledge to place its nuclear facilities under immediate international inspection.

North Korea repeatedly maintains it wants diplomatic recognition from the U.S. and a peace agreement officially ending the Korean War. With a struggling economy it also needs opportunities for trade and investment.

The outlines of a deal are clear: North Korea should freeze its nuclear weapons program, the U.S. should offer security guarantees and pursue diplomatic recognition, and the nations of the region should cooperate to promote economic, technical and cultural cooperation with North Korea. Diplomacy and trade, not military threats or sanctions, provide the best hope for peace on the Korean peninsula.

There is no time to waste, and no alternative to diplomacy.

James Reilly

(James Reilly is a Quaker International Affairs Representative who is based in East Asia, serving on behalf of the Philadelphia–based American Friends Service Committee, a co-recipient of the Nobel Peace prize for humanitarian service during World Wars I and II.)


Asians Are Watching Ban Ki-moon
(by Barbara Crossette)

When Ban Ki-moon, the next United Nations secretary-general, stood before the General Assembly to acknowledge his victory on Friday, October 13, he said something puzzling. "Asia," he declared, "is a region where modesty is a virtue."

Really? Modesty is not a commodity much prized in the boomtowns of China or India these days. Ask Lee Kuan Yew, the founder of Singapore, whether he would describe himself that way. Asian history has been electrified and driven by immodest men: Mao Zedong, Sukarno, Jawaharlal Nehru, Kemal Ataturk, to name a few.

It is true that a conciliatory, nonconfrontational style is a hallmark of much of Asian diplomacy, Southeast Asia in particular. Still, the choice of Ban, South Korea's foreign and trade minister, to succeed Ghana's Kofi Annan, was greeted with polite but reserved reaction in the region, to judge from an informal survey of major media.

In part, this was no doubt due to the realization that Ban, 62, had a lockhold on the job weeks before the final vote, which was no surprise, and that the feelings of other Asians in the race had to be considered. The Association of Southeast Asian Nations (ASEAN), the strongest of subregional groups, coupled its congratulations to Ban with praise for the "vigorous campaign" conducted by Thailand's Surakiart Sathirathai, that region's own candidate.

Furthermore on the UN's regional map, Asia stretches from the Middle East to the Pacific. Thus the Khlaeej Times of Dubai had questioned before the final vote whether Ban would have the breadth of vision and inclination to support demands by the 57 Arab and Muslim countries (a number of them in Africa) for greater voice at the UN. Others wonder if he can talk tough to rogue governments such as Sudan's.

It is not be surprising that many risk-taking Asians, living in the world's most dynamic region, seem to sense that Ban is not one of them, not only because of his low-keyed approach to crises and the diversity of Asia. In a region where Islam, Hinduism, Buddhism and Confucianism predominate, Ban is a Christian. Moreover, his home country, Korea, is a military ally of the United States, now the target of so much criticism around the world, especially among Muslims.

Some Asians contend that Ban was as much a candidate of the Security Council's most powerful nations as he was a pan-Asian contender. His cautious 40-year diplomatic record must have impressed the Americans, who had taken umbrage under both Clinton and Bush administrations to secretaries-general with strong opinions and no hesitation in voicing them.

Ban's role in softening Seoul's attitudes toward North Korea—the "sunshine policy"—did not seem to undermine long-term thinking in Washington that he was someone who would be less troublesome than Boutros Boutros-Ghali or Kofi Annan. Moreover, a reputation for going easy on Pyongyang, even as it rattles nuclear weapons, certainly did no harm in Moscow or Beijing. This could, however, create concerns in Japan, a major UN contributor that under a new prime minister is taking a much tougher line against North Korea, and has a history of tensions with Seoul.

Of course, an Asian secretary-general does not represent Asia at the UN. Yet for the region, the election of an Asian could be a very important moment. It has been more than a quarter of a century since the last and only Asian secretary-general, U Thant, held the post, from 1961 to 1971. Over the ensuing years, the UN has often seemed a very distant place, remote from daily lives of most Asians, unless you were a refugee, recipient of development aid or a victim of war or natural disaster. From the Middle East to the Pacific, subregional organizations—the Arab League, the South Asian Association for Regional Cooperation and ASEAN among them—became more prominent in intergovernmental affairs. Asians were often underrepresented in UN operations and offices. Coverage of the UN is scant in the media in most places.

As Ban Ki-moon steps into the world's brightest spotlight, he has the chance to demonstrate what Asian leadership might mean to the UN at this time of multiple crises and global dangers. Now that it is finally "Asia's turn" at the top, there is a good chance that more Asian journalists will join the UN press corps and spark heightened interest among the region's newspapers, broadcast networks and online news services. Ban can count on the lively media in major Asian nations to be quick to criticize or commend. Skeptical or supportive, Asians will certainly be watching him.

(Ms. Crossette is a former New York Times chief correspondent in Southeast Asia and South Asia.)


North Korea nuclear USA Asian Ban Ki-moon United Nations secretary-general Malaysia Mahathir Badawi privatization