Wealth distribution must take precedence

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THE first two companies held by Khazanah Nasional Bhd and Permodalan Nasional Bhd (PNB) that are to be sold to bumiputera entrepreneurs have been identified.

The question now is whether the eventual sale via open tender will result in fairer distribution of wealth, or its further accumulation by those who are already rich and successful. Ideally, it should be the former and not the latter. Wealth within the bumiputera community should not be concentrated in the hands of the few.

To get the most able and deserving declared the winner and not necessarily the highest bidder with the best technical bid is where the real challenge lies. It must be re-emphasised that this whole exercise of transferring Khazanah's and PNB's assets must result in wealth distribution and not accumulation. That is what the bumiputera community wants and that is the way it should be.

Government investment arm Khazanah will sell its entire interest in wholly owned subsidiary STLR Sdn Bhd — a property investment holding company with land in the premier residential area of Bukit Tunku in Kuala Lumpur.

Meanwhile, PNB — the national equity corporation and guardian of bumiputera corporate shares — will part with its 71.14% equity in FEC Cables Sdn Bhd, a manufacturer of electrical and telecommunication cables.

The sale of these two companies is part of Khazanah's and PNB's strategy of assisting the government in encouraging entrepreneurship and expanding corporate ownership among the bumiputera by divesting their non-core businesses. This follows the announcement by Prime Minister Datuk Seri Najib Razak on Feb 9 at the Bumiputera Agenda Action Council meeting that Khazanah and PNB would each initially sell five of their non-core assets.

The move is also in line with the long-term key objective of the government — which actually started with the New Economic Policy (NEP) in 1970 — of creating a viable bumiputera commercial and industrial community (BCIC), which somehow or other has not progressed as expected.

For STLR, Khazanah said the divestment would involve a three-stage bidding process — pre-qualification, indicative bid and binding bid — conducted in a transparent and merit-based manner and presided over by an independent evaluation panel.

The potential buyer should fulfil several pre-qualifying criteria, such as being a 51% bumiputera owned and managed company with a good financial record and experience in the relevant sector. Other criteria include possessing a viable business plan, strong entrepreneurship and business acumen and offering the best bid for value creation. The new shareholder of STLR would be selected on both financial and strategic considerations.

For FEC, PNB has outlined its pre-qualification criteria, among which is that the bidder must be a bumiputera individual or company and must demonstrate a track record of strong entrepreneurship and management capabilities in a related business.

The bidder must acquire the entire FEC shares held by PNB and then redeem the redeemable cumulative preference shares held by PNB Capital Holdings Sdn Bhd,and demonstrate financial capability to complete the acquisition. The successful bidder shall develop the company and ensure that its equity stake in FEC does not fall below 51% for a period of five years from the completion of the date of acquisition.

These criteria are considered fair but selection should not be a straightforward process that does not take into account the wealth distribution factor. To maintain fairness, additional standard criteria should be included, barring those who are already rich and successful — let's say, bumiputera individuals whose assets exceed RM500 million — from bidding.

In fact, for smaller companies or businesses that PNB and Khazanah want to dispose of, that threshold should be even lower; for example, disallowing those with assets exceeding RM100 million from bidding.

Free-for-all open bidding has its merits — one can select as winner the individual or company that submits the best financial and technical/expertise bid. But this route would give those with the strongest financial muscle and most experience the upper hand and inadvertently result in wealth accumulation rather than distribution. It will also not be in tune with the NEP objective of expanding the BCIC community and creating new entrepreneurs.

In recent times, two of Khazanah's major divestments — Pos Malaysia Bhd and national car manufacturer Proton Holdings Bhd — have gone to the DRB-Hicom group, controlled by billionaire Tan Sri Syed Mokhtar Al-Bukhary. While there is no dispute over the transparency of the sales of these assets or Syed Mokhtar's ability to make these companies more efficient and profitable, many within the community want the government to ensure a fairer distribution of wealth, especially when it comes to the sale of smaller companies.

Another criterion or condition that should be imposed on the winner is that these companies and assets should remain in the hands of the bumiputeras, akin to the status of Malay reserve land. Future sale of a controlling stake should only be to other bumiputera companies or individuals. This is the only way that the 30% bumiputera corporate equity target of the NEP — set way back in 1970 and which should have been achieved by 1990 — can eventually be met. Bumiputera equity in the corporate sector — mostly held by institutions such as PNB and Tabung Haji — now stands at about 22%.

There have been many cases in the past where government-linked companies (GLCs) sold their businesses or land to politically well-connected bumiputeras in the name of expanding the BCIC. However, these assets were not developed but later sold to non-bumiputera companies for a hefty profit. The "Ali Baba-nisation" of such assets should not be allowed to continue.

In the case of the sale of PNB assets, this condition — that the companies remain in the hands of the bumiputeras — is more crucial as these assets are already bumiputera-owned through funds invested by millions of its unit trust holders. Allowing the winning bidder to dispose of these assets to non-bumiputera companies in the future will be a self-defeating exercise as far as the NEP is concerned.

In his column, Joseph Stiglitz writes about the US having the highest inequality in all the advanced countries, with the top 1% of US income earners capturing 93% of the country's income growth (see Page 68). What we want is not only to prevent the income gap between bumiputeras and non-bumiputeras from widening but also to narrow the gap between rich and poor bumiputeras.

That is why fairer wealth distribution must almost always take precedence over continued wealth accumulation by the selected few.

Azam Aris is deputy editor-in-chief at The Edge. This story appeared in The Edge on June 11, 2012.

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