Malaysia in the 1980s and 1990s was a big privatization story – embracing infrastructure projects from roads and bridges to tollroads. The financial crisis of 1997-98, however, exposed the weakness of some of the privatizations that had already taken place. Bankers found that many of the projects did not meet the forecasts that had been made and, worse still, were in many cases unbankable. Their concerns about balance sheet erosion quickly heightened.
Many of the large infrastructure projects were non-recourse financing deals. That meant if a project could not meet its targets, the banker could only take charge of the asset, and not demand additional recourse from the holding company. Taking assets over had limited appeal in many cases, particularly when bankers realized how wide the gap was between funding terms and actual cashflows. Many of these issues ended up with the Corporate Debt Restructuring Committee (CDRC).
In the second of a three-part interview, CDRC chairman Chellappah Rajandram talks about the problems facing the country's privatized projects in the aftermath of the financial crisis, and discusses Malaysia's plans to solve them.
Q: Looking back, do you blame the troubles of some of these projects on the bankers, companies, or the traffic consultants who forecasted too liberally?
A: Bankers were very free with their funds, they lent more money than companies could hope to repay. Before, money was lent based on securities. If you had a good security they took it, rather than looking at cashflows. However, they didn’t look to see whether this company under different conditions could repay the debt, and without selling the securities. These problems are now being addressed by the central bank.
Q: How badly are banks to blame?
A: The fault isn’t just with them. It was at different points.
Q: Can you pinpoint some problems?
A: Say, it takes M$2 billion ($529 million) to build a highway. If he [the owner of the concession] is really honest about the whole thing, he will look for funding. He goes to different sources. Of course, he will go to government and try and get some soft loans. But banks ended up offering the predominant capital.
Q: You’ve been saying all along banks shouldn’t be bankrolling long-term infrastructure projects. Why?
A: Banks aren’t capable of bankrolling this. The reason is the returns will come in only after many years… And where is the long-term money in this country? EPF. [Malaysia’s Employees Provident Fund]
Q: So that’s how we ended up with such a mismatch in funding?
A: Exactly. What happened is that banks looked at these detailed agreements and saw the government was saying: 'If anything happens they will take take care of it.' So the banks said: 'We can fund you.' They used their short-term deposits money to fund these projects. Everything would have gone well if the traffic projections were okay, there weren’t cost over-runs...
Q: But unfortunately the recession hit. Was it a big shock?
A: The questions that we started going back and asking were: Did the consultant do the right thing? Did we believe what he said? Was the funding right? Were the construction cost overruns really genuine or was there some siphoning off of… [short pause] Were the costs of construction being overstated? You can make money at the end or in the beginning by boosting costs marginally? He [the concession holder] can take construction profit or he can take concession profit, there are two profits.
Q: Are you suggesting . . .
A: We don’t know, but when we found all these things happening. We found there were quite a few things that were not right; first the traffic projections were not right with the exception of North-South highway [the PLUS highway], which is excellent. All the others were unable to meet their forecast. They should really be public sector projects.
Q: Is there a simple way to tackle Malaysia’s privatization problems?
A: When you look back the problem was very simple. You get money from equity, banks and private debt securities. In the past, banks provided the predominant capital. When the meltdown took place, the banks became affected. So now we are restructuring in favour of private debt securities.
Q: So the underlying plan is to tackle the mismatch of funds?
A: Say, I have a 10-year project, I want to find long-term funds. Unfortunately in Malaysia, the bond market isn’t developed. I want to shift [the process] from the banker to the capital market. But for that to happen, you need infrastructure development of the bond market. You need primary subscribers, a very good efficient secondary market. This is what the Securities Commission is trying to do.
The most developed market is the US. They have a huge economy and so many superannuated funds. We need more saving institutions, other than EPF; we need more long-term funds and we need more liquidity in the [local] debt market.
Q: Tell us about this game plan to nationalize transport projects that had been privatized?
A: We are now saying [such projects] can no longer totally be in the private sector. The amount of revenue that can be collected is limited by the government's desire not to overly burden the public. You need to keep the costs down, it can be subsidized in some way.
Q: Some of these infrastructure projects, such as Renong’s Putra project (Malaysia’s mass transport system) were said to be unbankable from day one.
A: They can be bankable – over a long period of time. You talk about mass transport [system]. That may not be totally bankable, but the banks have funded it.
Q: Is the plan to create a mass public transport system and list that?
A: What we plan to do is to go back and restructure them. We have the asset construction in one area, which has to be government-backed with long-term funding. Insurance companies [can] come in and take an interest here because of their funding structure. Operationally, we franchise it out. The fellow who operates it efficiently, the government may pay him some money to operate it.
It’s no different from Singapore, where the government owns the MRT and someone else operates it. There’s nothing unusual about it. What we are looking at now is the urban transport system. That covers the LRT. We are talking about a multi-model system, where the bus and the trains are linked.
Q: So you buy these assets from both groups – DRB and Renong? Intrakota from DRB-Hicom group and say Putra from Renong?
A: Yes. And we restructure them. All of them are in difficulties. You come back with a new company. We haven’t completed our proposal yet.
