Tuesday, 2 April 2024

Are We a Land of Bailouts? (Part 2)

Further to Part 1 (as highlighted yesterday), the AG’s report also found that the Armed Forces Fund Board (LTAT) had failed to account for a total of RM812 million in impairments on investments at its subsidiaries, that is, a RM768 million investment in Boustead Holdings Bhd and a RM44 million investment in pharmaceutical company Pharmaniaga Bhd. This resulted in the fund overstating its net profit and investments in subsidiaries by RM812 million in 2022. 

In other words, LTAT would have made a RM379 million net loss for 2022 if the RM812 million impairment is considered. Instead, the LTAT reported a 13.1% increase in net profit to RM433 million in 2022 from RM383 million in 2021. The fund also saw its revenue rise 27% to RM653 million in 2022, from RM514 million in the previous year.

Source: https://en.wikipedia.org

According to the report, LTAT had made an investment of RM5.29 billion in 13 subsidiaries in 2022, including investment costs of RM2.55 billion in Boustead and RM106 million in Pharmaniaga. In June last year, LTAT completed the takeover of Boustead, making the latter a wholly-owned subsidiary of the fund. LTAT directly owns an 8.615% stake in Pharmaniaga and indirectly hold 51.835% via Boustead as at end-March 2023.

Additionally, the report found that LTAT divested its holdings in Perumahan Kinrara Bhd and Tanah Sutera Development Sdn Bhd, selling them for a total of RM43 million to Perbadanan Perwira Harta Sdn Bhd (PPHSB). In return, LTAT received PPHSB shares valued at RM232 million. From this transaction, LTAT recorded a non-cash profit of RM189 million, forming the basis for dividend payments in 2022 to its 122,936 contributors. In 2022, LTAT paid dividends totalling RM476 million (5%), utilising both its net profit and accumulated gains, the report stated. That’s financial engineering!

State-owned agencies continue to rely on government bailouts to stay afloat and remain viable. Should they continue to be bailed out, or should they be allowed to fail?

For one, the National Audit Department is concerned about FELDA’s heavy reliance on financial aid to keep operating and has advised the agency to chart a clear direction without further financial assistance from Putrajaya. In the recovery plan, the government has agreed to inject RM1 billion for a period of seven years for FELDA to settle its debts and government guarantee revolving credit. Still, FELDA’s huge debt places a substantial burden on an already-strained national budget and further increases the growing debt bubble. 

Following the latest findings from the AG’s report, it remains to be seen how agencies like FELDA and PR1MA will resolve their pile of debt without resorting to major bailouts. 

For PR1MA, it can take a leaf out of the success of Singapore’s Housing and Development Board’s (HDB) book. It was reported that HDB flats house 80% of the city state’s resident population, of whom about 90% own their home.

We are in dire need of solutions that can create viable government entities. Unless we are prepared to remove politicians from being involved in the Board or Management of these entities, we will have difficulty in ending bailouts. In the private sector, very seldom there are bailouts. It is only when the organisation is “too big to fail” that a bailout is considered.

The U.S. did this in the Great Recession of 2008/9, saving major banks. It was a surprise for a capitalist system which normally touts market forces. In the end it was seen as a systemic risk or a personal “injury” for some vested interests – not unlike Malaysia! Seriously, we need to get a handle on this, if not we may have dire consequences.


Reference:

Malaysia-land of endless bailouts, Kang Siew Li, The Edge Malaysia, 18 March 2024



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