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Sakmongkol ak 47

Thursday 18 November 2010

Let’s KPI Khazanah

Was Asas serba's offer to take over the 23 toll road concessions for RM 50 billion rejected because Nor Mohamad Yaakob wanted it that way?
For that matter, had the offer been made by any other entity for RM 50 billion, would such an offer be cavalierly rejected?
I say cavalier because the boss at Khazanah, Azman Mokhtar made just a cursory mention that it had received an offer from Asas Serba. RM 50 billion and yet no considered evaluation? 50 billion isn't exactly small change is it?
He went on to say, PLUS highways are generating cash and profit and the highways belonged to the people. But we are never told the basis for rejecting offers to buy the PLUS highways. Surely the reasons to divest are there because Khazanah and EPF formed a SPV to take over the business.
My point is, if there are reasons justifying the eventual takeover of PLUS highways by the Khazanah-EPF JV, then the same reasons must have existed at the time when Asas Serba or MMC made their offers. Or the people from MMC and Asas Serba didn't think about these reasons?
We the 'people' who own the PLUS highways don't know what is happening.
Asas Serba offered to buy at RM 50 billion. That would make the owners RM 50 billion richer. RM 50 billion would go into the system and would probably increase liquidity. The government would probably save money by not having to pay compensation in the form of subsidies.
There was also an offer made by MMC group led by Syed Mokhtar alBukhari. It was also rejected. The offer was said to be somewhere in the region of RM 15-16 billion.
I always thought, the basic role of Khazanah, at least before being headed by Azman Mokhtar is to function something like Warren Buffet's Berkshire Hathaway. Basically it invests in sound companies and let those who are cleverer and better than them, manage and operate the businesses. It's a sovereign fund anyway.
In that way, it ensures the best returns to it as a stakeholder. It now seems Khazanah wants to micromanage everything which means it is running the business. It is now in business with the luxury of using money belonging to us the people.
Now, as we read the many public statements by Azman Mokhtar, the principle which he uses to reject or spurn an offer is to say it won't sell a profitable business. The other excuse he uses is to say a particular business belongs to the people. I like these two principles by which he swears because; we are going to take him on that.
Why did it reject a RM 50 billion offer without explaining? It gives rise to suspicions that a reasonably good business offer is rejected on some non-objective reasons. Why is Khazanah still being controlled by Nor Mohamad Yaakob when it is the finance Minister who should be in charge of it? Hasn't Husni Hanazlah got the steely determination in his constitution to counter Nor Mohamad Yaakob?
Has khazanah got a big war chest? Has it got money to spend around? Has Khazanah veered from its original objectives on which it was established?
A look at the management structure of Khazanah gives the impression it's a club for the alumnus of consultant companies. Mckinsey, Ethos and Bina Fikir. The 'best brains' said Nor Mohamed Yaakob at one UMNO General Assembly. These people would live and breathe by the code of KPI.
That's a lot of bull crap. Anyone who attended the fanfare-ish ETP presentation by Idris Jala would be immediately aware of the emptiness in that claim when the young cikus (a large number from McKinsey) manning the many booths were often hung out to dry.
We need to examine the incestuous practice of seconding or hiring consultants in charge of Khazanah and then having the same people consulting out their work to their previous companies. Do we need consultants to hire consultants?
I am still trying to make business sense from the purchase of PLUS highways by the SPV belonging to EPF and Khazanah. By doing so, it's tantamount to taking PLUS highways private in the same manner what Ananda Krishnan did to his company.
These two already owned chunks of PLUS highways. EPF already owns a 12.3 per cent stake and Khazanah holds 55.2 per cent of the firm that operates the lucrative North-South highway running from the northwestern tip of Malaysia to Singapore. The Employees Provident Fund (EPF) and state investment arm Khazanah Nasional formed a special purpose vehicle (SPV) to take over the assets and liabilities of PLUS at RM4.60 per share.
Why the takeover and how can it be justified?
The target became the subject of public interest when an unknown company called Asas Serba submitted a proposal to take over PLUS highways and the other 19 highway concessions from the respective owners for RM 50 billion. The offer included a reduction of toll rates by 20%. It sounded good. But the offer was received in a lukewarm manner and by Nor Mohamad Yaakob in an openly hostile manner. He went on to say, it cost the government over RM 200 billion to build the highways. In other words he was saying, over his dead body.
Was the offer rejected on sound business reasons? The SPV is taking over the 4 toll concessions held by PLUS for RM 23 billion, now RM 26 billion? The share was valued at RM 4.60 each. Asas Serba's offer of RM 50 billion was for all 23 toll road concessions. The rest are loss making entities. It didn't separate what it would have paid for the PLUS toll concessions. Was it a wrong strategy to lump its offer altogether giving anyone the lame excuse, it's difficult to know what the offer would be just for the PLUS assets.
So we have no way to ascertain whether had AS lodged an offer for PLUS, could Asas Serba financially manage to keep to its earlier promise of not only cutting toll rates by 20% but also keeping them flat until the end of the current concession agreement. Keeping it flat or reducing the tools rates is not a major issue, because the government compensates the toll operators anyway. The offer would be superior if in addition to offering that price, reducing the toll rates and keeping them flat over the entire tenure, it can say the government doesn't have to make any compensation. Did the government get this?
But Asas Serba's offer was already doomed from the start. First the group is said to be associated with Halim Saad or Daim Zainudin. Halim's Saad UEM group was taken over on the excuse that Halim could not exercise his put option. This is an old story which I am hoping to retell. The company he headed wasn't even bankrupt which would have really necessitated the government taking over his business empire. His greatest sin it seems to me, looking as an outsider was his inability to exercise his put option within the time limit and the general impression that he was linked to Daim Zainudin.
If the government then had wanted to help out, they could. Because it helped out other distressed companies such as Lion Group and Azman Hashim's Ambank. But the other two were not linked to Daim.
Then of course, you have the sage-like evaluations by analysts. One typical evaluation goes like this:- suppose AS buys PLUS in a leveraged buyout deal in excess of RM23bil, we wonder just how much financial wriggle room would Asas Serba have if much of PLUS' cash flow be used to service the debt taken on to fund any takeover. So? You have cash flow- do you just ogle over it? After it takes over, its cash flow belong to them and they will manage it in the best way they could.
Then, in a I-told-you-so very facile aside, a wry comment would go like "If something goes wrong with PLUS after a takeover by Asas Serba, would it then lead to another bailout?"
Others noted that the issue on who would eventually gain control of PLUS and its highways went beyond pricing concerns.
This is purely a private sector business proposal. If Asas serba should fail, the government can always sell it to the next buyer. Others will offer to buy them out. The mischievous question as to who would gain control over PLUS beyond pricing questions is just that- mischievous. They have got to be controlled by somebody in the end. Does it matter whether it's Z or Y.
The better question would have been, is Z better than Y.
Asas serba would certainly employ its cash reserves for some specific objectives. We haven't been told how they would raise their finance fully. PLUS's cash flow is an obvious candidate but we cannot discount the possibility of other sources. Now that the offer by Asas serba has been rejected, we don't have the chance to see the details of their offer.
My question is, have the offers from both Asas Serba and later Syed Mokhtar's MMC been scrutinized carefully and if they have, by whom? You can't expect Khazanah and EPF, to offer an objective evaluation.
Asas Serba said it planned to issue bonds with a dividend component to pay for the estimated RM50bil it would cost to complete the transaction. The bonds, which will be issued by the new concession company set up by Asas Serba and other new shareholders, would carry an annual coupon rate of 7% PLUS a share of profits that is equivalent to a 2.5% to 5% effective yield. The bonds with the dividend sweetener will be issued with tenures to be fixed based on the projected cashflow statements of the toll-road companies.
Asas Serba said the share of profits would give bondholders the benefit of sharing the upside of the returns to the new concession company. Its proposal contains a number of options for current shareholders and lenders. The lenders can cash out of their investment, invest in the bonds that the new concession company will issue or stay on as creditors. Shareholders too can choose to cash out, invest in the bonds or invest as shareholders in the new company.
The company believes that its plan would work as it centers on making the operations of the highways more efficient by reducing costs. The company feels it can cut costs by 15% in a short time and implement programs to raise non-toll revenue.
Now that the Khazanah-EPF SPV has taken over the PLUS highways, perhaps the best option available to Asas Serba is to take over the remaining 19 tolled highways and show they can make profit from there. Or as defined by Azman Mokhtar, because highways are the people's assets, then maybe Khazanah and EPF should plan to take over the remaining highways.
It would be interesting to speculate on who will get to buy the Plus highway should one day, Khazanah and EPF chooses to divest this business just as Azman Mokhtar's contract is not extended?


Anonymous,  18 November 2010 at 07:51  

It is beyond my imagination why Khazanah and EPF JV can't offer a toll reduction and guarantee of no toll increase as offered by Asas Serba when they are only operating the profitable PLUS highways. That definitely shows that they are not thinking of the Rakyat. On top of that they are still asking the Government to use the Rakyat's money to compensate them of any shortfall in profit forecast. This clearly show how incompetent these people who manage the highways. To laymen like me their KPI can only go down to the lowest level. it is heartening to note that there will be a change in the man at the helm. Hopefully they will be able to find someone better. Ain't it high time that the former Finance Minister 2 should be retired too from being in active management of the nation's khazanah? He had failed us too many times and yet he is still calling all the shots on many important decisions. The PM seems to be very impotent in dealing with this man.
Pak Tua

Anonymous,  18 November 2010 at 08:17  


How about PNB? Do you wish to write something about it?

Anonymous,  18 November 2010 at 09:22  

Azman Mokhtar cannot count?

"......Spending RM10 bn to acquire a 100% of Parkway does not make sense for the following reasons:...."

".....Of the total value of RM2.036 bn (S$862.9 m) Khazanah's share is only 35%, which will amount to RM712m (S$203 m). As such incurring RM10 bn on Parkway is to big a price to pay!....."

Dulu kata Pak Lah tidur. Nampaknya Najib dan gang pun tidur juga.

Ataupun semua pura-pura tidur.

Sini RM10 billion, sana 10 billion, mana tak bankrap!!

Anonymous,  18 November 2010 at 10:10  

If I might add, the mechanism for a 20% reduction is already implemented via rebate fot toucn n go users. As for the other sweeteners offered by AS, I believe that a JV owned by EPF and Khazanah would be in a stronger position to renegotiate with the bond holders. Their commitment not to raise the rates for the next 2 years is a preliminary measure until the negotiation is finalised. I would not be surprised if the outcome would involves a further reduction of rates, elimination of compensation by the goverment and most importantly lower interest rates of financing by the bond holders.

DSN Supporter

Ariff Sabri 18 November 2010 at 10:17  

dsn supporter

is a 20% reduction upfront the same as an incentive rebate? the rebate works when you have accumulated certain frequency of using the toll gates.
also dsn supporter

Anonymous,  18 November 2010 at 10:53  

This Khazanah-EPF JV stinks to high heavens. But not to worry, the UMNO led government has already factored in the bail out in the ETP. In the meantime, some fellas linked in this deal are already laughing their way to the banks with their consultancy cum commission fees.

Chinaman,  18 November 2010 at 10:55  


Good article!! GOM should have opened PLUS for tender. Whoever can put up the best proposal to GOM and toll road users should get the deal.

The current deal who dunno how to do? PM say 5 year no toll increase, the next day UEM say GOM will compensate for no toll increase!!

So what's different?

Ryzal72 18 November 2010 at 10:56  

Assalamualaikum Dato',
Can u relook on the SIME DARBY Issues....there are few resign and yet mr ellegent silent still not hahahahhaha...whts wrong with them actually....the process of transparency was so slow. Furthermore it was remembering me to Yayasan Selangor case....hehehhehe!

Anonymous,  18 November 2010 at 11:07  

When the state gets involved in business and deprive the private sector any chance, it is going to go to the dogs.

Not many are angels and will put the "people's interest" ahead of their own expecially in this country.

In this country, and with this kind of govt so loved by some in this blog, to get into a position means to make money. Give some of this money to these supporters, they would praise them sky high while the entire country goes from top to the bottom.

Again who cares, as long as they get some share (through contracts etc etc).

Professionals should run businesses. Parties like Khazanah, manned by civil servants should take their hands off or cases where civil servants amassing RM900 million as reported by an immigration officer will be widespread.

Yes, Malaysia is a land of opportunites for those who know who and for those who sits in the right places at the right time.

Leave all businesses to the private sector. Government should ONLY collect taxes and run the country.

This is where TDM made the biggest disaster for the country by privatisation of anything profitable.

We call it robbing the people.

Anonymous,  18 November 2010 at 11:35  


The AS proposal is layering of toll roads debt into a tower of bonds. With PLUS at the top and some crappy stuff right at the mezzanine and perhaps a sliver of equity supporting the base. Their game is credit enhancement . And hopefully pick up 100bps of 50bn as the immediate cash takeout.
To make this tower from toppling , a few , among others must happen :
1-low interest rate regime
2-govt gives tax relief in lieu of flat toll tariffs
3- govt offers some compensatory business ( real estate etc)
4- govt ensure sanctity of toll concession agreeement. The downside of not doing that is future infra projects will be extremely difficult to finance as long dated infra bonds will ratchet to junk status.
5-govt will have to function as the back stop on the last day of concession period fore even the khazanah-elf structure. Never mind asas serba or mmc. Those 2 will junk the notes from day 1 ( fleece PLUS to shave SILK for an illustration )

The lessons to be learnt are plenty in public services PFI or PPP. Most importantly is that govt will have to be the buyer of last resort and doesn't matter who does it - EPF will be sucker on the long dated debt notes.

Bottom line : epf n knb will start as a simple SPF with enough lbo debts to swim and end up as a glorified toll authority funded by perpetual bonds.
It's only a question of time before ALL the other TOLL Roads will be dumped into this SPV.

Anonymous,  18 November 2010 at 11:42  

Dato' mudah cakap la Pak Jibby still sleeping and clueless.
Still DSN supporter for the time being unless he wakes up and tell Kak mah to shape up and behave!

Donplaypuks® 18 November 2010 at 11:49  

It's not clear what the post-privatisation shareholdings of PLUS will be between Khazanah & EPF. This info is curiously missing.

But frankly I see this exercise as mainly for the benefit of several minority shareholders who still own millions of shares in PLUS. It has long been suspected that several political parties own chunks of shares in PLUS through nominees and they all want to cash out before the next GE?

Why? Their gravy train may come to a screeching halt if UMNO/BN sinks badly in the GE and so this is a hedging proposition! That much is obvious!

we are all of 1 Race, the Human Race

OneMalaysian,  18 November 2010 at 12:23  

Dear Sakmongkol

The proposed privatization of PLUS gives us an opportunity to examine several important issues with regards to how Khazanah and EPF manage funds under their remit. It also should allow for an examination as to how privatization of government assets should be carried out, the need for transparency of processes, the objectives of government, and the benefits to society at large. It is indeed a very murky area now, with too much room for wheeling and dealing, and too much discretionary power in the hands of the minister. This can lead to very bad outcomes for the government and very good ones for the lucky or well-connected parties.

First, let’s look at the idea of privatization. It is based on the ideology that the government should be as small as possible, and that it should not be in business to compete with the private sector, and do things that the private sector can do better. It’s about efficiency of use of capital, better returns and better services, and crowding out of opportunities for the private sector by the government unfairly competing against private interests. The ideological framework is sound. Over the past 20 odd years the government has in fact privatized many projects/businesses, though they were not always done in the best possible way. Never mind this for now.

But if it has already privatized PLUS (and other highway concessions), why is there a need to use a sovereign wealth fund (Khazanah) and a government-controlled pension fund (EPF) to buy out private interest in PLUS? This is a reverse privatization or nationalisation. It goes counter to the original ideology. Does this mean the government has reversed or abandoned its original philosophy? If yes, then it should say so and explain why. And be consistent about this going forward so the private sector can understand and act accordingly.


OneMalaysian,  18 November 2010 at 12:25  


Second, if there should be any sort of sale of government assets, that is a privatization - the current examples being the RMAF base land in Sungei Besi and the FRIM experimental estate in Sungei Buloh - surely the prime objective of government is to get the best possible deal. It can only achieve this via an open public tender. If it should want to reserve a certain portion for Bumiputra parties, the tender can be divided into two portions, with one only open to Bumiputra parties. But each must have a reserved price and clear terms of payment. The highest bidder in each portion wins. And this must be done openly in a transparent way. But in both of these cases no such procedure was followed. Shadowy deal making ensued. The public is in the dark. This is no credit to the government. It continues to support cronyism and indulges in unsavory practices that can only lead to corruption.

Third, we should ask if it is the business of a large public pension fund and a sovereign wealth fund to be in control of large public companies and thus get involved in their management? A few years ago, the EPF owned more than 80% of RHB Capital, the 4th largest bank in Malaysia. It does not really matter that they justify this by saying that they had to come in to “save” RHB or to protect their small investment in it when the bank got into some difficulties. For a couple of years the CEO of EPF was concurrently the CEO of RHB. Pension funds invest in portfolios of shares, bonds, and other assets, but each should be small and non-controlling to spread risks. Besides, fund managers do not have the expertise to run banks or any other active business. They should not pretend to. Neither is it their job to rescue companies. Now the EPF is bidding for the 1500 acres of RRI rubber estate land to become the lead property developer! What is this? Do we lack a competent real estate sector?

As for Khazanah, it is behaving much the same. Look at its take over bid for the Parkway Group of hospitals in Singapore. Is it necessary to buy 100% of it? If it controls the entire company it must provide its management too. It cannot say let a profession team run it. Khazanah must know intimately about the operations of a hospital/health care group to know how to recruit and manage the senior managers, and set various KPIs, etc. That is management, isn’t it? Can Khazanah do this? And if so, in what other industries can it also provide such management? PLUS seems like one other.

Fourth, where does the public interest figure in all these privatizations? No statement is ever given as to why a certain privatization is good for the public, and no explanation is given when the government effectively nationalizes it. Look at the water privatization mess in Selangor. The only beneficiaries are the Teflon-coated bondholders. Again look at the privatization of power generation on over-generous terms, which turned out so badly the government wants to amend them. All this happened because there is no transparency of process, woolly thinking, and the nexus between powerful cronies and powerful politicians. It is always the public that suffers. There is much cursing and bitter complaints, but nothing seems to change. The cronies always win, and the public lose.

George Choo 18 November 2010 at 12:58  

Dear Sak, I supported the idea that any proposal of RM 50 billion must be given consideration irrespective of who the proposer is.
From the way things are going,I agree with you that Husni is not able to counter the influence of the Nor Yakob whose MACHAI are everywhere.

As an EPF member,I am very worried because Nor Yakob "Machai" Shahril Redza is the chief investment officer.It does not surprise me if Nor Yakob control the investment decision made by Shahril.
I do not trust Nor Yakob and I hope Shahril will not invest our money for the agenda of Nor Yakob.For your information,Nor Yakob appointedf Shahril to replace Maidin at MRCB.

Anonymous,  18 November 2010 at 17:16  

Maybe we should trust GOLD more than EPF now. Or else the day may arrive where our EPF money will be pay out in monthly mode due to over gearing and wrong investment.

Anonymous,  18 November 2010 at 19:01  


These people you call clueless, sleepy, incompetent etc etc are in positions we can only dream of.

They didn't get there being clueless, sleepy, incompetent etc etc.

They are shrewd, manipulative liars who crave power.

Money gives them that power.

Politicians past and present, know that money rocks their world.

Every deal is designed to line not just one pocket but many such.

So stop all this second guessing and analyzing. They know full well what they do. Down to the various percentages in commission and fees each and every contract and sub-contract pays out.

The current frenzy to make deals is because everyone is out to make a killing before the music stops and the party ends.

UMNO controls the media and so they can do what they want and say what they want.

Lies, truth they all don't matter cause come what may UMNO will get the majority of the Malay vote and with the help of postal ballots and the EC, BN will always be the majority in parliament.

Until the Malays wise up and the music stops.

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