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Friday, November 26, 2010

The big rod on Syabas


Let's just be blunt: The Eurozone's bailout program has failed. It's not solving the underlying causes of the European debt crisis; it might even be making matters worse.

The above is a quote I read on an assessment of what happened in Ireland recently. Ireland is seeking out a bailout from the European Union and IMF.

So let's also be blunt. The government shouldn't be bailing out private businesses even if they are owned by UMNO supporters who went on to form BAPAK. Rozali Ismail is a fat cat happy and contented. Mazlan Aliman is lean and has got that dangerous hungry look.

Syabas or Puncak Niaga does not need an Ireland style rescue. If the government steps in, it should go in IMF style. Bring the big rod and don't be shy using it. Replace Rozali Ismail for instance would be a good initial measure.

The text book strategy, perhaps dished out by people at Khazanah which is essentially Mckinsey-esque through and through so far has been simple: Put up rescue funds, demand reforms in the management and hope those steps rebuild confidence in financial markets that people like Syabas can pay back their giant debts.

This kind of approach is meant first and foremost as a confidence-building measure only, so bondholders could be assured that enough cash was at hand to make them whole, no matter what happened in Selangor or elsewhere for that matter.

Why will this bailout strategy fail? Because investors don't believe it is viable. The strategy is predicated on the notion that the companies receiving bailouts can fix their finances sufficiently enough to restore confidence in their ability to pay their debts. That means Syabas and whoever leads the consortium have to implement steep budget cuts and other austerity measures. Clearly they have been incapable of doing so- they have been spending like wild men, that is why they are facing this problem now. Gentle persuasion is not working.

How about cutting Rozali Ismail's humongous salary first if he stays on? He gets paid over RM 400k a month and he sets up a fund for those who have overpaid to contribute to help out those who can't pay. Why doesn't he volunteer cutting his salary by 50% and give it to the fund? Or give him a golden handshake?

But if we do that (the gentle persuasion or feather teasing method) it will only further depress an already depressed business. Even if UMNO politicians can muster the political will and authority to sustain those policies – and that's a big if -- there's no guarantee they will work to turn the business around. In fact, the bailout-mandated cuts, by suppressing growth, may make it even harder for Syabas and it cohorts to repair their financial position and pay their creditors. So investors don't believe that the bailout programs are ensuring they'll get their money back. That keeps the fear of eventual debt restructurings, in which bondholders share the losses, or even worse, defaults, very much alive.

The instinct of investors under these circumstances is to sell the bonds of weak businesses. Stopping this cycle of fear and crisis won't be easy. Investors have to be convinced that their money is safe as Syabas bonds.

How can we correct the situation? The government moves in to discipline the errand boys. It has to address the problem with more than budget cuts and bailouts. Syabas, and the others all have to get their fiscal deficits under control and stabilize debt levels. What were the causes of overspending n the first place? Huge operating costs? Losses? Corruption of non-water revenue leakages? Blind slashing with a hatchet can't be the sole method.

Make Syabas tackle its debt problem more proactively, not waiting until the edge of the abyss to call the government to step in, but getting ahead of the markets and putting in place reform-based bail outs. How so?
Make it mandatory for them to allocate funds into the reserve fund. Clearly this requirement has been violated because perhaps, putting reserve funds has been voluntary. Otherwise, if it has been mandatory all this while, then monitoring it has been lax or some people have been paid to look the other way.

We can't just put up some cash for a bailout and let Syabas go about their business as usual. Putting in bailout money is going to place heavy political pressure. The public is asked to be frugal while our taxed money is directed to helping people like Rozali Ismail.

courtesy of sakmongkol AK47

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