Malaysian Maverick: Mahathir Mohamad in Turbulent Times Read online

  ...told us that there was no money left with UMNO, not a single cent. So after that I had to go around tracing the shares, which were held by different people. You see, in those days they gave shares for people to hold on because they didn't have any system of trustees, or anything like that. And when these people died, their children claimed that their father's money didn't belong to UMNO. So I had a tough time gathering information on who had the money. And twice I had to do that.[27]

  Dr. Mahathir said the assets were recovered on both occasions by tracking and approaching individuals believed to be holding party-owned shares and persuading them to return the scrip. "Eventually, I collected practically all the money that belonged to UMNO," he said.[28] According to Daim, Tengku Razaleigh and others, the missing shares were in Utusan Melayu Press, which Tunku Abdul Rahman had taken over for the party in 1961. Most of the shares, though not all, were recovered, they confirmed.

  Daim affirmed that UMNO was completely broke when he took over management control of the Fleet group in 1982. In fact, he said the group was actually RM500 million in debt as a result of a poor business and investment strategy.[29] His statement was surprising, since an independent study later by Terence Gomez found that Fleet under Tengku Razaleigh had proceeded cautiously and made few major purchases, and there was little evidence of debt.[30] UMNO borrowed heavily for its new headquarters, but that was through Khidmat Bersatu Sdn. Bhd., a company set up to handle the building project, and the first of two major bank loans was obtained only in 1983.[31] It was public information that Fleet Group, with holdings in 23 companies, showed a profit of RM15.7 million in 1982. Daim said the problem was in Fleet Holdings, whose financial results were not published because it was an exempt private company. Although it had paid-up capital of only RM1 million, he said, Fleet Holdings had borrowed hundreds of millions of ringgit from banks only too eager to lend to UMNO. Daim contended it was almost impossible to make a profit: With so little capital, the company had to borrow heavily to acquire assets and use all its earnings to service debt and repay loans.[32]

  Tengku Razaleigh scoffed at Daim's claim. Fleet had borrowed from a bank only once for investment, to purchase the Straits Times shares from Singapore, and had repaid the loan within two years from the profit on floating 49 per cent of the shares, he said. "What is that RM500 million needed for?" said Tengku Razaleigh. "Fleet Holdings was making money," he said, and held shares in only two companies, New Straits Times Press and Bian Chiang Bank.[33]

  Confidential UMNO financial accounts, professionally audited and obtained by the author in the course of his research, cast grave doubts on the version propagated by Dr. Mahathir and Daim.[34] The accounts, which did not include Fleet's operations, confirmed that Daim inherited a party in sound financial condition when he became treasurer in 1984. The top secret UMNO Political Fund — which both Dr. Mahathir and Daim specifically said was empty[35] — at 31 December 1983, actually had assets of RM88.6 million and no liabilities, including RM39.8 million on fixed deposit and RM6.8 million cash in the bank. Investments in nine publicly listed and three unquoted companies, Fleet Holdings among them, totalled RM5.9 million. That figure seriously understated their worth since the investments were declared at cost. For example, the stakes in the public companies, purchased for a collective RM4.5 million, had a current market value of RM28.5 million. The UMNO Political Fund contributed RM25 million towards the construction of the new party headquarters in 1983, in the form of an interest-free loan. After receiving dividends, interest and donations, the fund finished the year RM3.5 million in the black, according to the accounts certified as "true and fair" by a local auditing firm.

  Regardless of the controversy, Fleet under Daim abandoned Tengku Razaleigh's passive approach to investing. With instructions from Dr. Mahathir to shake up the group by tightening management and financial control and getting the companies "really moving",[36] Daim sought to turn a profit in a hurry. "My role was to build up the Political Fund, as well as make sure the business activities generated income," he said.[37] Fleet adopted an aggressive growth strategy that saw it quickly add companies in diverse and unrelated fields. Fleet snapped up stakes in TV3, the country's first private television station, the hotel and real-estate group, Faber Merlin Malaysia Bhd., and food retailer Cold Storage (Malaysia) Bhd., all publicly listed, and Commercial International Merchant Bankers Bhd. By the mid-1980s, the number of companies had almost doubled, extending the Fleet group's reach into construction, plantations and management services as well as print and electronic media, telecommunications, banking, insurance, retailing, property and hotels.[38]

  Typically, holdings were acquired "by a torrent of rights issues and share swaps and rarely involved cash outlays by companies associated with UMNO".[39] At the same time, many of the companies acquired during Tengku Razaleigh's tenure were spun off in a series of share swaps to the subsidiary New Straits Times Press. Inter-group sales created a convoluted web of highly-leveraged concerns. In the case of the acquisitions, Fleet's holdings in listed and unlisted companies were often pledged as collateral, and assets were shuffled among different listed companies held by the entire group. Although Daim denied it,[40] critics contended that in many cases the stakes purchased by Fleet were either overvalued or the shares offered were undervalued, allowing some individuals associated with UMNO to make large profits.[41]

  Apart from what has been called Daim's "paper entrepreneurism", defined as the relentless pursuit of restructuring opportunities in search of a quick profit at the expense of actual production, there were other distinctive features of Fleet's acquisitions. Many of them were connected with Daim's family companies, or with his responsibilities as head of Peremba, and they were in his favoured property development.[42]

  From 1982 to 1984, Daim's obligations were split three ways. He was building his own conglomerate at a rate that would make him the richest Malay in the country. As chairman of Peremba, he was serving the government while also acting as an unofficial adviser to Prime Minister Mahathir. And as chairman of the Fleet group, he was UMNO's trustee. "I am a man who can do many things at the same time," Daim once said. "I can put every one of them in separate compartments."[43] But in an academic study of Daim's "triple capacity", Terence Gomez concluded that Daim did precisely the opposite: He "apparently had no qualms about mixing his personal business interests with those of the companies entrusted to him".[44]

  Interlocking directorships indicated that Daim had a few common nominees, who were assigned by him to manage the companies under his control. Mohamed Desa Pachi and Abdullah Mohamed Yusof, the most prominent, were appointed by Daim as directors of Fleet Holdings and Fleet Group. Desa was also a director of Fleet Group's main publicly listed companies and most of Fleet Group's other private limited subsidiaries. He was also a director of Peremba, and sat on the board of two of Daim's family companies, apart from being a director of publicly listed companies in which Daim had a significant stake. He was a director of several major government-owned companies as well. Abdullah, a lawyer, was also a director of Peremba, and a director of some of Fleet's listed and private companies. Younger associates, Daim's boys, also served as nominees: Halim Saad, Mohamed Razali Abdul Rahman, Wan Azmi Wan Hamzah and Tajudin Ramli.[45]

  Daim stoutly defended his business methods:

  If I think the government can make money with me, why not? I mean, there's transparency, particularly as these are listed companies in which I was involved, or where Peremba was involved. Where some group want to sell, and Peremba doesn't want to buy, since I have the details of the company and I think it is a good investment for my family, why not? If everybody is going to make money, why not? So I see no reason why it is a conflict, so long as everybody declares their interest.[46]

  One of the government's first privatizations, the granting of a licence in 1983 for TV3, showed Daim's juggling act. The licence was given to Fleet Group, which took 40 per cent of the equity, while 10 per cent went to two of Daim's companies and
10 per cent to the holding company of the Malaysian Indian Congress, a partner in the ruling coalition. Another example was the use of a Daim-owned company, Daza Sdn. Bhd., to purchase the outstanding, Singapore-owned 20 per cent of New Straits Times Press for Fleet, with the negotiations, including bank loan commitments, conducted by the general manager of Peremba.[47] In another case, Fleet-invested Faber Merlin, in which Daim had a major equity stake, bought subdivided land from his main publicly listed company, while he was in control of both companies. Only a month earlier, Fleet had been allocated all the special bumiputra convertible unsecured loan stock in Faber Merlin by the government. Later, Fleet acquired Daim's stake in Faber Merlin.[48]

  Daim mired himself deeper in controversy when he became finance minister in 1984 and accelerated Dr. Mahathir's privatization programme. Although he quit Peremba and pledged to put his businesses in a blind trust, "Daim brought to government a view that no longer saw the spheres of government, party or private interests as distinct entities", wrote Peter Searle, an academic specialist in Malaysian business. "For Daim national, political and private interests might be pursued simultaneously or in tandem...".[49] Daim himself described the situation as "commonness" rather than a "conflict" of interests.[50]

  As the economy slumped in the mid-1980s, property prices sagged, leaving Fleet with a large quantity of overvalued real estate and shares that had lost a significant percentage of their market value. Fleet Group, which recorded a RM27.3 million profit in 1984, plunged into the red, losing RM20.3 million in 1985.[51] The company's financial statement for the year ended 31 August revealed a "shocking state of affairs".[52] The auditors qualified the accounts on the grounds that the ability of the company and the group to continue operating depended on the success of various steps taken by the directors. The balance sheet indicated that current liabilities exceeded current assets by about RM222.3 million. A significant portion of the company's investments — in listed and unlisted subsidiaries, amounting to RM178.4 million — had been pledged to financial institutions to secure bank facilities for Fleet Holdings. The company also owed Fleet Holdings about RM235.6 million. And Fleet Holdings itself had incurred losses, though as an exempt private company it did not report the details.[53]

  By 1987, Fleet's debt had grown — or diminished, if one accepted Daim's figure of RM500 million debt in 1982 — to RM343.5 million.[54] To stay afloat, Fleet Group was forced to sell some of its best assets to New Straits Times Press, in which Fleet was the major shareholder. In other words, the most profitable arm of Fleet Group was used to purchase its holding company's major subsidiaries.[55]

  UMNO was also seriously over-extended on another front. In 1981, the party had gone ahead with the construction of its 42-storey headquarters, together with a convention and exhibition facility, at a cost of more than RM300 million. It was built on a 3.6 hectare site on which Tengku Razaleigh once had an option, which he had been persuaded to relinquish to UMNO at cost.[56] Originally, UMNO planned to finance the Putra World Trade Centre, as it was called, with a RM200 million bank loan secured against the land. According to projections presented to UMNO's Supreme Council, which cleared the investment, cash flow from office and hall rentals would pay off the debt within 17 years.[57] But after drawing down the first portion of the loan in 1983, UMNO's vehicle, Khidmat Bersatu, defaulted, failing to pay interest or principal after 1984, until at least July 1988, when court records revealed the dire state of affairs. By then, according to the records, UMNO owed Bank Bumiputra nearly RM300 million and other banks about RM86 million, while incurring RM61,000 a day in additional interest.[58] In the absence of any plausible explanation, analysts suspected the rental income was diverted to other UMNO investments, or to service debt.

  UMNO's lifeline, shrouded in the usual secrecy, took the form of financially beleaguered, publicly quoted United Engineers (Malaysia) Bhd, an engineering and construction company. Although it had suffered five straight years of losses, had never built a major road or bridge and was nearly insolvent, United Engineers was tentatively awarded a RM3.42 billion government contract in late 1986 to complete 494 kilometres of the north-south highway stretching from Thailand to Singapore. A consortium led by the company — Projek Lebuhraya Utara Selatan Bhd., known as PLUS — would operate the privatized road network and collect tolls for 30 years along the entire highway. With tolls to be increased regularly, revenue across the life of the concession would total RM17 billion, United Engineers estimated, though the political opposition put it at RM54 billion. In addition, the government provided RM1.65 billion in "supportive construction loans", as well as financial safeguards against exchange rate fluctuations on foreign commercial loans, or a shortfall in toll collections. In brief, PLUS was guaranteed profitability, securing UMNO's financial base. Later, toll roads were expanded to cover much of the country, becoming highly unpopular in many cases.

  The initially-unpublicized connection with UMNO was through the controlling shareholder in United Engineers, an equally obscure concern with a money-losing record called Hatibudi Sdn. Bhd. Formed in 1984 with a registered address in Daim's office, Hatibudi at one stage listed two of Daim's prot&eaute;gés, Halim Saad and Mohamed Razali Abdul Rahman, as directors and shareholders. After initiating a financial restructuring package that paved the way for Hatibudi to take over United Engineers, Razali resigned from the board. His shareholding in Hatibudi was transferred to Halim, who was also appointed chief executive officer of United Engineers. Public records showed that all but one of Hatibudi's shares were held by Halim.[59]

  The UMNO link remained hidden until Works Minister S. Samy Vellu, under fire in Parliament over the contract, apparently inadvertently identified Hatibudi as an UMNO-owned company. He said Hatibudi's "trustees", by virtue of their standing in the party, were Prime Minister Mahathir, president of UMNO; Deputy Prime Minister Ghafar Baba, deputy president; Finance Minister Daim, treasurer; and Agriculture Minister Sanusi Junid, secretary general. In an affidavit submitted in a subsequent court case, Halim said he held his Hatibudi shares "in trust for the ultimate beneficial owner, UMNO".[60]

  Exposed, UMNO political leaders acknowledged that United Engineers was being used to pay for the Putra World Trade Centre. "In the case of the north-south highway project, it is a means of UMNO solving its problems by repaying loans taken for the new UMNO headquarters building", said Najib Razak, minister of culture, youth and sports. In response to critics who questioned the probity of the case, Dr. Mahathir said, "We agree...but who is going to pay the RM360 million for the UMNO complex?"[61]

  Lim Kit Siang, the opposition leader, delayed the formal awarding of the contract through a series of legal actions and a report to the police alleging corruption. He portrayed the choice of United Engineers as political favouritism that amounted to yet another financial scandal in a series that had plagued the Mahathir administration. Lim said the participation of the four UMNO trustees in a cabinet meeting that decided to privatize the highway was a criminal offence under the Emergency (Essential Powers) Ordinance, which prohibited any elected or public official from using "his public position or office for his pecuniary or other advantage".[62] By the time the Supreme Court ruled narrowly against him in early 1988, however, the hapless Lim and his lawyer, Karpal Singh, another opposition legislator, were behind bars, rounded up with dozens of other alleged troublemakers in Operation Lalang the previous year.

  But before UMNO could secure its fresh source of funds, political turmoil within its own ranks put the coveted prize temporarily beyond reach. A High Court declaration on 4 February 1988 that UMNO was an illegal organization triggered a confused scramble by the competing Mahathir and Razaleigh factions to reconstitute the party and claim its assets. After Dr. Mahathir out-manoeuvred his rival and registered New UMNO, the government went ahead and signed the contract with United Engineers in March, despite uncertainty over the legal status of UMNO's 33.3 per cent stake in the company.[63]

  The trouble was that with UMNO outlawed, the
party was required by the Societies Act to place all its assets with the government's Official Assignee, for safekeeping or eventual liquidation. Dr. Mahathir's followers were able to counter legal moves that would have required them to disclose details of UMNO's many businesses, not the least embarrassing aspect of which was their bleak financial position. Liabilities were "massive", Daim admitted later, with RM600 million in borrowings, and interest at 10 per cent amounting to RM60 million a year.[64] Bank Bumiputra had received High Court approval to auction the Putra World Trade Centre and the land on which it stood, though the sale was postponed while UMNO tried to renegotiate a refinancing plan with its creditors. It was a magnanimous gesture, considering that UMNO had failed to make any payments for years, though not surprising, since UMNO effectively controlled Bank Bumiputra; in Daim's words, "As long as UMNO is the government, the bank will not disturb you."[65] The need to recover the assets gained added urgency with the approach of a general election. It had to be held by mid-1991, and would require a bigger campaign war chest than usual if Tengku Razaleigh's camp, as expected, joined the opposition ranks.

  Dr. Mahathir exploited the same crucial advantage that had enabled him to register a successor party to UMNO with a similar name ahead of his opponents. The Official Assignee's office, like the Registrar of Societies, was part of his home affairs ministry. Operating in secrecy, the Official Assignee sold UMNO's Hatibudi interest in United Engineers in June 1989, though it remained publicly unknown until the following month, when relatively small, publicly listed Time Engineering Bhd. made an announcement to the stock exchange. Time Engineering revealed it had acquired RM37.5 million of convertible unsecured loan stock in United Engineers from the company that obviously got it from the Official Assignee: Hatibudi Nominees Sdn. Bhd, created in 1987. Not only did the company's name closely resemble that of the former trustee of UMNO's holdings in United Engineers, but its two shareholders, Halim Saad and Anuar Othman, were also directors of the original Hatibudi, and of United Engineers. In a complex share-swapping arrangement, Hatibudi Nominees, the controlling shareholder in United Engineers, took over Time Engineering, which was given a RM400 million contract to provide electrical and communications equipment and steel guardrails for the north-south highway project. The bottom line was that the Mahathir faction had regained UMNO's coveted source of recurrent earnings — its "golden goose", as one party legislator called it — while also adding another company to the stable.[66]