Inevitable end of 1MDB and crony capitalism

By Medecci Lineil

Crony capitalism is about a company which use coercive powers of government to gain money, market and resources that would not otherwise be achievable in a free market.

1Malaysia Development Berhad (1MDB) is the most troubled crony capitalist company by far.

According to its website, Prime Minister Datuk Seri Najib Razak is the chairman of board of advisers who has been given enormous power but it is impossible for any one person, no matter how wise he is, to anticipate the consequences of 1MDB’s business policies.

Austrian economist Friedrich Hayek once said: “The curious task of economics is to demonstrate to men how little they really know about what they imagine they can design”.
1MDB has been going on for several years and the consequences finally come as the total worth of so-called assets of RM51.4 billion crony capitalist will gradually come to an end, hopefully.

1MDB is now come under fire mainly because of its profitability, accumulating mountain of debts, controversial business transactions which eventually will become a financial burden to us.

Last week, Moody’s Investors Service analyst Christian de Guzman said there was a worry that Malaysia’s fiscal consolidation may be derailed should the government be forced to assist 1MDB financially.

“We know that support is possibly forthcoming, in fact support has already come in the form of a line of credit to 1MDB earlier this year. The question we’re asking ourselves is if the magnitude of support will eventually derail the trend of fiscal consolidation and that may cause us to re-look outlook” he said.

I think it is fair to say that this is the price we must pay for making huge mistakes by letting our government grow without bounds, extending its tentacles into every aspect of our economy.

And we have allowed crony capitalism like 1MDB to grow along with it.

Ironically, politicians and civil society groups, including the prime minister himself, suggest we need to increase government powers and oversight via Cabinet, Public Accounts Committee (PAC) hearings in Parliament, auditor-general, police and Malaysian Anti-Corruption Commission to investigate the scandal.

Why are we repeating the same mistake again? Why did we not think that the government is the very thing causing the scandal? Too much technical details are being studied until we forget the most fundamental aspect that governments are inherently poor at running a business.

In my view, increasing government power will give us a stabilisation of the 1MDB scandal politically. Nothing more than a public relations exercise. Nothing changes in principle.

For example, other GLCs under Khazanah Nasional are bound to offer no explanation to PAC on what is happening in their companies administratively, operationally or their investments despite making terrible losses e.g klia2, according to PAC.

Back to 1MDB, we should urge the board to answer proactively to their critics, stakeholders, rating agencies and investors. That is the moment needed because errors and mismanagement have been made and more importantly, how will the market respond.

We have seen a mere speculation of purchasing the power assets under 1MDB caused Tenaga Nasional Berhad’s shares to lose some RM6 billion in value over the last six trading days.

The nervousness surrounding 1MDB continues when a report by Singapore Business Times said a consortium of banks led by Deutsche Bank has asked for their US$975 million loan to be repaid four months ahead of its due date.

Even though the Finance Ministry believes it is possible to restructure 1MDB, the moment must eventually come when no further extension of government assistance is possible.

Look at Malaysia Airline System Berhad, after so many denials, injection of funds and turnaround plans over the course of 22 years, finally the company will cease to exist.

Like it or not, we must let market corrections take place in 1MDB. The story of crony capitalist always ends with crash! It’s inevitable.

First published at The Malaysian Insider on June 2, 2015.

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