How to be a Godfather (Part 2)
|Aug 23, 2007|
See Also: Asian Godfathers (Part 1)
Yesterday, we presented the first of two excerpts from Asian Godfathers, a unique book on the role of monopolies and crony capitalism in East Asia written by Joe Studwell, editor of the China Economic Quarterly. Here is the second. Much, mostly hagiographic, has been written about the fabulously wealthy group of mostly overseas Chinese whose names are familiar throughout the region and have been widely assumed to have been responsible for its economic growth. This second section, “Core Cash Flow,” describes how the close relationship between government and commerce can lead to an atmosphere that can produce a godfather cartel.
The 330-page book, published by Profile Books, London, is currently on sale in all the countries/territories with which it deals -- Hong Kong, Malaysia, Indonesia, the Philippines and Singapore – with the sole exception of Singapore.
Core cash flow
At the heart of the average godfather’s empire is a concession or license that gives rise to a monopoly or oligopoly activity. In the instances this is not the case, a structural economic anomaly created by government leads to an environment where a cartel of godfathers can flourish or competition is artificially suppressed. This is the basic reality of tycoon business in Southeast Asia. Every rising godfather is on the lookout for this non-competitive core cash flow, the river of molten gold that will keep him going through good times and bad, ensuring that even the most sprawling business empire is difficult to topple.
The source of core cash flow can be extremely simple. Half a dozen of the richest men in Hong Kong and Malaysia depend on money from gaming monopolies to fund expansion of their business conglomerates. Stanley Ho, who obtained the Macau monopoly on all forms of gaming in 1961 and was able to renew it for fifteen years in 1986, is well-known for this.
But behind Stanley Ho was Henry Fok, who funded a similar equity share in Sociedade de Turismo e Diversões de Macau (STDM), the private firm set up to run gambling in the former Portuguese colony. These two men were joined by a third tycoon-to-be, Cheng Yu-tung, in bidding for what was to become by the 1970s the third-largest gaming centre in the world after Las Vegas and Atlantic City.
While Fok has been popularly viewed as a major real estate developer in Hong Kong and mainland China, and Cheng developed a stable of listed companies under the New World name, it was casino earnings that underwrote their expansion. (Fok, who helped China circumvent the United Nations embargo during and after the Korean War, obtained a second cash-churning monopoly on the importation of mainland sand to Hong Kong during the post-war construction boom.) The exact shareholdings in STDM have never been confirmed, but company directors over the years have suggested that Ho and Fok held 25-30 percent each and Cheng around 10 percent.
Despite Cheng Yu-tung’s limited stake, it is speculated in Hong Kong financial circles that his STDM shares generated more cash than his controlling position in
publicly traded flagship New World Development. Ananda Krishnan, Malaysia’s richest resident since Robert Kuok relocated to Hong Kong in the 1970s, is seen as a real estate, telecommunications and media magnate who built what were briefly the tallest buildings in the world, the Petronas Twin Towers in Kuala Lumpur. But for almost twenty years, Krishnan has been able to rely on a steady supply of cash from a monopoly franchise on Malaysia’s racetrack betting.
Another Malaysian billionaire, Vincent Tan, relies on cash from the sale of formerly state-controlled gaming activities in the 1980s. In 1985 Tan acquired control of Malaysia’s Sports Toto lottery in a ‘privatisation’ that involved no prior announcement of the sale and no public tender. Billionaire Lim Goh Tong was the original post-independence beneficiary of the kind of private gambling franchise that echoed the old colonial vice farms. In 1969 he obtained a three-month, renewable license to operate Malaysia’s only legal casino. The license has been active ever since.
Lim’s partner was Mohammad Noah Omar, father-in-law to not one but two Malaysian prime ministers – Abdul Razak (1971–6) and Hussein Onn (1976–81). Lim’s Genting group subsequently diversified into plantations, real estate, power generation, paper making and cruise ships, but its vast casino continues to produce most of the earnings.
The earliest government-sanctioned monopolies and cartels after independence
in Southeast Asia were those for importing and trading foodstuffs. The creation of licenses was not simply designed to line the pockets of a godfather class. It aimed to curb speculation and stabilize prices for what were deemed essential commodities. But ultimately the suppression of competition led to guaranteed cash flows that fed tycoons for decades.
One of the biggest beneficiaries of import monopolies was Indonesia’s Liem Sioe Liong. After Suharto came to power in 1965, Liem was granted a monopoly on the import of cloves in concert with Suharto’s half-brother Probosutedjo. Separately he was granted a monopoly on flour manufacturing, which in turn made him the noodle king in a noodle-eating country. Here was the core cash flow that allowed Liem to move into everything from real estate to textiles to rubber to logging to steel to cement. Along the way, he could afford to make considerable mistakes given the scale of the economic rents he had been granted.
In Malaysia, Robert Kuok was the prime beneficiary of policies restricting imports of refined sugar and flour. A soft commodity trader by background, he also partnered Liem in Indonesia in his sugar and flour businesses. Kuok remains the controlling shareholder in three of Malaysia’s four sugar refineries and is allocated the bulk of a government-set quota for the import of raw sugar. The arrangement is justified on the grounds that Kuok has kept sugar and flour prices stable in the face of international market fluctuation.
But, as in Indonesia until the import monopolies were scrapped after Suharto’s 1998 ouster, the other reality is that consumers pay, on average, more than they would in a free market. When Kuok was lobbying for full tariff protection and sugar refining licenses immediately after independence, his main co-investors were two other tycoons-in-the-making, Khoo Kay Peng and Quek Leng Chan. The attractions of monopoly were not hard to spot.
In the Philippines a tradition of political allocation of state offices and government largesse built up from the 1920s, under American colonial rule, until it reached its logical conclusion under Ferdinand Marcos. There were trading monopolies for major foodstuff imports, and marketing monopolies for the key local crops – sugar and coconuts.
Eduardo ‘Danding’ Cojuangco was one of the leading Marcos monopolists. (It is a reminder of the small and élitist world in which money and power resides in Southeast Asia that Danding is from the same landed family as Cory Aquino, whose ‘people power’ movement overthrew Marcos in 1986.) Danding, a Marcos favorite, benefited from a new levy on coconut production that funded the development of United Coconut Planters Bank. He was made president of the bank, which in turn bought up most of the Philippines’ coconut milling facilities. Danding’s coconut cash flows were strong enough to buy up much more besides. He became known as Mr Pacman, after the video game character that eats everything in its path.
Marcos monopolies set new standards in the powers they conferred. Lucio Tan’s Fortune Tobacco Co., which was given tax, customs, financing and regulatory breaks that were tantamount to a domestic monopoly on cigarette making, wrote a new cigarette tax code that Marcos signed into law. In the same period Tan is alleged to have printed his own internal revenue stamps to paste on cigarette packets. The cash flow from tobacco propelled him into chemicals, farming, textiles, brewing, real estate, hotels and banking. After Marcos fled to Hawaii in 1986, Tan wrote an open letter to new president Cory Aquino in which he asserted: ‘We can proudly say that we have never depended on dole-outs, government assistance or monopoly protection throughout our history.’
Cartels, Cartels Everywhere
The crudeness of the monopolies handed out by Marcos and Suharto tends to obscure the almost universal presence of monopolies, cartels and controlled Asian markets in Southeast Asia. Hong Kong is a case in point, not least because it is regularly voted one of the freest economies in the world. The right-wing American think tank the Heritage Foundation has ranked Hong Kong first (and Singapore second) in its Index of Economic Freedom for the past fourteen years. The Nobel Laureate economist Milton Friedman lauded Hong Kong for decades as a bastion of the free market; a week after the territory’s return to Chinese sovereignty in 1997, he lamented: ‘If only the United States were as free as Hong Kong.’
Such assertions reflect a focus on Hong Kong’s status as a free port with tariff- and exchange control-free international trade. But Hong Kong’s domestic economy, where the godfathers operate, is a different story. It has long been a patchwork of de facto cartels. The origin of the cartels lies in the colonial era. The best known of them dominates the territory’s real estate market and is the core source of wealth of every Hong Kong billionaire. The British administration set the scene for real estate oligopoly because it chose to depend heavily on land sales – all land was deemed ‘Crown land’ until sold – to fund its budget.
As Hong Kong grew in the post-Second World War era, the government auctioned off development land in ever more expensive chunks: US$1 billion a pop for large plots
by the mid 1990s. Anyone who acquired land in the secondary market that was not designated for building – agricultural acreage in the New Territories was targeted by the tycoon families behind Sun Hung Kai and Henderson in the 1970s and 1980s – had to pay a hefty upfront conversion premium before construction could begin. The effect was to rule out small players and persons without good connections to the large British banks.
A government-commissioned 1996 report by Hong Kong’s Consumer Council found that three-quarters of new private residential housing was supplied by only ten developers between 1991 and 1994, and 55 percent came from the four biggest developers. A separate look at profitability considered thirteen large residential developments. Margins were extraordinary, especially where conversion fees had been set by private tender on large lots of agricultural land. In such cases, the lowest return the Consumer Council found – as a percentage of total estimated development costs, including land – was 77 percent. The highest was 364 percent.
Such high levels of concentration in the real estate market are, at the level of economic theory, bound to be anti-competitive. Rumors of bid-rigging are a traditional source of Hong Kong discourse. ‘The property guys used to do a bit of bidding. Then one guy gets it. Then a tea party where it’s all divided up,’ remarks Sir William Purves, former chief executive of HSBC, matter-of-factly.
So long as land revenues flowed in and budgets were balanced, colonial governments (and the always-influential HSBC, the biggest mortgage lender and developer financier) were not unhappy with the real estate arrangements. The system was simple and low maintenance. As one of the real estate tycoons puts it: ‘British capitalism as practiced in Hong Kong has always favoured the big boys.’
Middle class Hong Kongers, meanwhile, paid low nominal taxes but some of the world’s highest rents, or mortgage repayments, and apartment management fees equivalent to 13–15 percent of rents.
The Hong Kong colonial tradition of working with a small number of ‘big boys’ – originally these were the British hongs which ran cartels in everything from air-conditioners to elevators – echoed the indigenous Southeast Asian autocrat’s need for trusted commercial lieutenants.
An interesting example of this came in the 1950s and 1960s when the Hong Kong government successfully negotiated the world’s largest textile export quotas for local manufacturing industry. It was admirable behaviour by a colonial administration since it went against the best interests of British textile producers. But when it came to distributing quotas, the government showed little impartiality. Instead of auctioning the right to export to the highest bidder or finding some other formula to identify the most efficient producers, bureaucrats simply gave away the enormously valuable quotas to the largest manufacturers and export houses.
Many of these were run by former Shanghai textile magnates who had moved to Hong Kong in 1949 and were close to the colonial establishment. There then developed a secondary market in quotas whereby those receiving them for free became rentier capitalists and sold the export rights on. Hong Kong has no competition law and its godfathers, Chinese, British and otherwise, extract hefty tolls on local services. The port, the busiest in the world, is perhaps the source of greatest chagrin. Hong Kong’s container terminal handling charges are also the highest in the world, despite labor costs far below those in countries with comparable per capita GDP.
The typically small manufacturing firms across the mainland border that use Hong Kong’s port have campaigned against the port oligopoly for years, as have shippers, but without success. The shareholders that dominate the container terminal operating companies are the big tycoon real estate players: Hutchison, New World, Sun Hung Kai, Jardine’s Hongkong Land and Wharf.
Li Ka-shing’s Hutchison is the undisputed leader of the pack, with current control of fourteen of twenty-four berths. It is cash flow from his port operations that has allowed K S Li to take huge speculative bets in the real estate market over the years; investment bankers believe he would have been bankrupted during a mid-1980s property crash but for the Hutchison port revenues.
Other Hong Kong de facto cartels include supermarkets, where K S Li’s Park’N Shop and Jardine’s Wellcome control about 70 percent of the grocery trade, and drug stores where Li’s Watson’s and Jardine’s Mannings are similarly dominant. Efforts to break the multibillion dollar groceries duopoly by French retailer Carrefour and a well-funded local start-up, Admart, during the past decade, foundered. The incumbents, with their big property arms, own key retailing sites around Hong Kong and make clear to suppliers that their business will be cut if they work with new competitors.
According to Mark Simon, who shut down the Admart business after losses of US$120 million, the company’s delivery trucks were not allowed into residential and office buildings controlled by K S Li. Li also has half of Hong Kong’s electricity- generating duopoly, in which the other half is held by the Iraqi Jewish Kadoorie family’s China Light and Power. A government regulatory scheme links the profit the companies are allowed to make to capital expenditure, creating an incentive to over-invest in fixed assets with long depreciation periods.
The side effect is higher electricity prices. Other important cartels include ones in buses, petrol, ready-mix concrete and professional services. It is telling that almost every major Hong Kong business in which K S Li operates has cartel characteristics – real estate, ports, power, cement, concrete, asphalt and chain retailing. As Simon Murray, who ran Hutchison for Li from 1984 to 1993, observes: ‘Hong Kong is a cartel environment … If the government’s going to give you a monopoly, grab it.’Among Murray’s major deals was the takeover of Hongkong Electric.
One former cartel and one monopoly that operated in Hong Kong have been dismantled in recent years. An interest rate cartel was employed by the territory’s banks from 1964 for more than three decades, with managers meeting every Friday to set rates (government also employed ad hoc measures to restrain the entry of foreign banks and thereby helped keep HSBC and sister bank Hang Seng’s share of deposits around 50 percent).
But the biggest attack on a Hong Kong monopoly came with the deregulation of the telecommunications industry under the last governor, Chris Patten. Interestingly, it led to a frenzied rush by tycoon-controlled conglomerates to enter the telecommunications business, destroying profit for all comers. The message seemed to be that the tycoons were unused to operating in conditions of genuine competition.
One of the earliest substantive actions of the first post-colonial government, led by shipping tycoon Tung Chee-hwa, was to reject the Hong Kong Consumer Council’s call for a general competition law. The position has not substantively altered under Tung’s successor as Hong Kong chief executive, career bureaucrat Donald Tsang, although popular demands for a curb on cartels continue to rise. International bodies including the World Trade Organization, the Organization for Economic Co-operation and Development, and the European Parliament have criticised Hong Kong’s failure to enhance competition in its domestic economy.
As Professor Richard Schmalensee, dean of the MIT Sloan Management School, put it: ‘The fact that Hong Kong doesn’t have a law against price fixing and basic cartel behavior is fairly amazing.’ Yet, somehow, the influence of big business on government is such that this remains the case.
Until recently, Singapore was the only other developed economy in the world without a competition law. The more southerly city state passed a Competition Act in 2004, which started to come into force in 2006. However, vast swathes of the domestic economy – electricity, gas, water, sewage, telecommunications, media, postal services, ports and some banking services – that are controlled by public companies are exempt from the legislation.
It is far from clear that local competition in Singapore will become any freer than it is in Hong Kong. The contrast between globally competitive external economies – those of the export manufacturers – and cosseted domestic economies – those of the tycoons – is equally apparent in both cities. In Hong Kong and Singapore, for instance, banks can happily force retail and small business customers to queue for an hour before hitting them with charges that are unknown in other developed economies.
Hong Kong banks charge shopkeepers to provide them change for their businesses. Singapore banks monopolise the sale of mutual funds and staff often know little of what they are selling. Customer experience is not what one would expect when walking into the sleek skyscrapers that dominate these cities.
Rentiers Then, Rentiers Now
The pursuit of core cash flow is about obtaining monopolistic or oligopoly licenses, wherever a godfather operates in Southeast Asia. The main difference between locales is that these rights were distributed afresh by postcolonial era governments in Thailand, Malaysia, Indonesia and the Philippines; they were – with the exception of some banking and real estate entitlements – grabbed by the government in Singapore; and they were gradually transferred in Hong Kong as local tycoons began to challenge and take over the established British hongs starting in the 1970s.
Fundamentally, however, everywhere has witnessed a process of evolution that echoes the colonial carve-up of economic rights. An unnamed commentator in a 1991 profile of Robert Kuok – perhaps the region’s most accomplished transnational tycoon – put it as succinctly as is possible: ‘Robert Kuok,’ he said, ‘modernised the rentier system in Southeast Asia.’ And that is what other godfathers did. Along the way, tycoons have greased plenty of palms.
The author did something of a double-take when one of the region’s leading billionaires, in an off-the-record conversation, nonchalantly described bribing a prime minister in order to obtain an important license that was extended soon after one nation’s independence. Of course, he said, he always referred to the bribe as a loan, recalling the precise amount half a century later.
An ethnic Chinese tycoon with businesses in several Southeast Asian countries is scathing about what he regards as a graft-seeking culture among indigenous politicians: ‘They’re broke every week,’ he says. ‘Feed your mouth, feed your prick. That is how they think.’
But the same person is not much less damning of the iniquity of the colonial regimes he dealt with. He refers to ‘unseemly practices’ in Hong Kong, senior civil servants and Hong Kong Bank executives holding court in private boxes at the races, and the cosy relationship that British big business enjoyed with the colonial regime. As an example he recalls John Bremridge, who transitioned from running British hong Swire in Hong Kong to being Hong Kong’s Financial Secretary, in which post he stood before the Legislative Council and announced the territory would not license more than one airline. The incumbent, Cathay Pacific, was and is one of Swire’s principal businesses.
Bremridge left government in 1986 to return to a job at Swire’s headquarters in London. A similar trajectory was followed by Baroness Lydia Dunn, who joined the Swire group in 1963, became the senior member of Hong Kong’s Executive Council, and then returned to London with Swire.
In Hong Kong and Singapore, relations between businessmen and political power have long been carefully choreographed to avert any appearance of overt collusion. In Hong Kong there are the Leglislative and Executive Councils to provide a patina of representative government, despite the fact that they are packed with the unelected representatives of big business.
In Singapore, the relationship between establishment political power and tycoons is shrouded in greater mystery. One correlation that may be apparent and which dates back to the colonial era, is that favored families show their appreciation through the works of a local charity, hence the Shaw Foundation (set up by the Shaw brothers in 1957) and the Lee Foundation (set up by the family of Lee Kong Chian in 1952). This tradition continues. Those tycoons who survived or prospered despite the British, or their successor Lee Kuan Yew do not bother with high profile charitable activities.
Kwek Hong Png, rubber-smuggler- made-good, and son Kwek Leng Beng, who sought and were denied the core cash flow of a Singaporean banking license, have not thrown money at a foundation. Elsewhere the business–politics nexus is much cruder. Suharto used charitable foundations – yayasan – controlled by himself and his family as vehicles to collect billions of dollars in bribes.
But the calculation for the godfather who wants to survive is much more complicated than hitching his cart to a leading politician and paying him off. There is a long list of tycoons who paid the price for putting all their eggs in one political basket. Liem Sioe Liong was the inevitable primary target of the backlash against what Indonesians dubbed ‘KKN’ (‘korupsi, kolusi dan nepotisme’ – ‘corruption, collusion and nepotism’) during the Asian financial crisis. Rioters made a beeline to his north Jakarta home, looting it and painting the words ‘Suharto’s dog’ on the gate.
In Thailand, Chin Sophonpanich fled to Hong Kong for several years after Marshall Sarit’s 1957 coup because of fears his closeness to the ousted regime would put his life at risk. In Malaysia, whole cliques of businessmen had their fortunes irreparably damaged because they were too close to former finance minister Tengku Razaleigh Hamzah when he challenged Mahathir for the leadership of UMNO in 1987,or to Anwar Ibrahim when Mahathir decided to terminate the deputy premier’s political career a decade later. When a Malaysian tycoon has been described as one of ‘Anwar’s boys’ or ‘Daim’s boys’ – after finance minister Daim Zainuddin – it has usually turned out to be a sign he was headed for a fall.
The truly great godfather never allows himself to be identified with only one side of a potential political argument. It is no coincidence, then, that the two richest Malaysians, Robert Kuok and Ananda Krishnan, are masters of being all things to all politicians. Kuok’s relationships are impeccable partly by virtue of longevity. His father played mah jong with Onn bin Jaafar, aristocrat and founder president of UMNO, when Robert Kuok was growing up in Johore state.
Robert attended school with Onn bin Jaafar’s son and Malaysia’s third prime minister, Hussein Onn, and was a contemporary at Raffles College of Malaysia’s second prime minster, Abdul Razak, as well as Harry Lee Kuan Yew.24 It was all but inevitable he would know the entire evolving establishments of independent Malaysia and Singapore. Despite sometimes strained relations with Lee Kuan Yew and Mahathir, Kuok never put himself in a position where his investments in Singapore or, remarkably, his still-functioning soft commodity monopolies in Malaysia, came under threat.
Krishnan is still more remarkable. In the 1960s and 1970s he was an intimate
business partner and friend of Razaleigh, and advised the finance minister on
the creation of Petronas, the national oil company, and the nationalisation of tin mining. When Mahathir became premier in 1981, Krishnan continued to find favor, being appointed a director of the central bank in 1982 and a director of Petronas in 1984. As relations between Razaleigh and Mahathir soured, Krishnan remained close to each of them, taking holidays with both men and looking after the children of the latter when they were abroad.
Other tycoons close to Razaleigh, like Khoo Kay Peng, found themselves out in the cold after their patron’s defeat in the 1987 UMNO election, but not Krishnan. He had covered every angle. When a reconciliation of sorts was effected between Razaleigh and Mahathir in 1996, the meeting took place at Krishnan’s home.
Few Asian godfathers play politicians so well. The deal for which Krishnan is best known – the 88-storey Petronas Twin Towers that define the Kuala Lumpur skyline – was a master class in the art of gentle manipulation. The man who had already nailed his core cash flow with Malaysia’s off-course betting monopoly then identified the 39-hectare site of the Selangor Turf Club in downtown Kuala Lumpur for a gargantuan real estate development. He went to the Argentinian–American architect César Pelli with a remit that Mahathir would find irresistible – the tallest buildings in the world, commensurate with the premier’s Vision 2020 to make Malaysia a developed nation by that year, with a design that incorporates elements of Islamic architecture.
Mahathir was sold, and to this day retains a vast, fishbowl-shaped private office at the top of one of the towers. According to documents filed with Malaysia’s Registry
of Companies, Krishnan obtained the project site at a total cost of MYR378 million. But private appraisers immediately valued the site at over MYR1 billion (about US$385 million at the time). Krishnan was able to borrow against the independent valuations and, with Mahathir’s support, bring in Petronas as a cash investor and anchor tenant. The upshot was that the godfather obtained 48 percent of a real estate development that was capitalised at MYR1.3 billion without having to use his own money. He then called in Japanese and Korean construction companies – to put up a monument to Malaysia.
Krishnan repeated the trick with media and telecommunications, pandering to Mahathir’s fantasies about developing an Asian media industry. Assisted by government subsidies, he put Malaysia’s first satellites into orbit. He set up production companies to make wholesome Malay-language programming devoid of ‘Western’ influence.
But mixed in with these high-tech, morally wholesome undertakings were businesses yielding great profits. Krishnan obtained exclusive licenses that made him the pre-eminent player in cellular telephony. He cornered the only bit of the satellite television market that is seriously profitable – supplying imported Chinese-language programming, wholesome and otherwise, to Malaysia’s Chinese population. And he received further cash investments from government companies; state investment agency Khazanah Nasional put up US$260 million for 15 percent of his satellite television business. Like other godfathers, he brought in whatever technology and content he required on a turn-key basis.