POSITIVELY, bailouts can be a considered remedy to save companies and industries whose demise might have dire metastatic consequences for the economy referred to as “systemic significance”. However, not all bailouts have the same circumstances and conditions. Therefore, policymakers must attach the sensibility tests and robust, strictly neutral, technocratic bailout framework to all government-led corporate bailouts.
Such stern mechanisms are essential to extinguish government-led bailouts’ main moral hazard danger—deterring the incentives and begetting more bailouts. Given that Malaysia’s corruption ecosystem is the only well-entrenched and thriving ecosystem we have, the government bailout moral hazard in our country can have a more explosive metastatic effect over and above any systemic benefits.
Even the international empirical evidence related to government-led bailouts suggests the phenomenon of yet another type of cartel—“bailoutpreneurs”.
Government-led bailouts were found to have lower post-bailout performance reversions than bailouts by other stakeholders (e.g., large owners, banks), and their announcements generate lower announcement returns than nongovernment bailout announcements.
At the same time, politically connected bailed-out companies exhibit significantly worse financial performance than their nonconnected peers at the time of and following the bailout.
Notably, politically connected (but publicly traded) companies are also shown to have higher leverage ratios than their nonconnected peers or, in other words, appear to be particularly favoured by lenders.
And to enclose this mutually beneficial circle, politically connected companies are significantly more likely to be bailed out than similar nonconnected companies.
In other words, the moral hazard risk abundant in the corporate world is multiplied times in the presence of government links and involvement.
In the corporate world, thanks to the presence of equity investors, the bondholders (entitled to fixed payments irrespective of the actual cashflows) are only concerned about the cash flows related to servicing the bond. On top of that, they are more inclined to extend credit to politically connected companies, possibly simply by coercion or being incentivised by the prospects of economic favour from the government or the eventual bailout. So by using public money to provide a lending facility that is more likely to be used to refinance or continue making interest payments on their existing debts, the government is bailing out the companies’ creditors.
Note how in the recent Sapura issue, the company is reported to be “saddled with RM10.3 billion in loans from nine[!] banks”, which is “more than the combined profits of all banks in Malaysia”.
Furthermore, once a company is in financial distress, the stockholders are tempted to play games at the expense of their creditors. For example, the stockholders will be less inclined to invest in a relatively safe (low-return) but the investment-intensive project (error of omission) because even if the project succeeds, the proceeds will be used mainly to pay the debtholders. Instead, they would be more inclined to take the money out, for example, to pay dividends. At the same time, they would be motivated to bet the creditors’ money on risky (potentially high-return) projects (error of commission). So, how does the government’s readiness to bail out (transfer public resources to wealthy risk-takers) adds to this hazard in government-linked companies?
Consistently, in the same Sapura Energy case, the group CEO is quoted to attribute “the decision [by the previous management] to aggressively bid for projects after the oil crash in 2014” to the current astronomic insolvency problem faced by the company.
One of the critical questions to be addressed before even considering a bailout is whether the moribund company is distressed only financially or also economically. In other words, whether there is a reasonable assurance that the company would be viable as a going concern, provided there is sound intervention. So that the rescuer oneself can recoup its investments in Net Present Value (NPV) terms or, at least, breakeven if we speak of the government—to safeguard the public good rather than possible narrow crony interests.
The bailed-out companies often have a variety of chronic financial problems inflicted by previous management waste, power abuse and reckless decision-making that cannot be salvaged despite an injection of public funds and as a result the problems are often recurring that may require more public funds to be injected afterwards.
While finding a successful example of the government-led bailout in Malaysia with companies being stabilized and invested peoples’ money recovered is pretty challenging, there is a galore of inefficient examples with completely opaque information on recouping invested public funds (Tabung Haji, Felda, Proton to name the loudest few).
In light of all the above, the former MP Rafizi Ramli’s call to enact a law that would strictly regulate public funds to bail out companies is timely and urgent before another whopping amount of peoples’ money is committed to the financing of recklessness.
The following are recommendations of what such a rigid bailout framework should possibly include:
- Requirement for and delineation of a transparent process of systematic assessment to certify how “systematically significant” and economically viable the bailed-out companies/industries are to qualify for the bailout in the first place, which can include but is not limited to the following: the number of jobs on the line, the number of investors among the public trusts funds, partners and other stakeholders negatively impacted etc. all with the solid number estimates backed by data;
- Requirement for a thorough forensic audit of book-keeping, capital management, governance structure, approval process, vendor payment process, etc;
- Attachment of a sound business turnaround/restructuring plan to a bailout package in line with company and industry prospects and NPV projections which will represent the conditional requirements, not recommendations, of how business model, mode of operation, corporate governance structure etc have to be transformed to qualify for government support;
- Tying the bailout to a moratorium on dividend payments or share buybacks as well as bonuses and other type of remunerations to the top management and board of directors for the time while the company is benefiting from the government support;
- Curbing the excessive executive pay;
- Revision of long-term incentive plans and bonuses;
- Requirement of payroll maintenance;
- Demand that all creditors receive haircuts;
- Ousting the management who presided over the company descend and found guilty of mismanagement (that is why forensic audit is important) and imposing claw backs on their salaries and remunerations;
- Stipulation of the debt relief as the preferred bailout mechanism versus cash injections, and if cash injection then only in the form of a loan with strict covenant conditions to minimise the risk of misappropriation.
In summary, such framework shall deter moral hazard and protect recouping the government investment.
However, it also should not be viewed in isolation from the broader cohesive governance reforms and strategic planning. For example, how does the involvement of nine banks in Sapura Energy mess correlate with our country’s Sustainable Development Goals (SDG) agenda? Do we have SDG criteria in plans and blue prints only? Is there any regulation to control banks’ risk exposure to the climate change risks? If yes, how was it circumvented?
Malaysia has truly limited public resources. And, speaking of “systemic significance”, apart from enacting regulations, policymakers need to shift from investing in and resquing those “too big to fail” projects to focusing on micro-investments instead. Rather than financing wealthy and reckless risk-takers, who don’t even bet their own money, use the same billions of ringgit to provide a helping hand to our Micro, Small and Medium Enterprises, who laboriously and honestly risk their entire livelihood. Cumulatively, this might have much greater systemic impact to Malaysia’s economy!
Dr Rais Hussin and Dr Margarita Peredaryenko are part of the research team at EMIR Research, an independent think tank focused on strategic policy recommendations based on rigorous research.
** The views and opinions expressed in this article are those of the author(s) and do not necessarily reflect the position of Astro AWANI.
Astro Awani
Mon Apr 11 2022
Policymakers must attach the sensibility tests and robust, strictly neutral, technocratic bailout framework to all government-led corporate bailouts. - REUTERS
Debut Sukan Olimpik 'langkah besar' dalam karier Nurul Izzah Izzati
Bintang muda berbasikal trek negara Nurul Izzah Izzati Mohd Asri menyifatkan penampilan sulungnya pada Sukan Olimpik 2024 di Paris sebagai 'langkah besar' dalam kariernya.
Raja Salman jalani pemeriksaan kesihatan di Hospital Jeddah
Pemeriksaan itu yang diadakan pada Rabu (24 April), dijangka berlangsung beberapa jam.
Dua maut kereta terbabas dan terbalik di Kuala Krai
Kedua-dua mangsa tidak sedarkan diri dan mangsa tersepit berjaya dibawa keluar dari kereta pada jam 4.11 petang.
Penganjuran Hari Perpaduan di sekolah bantu tingkat persefahaman antara kaum - Saraswathy
Penganjuran Hari Perpaduan di sekolah menjadi platform terbaik untuk meningkatkan semangat perpaduan dalam kalangan pelajar sekolah, kata Timbalan Menteri Perpaduan Negara K. Saraswathy.
MITI: RM58.91 juta diagihkan kepada PKS pada suku pertama bagi automasi dan pemodenan
Jumlah peruntukan bagi pinjaman mudah itu ialah RM150 juta untuk 30 syarikat dalam sektor pembuatan dan perkhidmatan berkaitan pembuatan.
2,214 stesen pengecas EV dipasang, MITI kekal sasaran 10,000 menjelang 2025
Ia sebahagian komitmen MITI untuk membangunkan infrastruktur pengecasan EV dan mencapai sasaran 10,000 titik pengecasan menjelang 2025.
Harimau Muda kurang 'kerja rumah' hadapi Piala Asia B-23 2024 - Penganalisis
Menerusi pemerhatian di laman media sosial, timbul cakap-cakap netizen yang lebih terarah kepada perjalanan kesemua pemain negara kendalian Juan Torres Garrido ke Qatar sekadar 'makan angin'.
UMNO aktifkan 'war room' bantu calon Kerajaan Perpaduan - Ahmad
Ahmad berkata UMNO juga akan melaksanakan kempen bagi membantu calon berkenaan dengan bersungguh-sungguh.
Pelepasan air terawat Fukushima digantung kerana terputus elektrik
Pelepasan air radioaktif terawat ke laut dari loji janakuasa nuklear Fukushima yang lumpuh digantung pada Rabu berikutan gangguan bekalan elektrik separa, kata pengendali loji itu.
Prabowo rasmi diisytihar Presiden Indonesia
Suruhanjaya Pilihan Raya Umum (KPU) secara rasmi akan mengisytiharkan Prabowo Subianto sebagai Presiden Indonesia dipilih, dalam satu majlis pada Rabu, seperti yang dijadualkan.
Sapura Energy terima kelulusan mahkamah bagi penstrukturan semula hutang
Perintah sekatan itu akan membantu syarikat skim untuk terlibat dengan pemiutang tanpa diganggu ancaman litigasi.
Sapura Energy Mexicana diisytihar muflis oleh Mahkamah Insolvensi Mexico City
Susulan Pengisytiharan oleh mahkamah Mexico itu, Victor Hugo de la Cruz Caballero dilantik sebagai pelikuidasi berkuat kuasa 29 Feb 2024.
Bursa Malaysia dibuka rendah, sentimen berhati-hati walaupun prestasi Wall Street lebih baik
Pada 9.10 pagi, FTSE Bursa Malaysia KLCI (FBM KLCI) susut 4.99 mata, atau 0.34 peratus kepada 1,435.12 daripada 1,440.11 pada penutupan dagangan Rabu.
Keuntungan bersih Sapura Energy meningkat kepada RM146.09 juta pada suku pertama
Ia meningkat 58 peratus kepada RM146.09 juta daripada RM91.93 juta pada suku yang sama bagi tahun kewangan sebelumnya.
Berita tempatan pilihan sepanjang hari ini
Berikut adalah yang paling menjadi tumpuan sepanjang Isnin, 29 Mei 2023.
Petronas nafi spekulasi penggabungan Sapura Energy, MHB
Sebarang pertimbangan berkaitan pelaburan atau penjualan dalam kumpulan Petronas adalah sentiasa dan akan terus berpandukan kepada kelulusan di peringkat Lembaga Pengarah.
Bursa Malaysia dibuka tinggi
Pada 9.10 pagi, FTSE Bursa Malaysia KLCI (FBM KLCI) meningkat 0.49 mata kepada 1,403.47 daripada 1,402.98 pada penutup Jumaat.
Sapura Energy Lantik Wan Mashitah dan Nur Iskandar sebagai pengarah
Wan Mashitah Wan Abdullah Sani dan Datuk Nur Iskandar A Samad dilantik sebagai pengarah bukan eksekutif bebas berkuat kuasa hari ini.
Kerugian bersih Sapura Energy pada tahun kewangan 2023 berkurangan kepada RM3.20 bilion
Pada suku keempat 2023, syarikat mengurangkan separuh kerugian bersihnya kepada RM3.30 bilion daripada RM6.77 bilion.
Bursa Malaysia dibuka rendah, pelabur pantau perkembangan krisis SVB
Pada 9.10 pagi, penanda aras FTSE Bursa Malaysia KLCI (FBM KLCI) susut 19.08 mata kepada 1,414.00 daripada 1,433.08 pada penutup Jumaat.