Frankly Speaking: Jul 26-Aug 1, 2010

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Catching up with the competitionMalaysia’s poor record in attracting investments since the 1997/98 Asian financial crisis reappeared like a bad dream at the press launch of the Unctad World Investment Report 2010 last Friday. In examining the key causes, Prof Rajah Rasiah of Universiti Malaya identified three areas of soft infrastructure development in which the country has lagged, and one external factor, namely intensifying competition from its Asian neighbours.

For the record, the three phantoms of Malaysia’s economic decline are its narrow human capital base, low level of synergy between R&D labs and industry and slow build-up in its technological capabilities. From another viewpoint, it is not that Malaysia is not making headway in its skills development, but that other economies are running way ahead.

A crucial dimension, notes UN resident coordinator Kamal Malhotra, is that merely developing a raft of economic policy responses is not sufficient to get to the root of the problem. For solutions to be truly effective, the weaknesses have to be addressed in the context of the country’s political economy.

While Malaysia’s brain gain efforts have not fared well, countries like India and Taiwan have benefited from “brain circulation”, with talent and capital returning after skills development and wealth creation abroad. In India’s experience, this is occurring even in the absence of any government incentive, says Malhotra, and Malaysia must ask itself why its remedies are not working.

Ironically, industry representatives have said plainly that they find it easier to do business in Malaysia than in China, for instance. Legal and administrative systems work better here and intellectual property rights get better protection. Yet, Malaysia does not even appear in the list of top 10 destinations for foreign direct investment for 2008 to 2009, while China attracted US$108 billion in 2008 and US$95 billion in 2009.

The New Economic Model, which aims to transform Malaysia’s fortunes, has almost got through its protracted birth. What remains is to make good on its promise.

Will Selangor really run out of water?Last week, Selangor Menteri Besar Tan Sri Abdul Khalid Ibrahim refuted claims by the federal government that taps in the opposition-run state will run dry as early as 2014.

Khalid and the Pakatan Rakyat state government say, based on their own studies, that water supply will be satisfactory up to 2019.

The Energy, Green Technology and Water Ministry, headed by Datuk Seri Peter Chin Fah Kui, meanwhile says Khalid and his team have got the figures wrong.
The fact is that the National Water Source Report (2000-2050) by the Economic Planning Unit (EPU) was done some 10 years ago, and what was true then may not be so today. It does not seem logical that a 10-year-old study could forecast the many changes that have taken place, such as the large number of illegal immigrants in the country. 

But then again, the fear of Selangor running out of water is not new, and the dates have merely been nudged forward from time to time. If past reports are to be believed, taps in Selangor would have run dry as early as last year. Yes, there were experts who claimed the state would run out of water by 2009 or 2010 if nothing was done to address the high level of non-revenue water (NRW).

These so-called experts were in effect calling for more spending to replace the pipes. But the funds have not come and yet there is no acute shortage.

So, is it a surprise if many do not take claims of water shortage deadlines seriously?

If it is such a priority, why wasn’t action taken against concessionaire Syarikat Bekalan Air Selangor Sdn Bhd (Syabas), which was given the mandate to distribute water and ensure NRW levels are brought down?

At present, the NRW level in Selangor is in the region of 32%. While it is better than the 42.8% when Syabas took over in 2005, it is above the 28% level in 2009, as stipulated in the concession agreement. That is much higher than the 20% or so level in Penang.

Shouldn’t measures be taken to reduce NRW before plans to spend more on the sector go ahead?

It would also be best if all involved concentrate on consolidating the water sector in Selangor and approach the problem from a holistic point of view. We have lost count of the number of times the deal has been postponed. Now there is a warning that Selangor will run out of water if the Langat 2 project does not take off the ground soon. Will this be taken seriously? M3Nergy intrigueThe latest turn of events at M3Nergy Bhd adds to the intrigue of the proposed takeover of the company by parties related to its group managing director and CEO Datuk Shahrazi Sha’ari.

Last Friday, the company announced that the board concurred with the opinion of the financial adviser appointed by the latter that the offer for M3Nergy is not fair, not compelling and does not seem to reflect its underlying value as well as its business prospects.

The opinion by the financial adviser is similar to the view given by the independent adviser to shareholders. This is not surprising, considering that the offer to take M3Nergy private at RM1.85 per share is far short of its net tangible assets, estimated at RM3 per share.

What’s puzzling is that M3Nergy’s shareholding is tightly held, with the Melewar group and parties related to it controlling some 71.41% equity interest.

With such a high shareholding, the board of M3Nergy should rightfully be controlled by the Melewar group and its nominees. To be noted is that the conditional offer to take M3Nergy private has, to date, seen an acceptance rate of 83.29%. This means that some of the units within the Melewar group, or all of them, would have accepted the offer.

So, why isn’t the board happy with the valuation offer? Is it sending a message that it is independent of the view held by the major shareholder?

The offer only becomes unconditional if there is 90% acceptance. Although the date for accepting the offer has been extended to Aug 3, Shahrazi’s bid to take M3Nergy private will be tough, considering that even the board does not agree with the offer.

Normally, when management makes an offer to take a  company private, it cannot be done without the tacit consent of the major shareholder. In this case, were all parties related to the major shareholder agreeable to it?


This article appeared in Corporate page, The Edge Malaysia, Issue 816, Jul 26-Aug 1, 2010