Malaysia's Masteel: Government-Linked Company?

A "private sector initiative" criticized by opposition figures in Parliament earlier this week to build a RM1 billion commuter train project linking the Malaysian state of Johor to Singapore is starting to take on the trappings that sank a controversial national cattle feeding scheme in 2012, which earned it the nickname "Cowgate" because of the magnitude of the scandal.

The circumstances of the contracts are about the same. In the feedlot episode, the Malaysian government granted a RM250 million soft loan to individuals closely connected to the United Malays National Organization that had no experience remotely related to the operation of a company feed and slaughter 60,000 imported cattle each year.

In the Johor case, a joint venture called Metropolitan Commuter Network, a 60:40 joint venture between Malaysia Steel Works or Masteel and KUB Malaysia Bhd, has won the commuter project, 70 percent of which is to be financed through a government soft loan. As with the National Feedlot operation, both sides of the Metropolitan Commuter Network are linked to UMNO and are in the process of finalizing the contract to build and operate the 100km inter-city rail service in Johor.

Like the National Feedlot Corporation, which established the cattle feeding operation without any prior experience in dealing with cattle but plenty of experience in dealing with UMNO -- since the concern was headed by Shahrizat Abdul Jalil, the government minister for women, family and community development ? Masteel acknowledges that it has never built anything remotely resembling a 100-km light rail commuter operation. In fact, it has mainly been involved in steel manufacturing.

Nor, of course, was the National Feedlot Corp. alone. It should be noted that there is no indication that Masteel will follow Cowgate into scandal. However, during the 22 years of his reign, former Prime Minister Mahathir Mohamad sought to create a long list of government-linked companies that in turn would help elevate rural Malays into prosperity. Unfortunately many of the companies simply collapsed and today are still being supported by government institutions such as Kazanah Nasional, the country's sovereign investment fund, or the Employee Provident Fund ? or have been rescued by Petronas, the national oil company.

Masteel argued in a press release that it has "experience in complex mechanical and electrical hardware and automation" which gives them "the relevant experience in operating trains (that) are relatively simple mechanical systems compared to steel mills."

Masteel responded to the criticism in parliament by saying other bidders have not been prevented from tendering the project and that it was a "private sector initiative, as opposed to a government-driven project." So was the National Feedlot Corp.

But while the rail project may well have been a private sector initiative before the government called for bids, others might think it odd that a company that has no experience in operating a commuter train system of any kind, especially a company closely linked to the country's biggest political party, suddenly got the idea it could build such a system.

"The federal government, in this case represented by the Public-Private Partnership Agency (UKAS) in the Prime Minister's Department, must still place emphasis on transparency and accountability in the award of any contracts," Democratic Action Party National Publicity Chairman Tony Pua said in a prepared release distributed today in Kuala Lumpur. "And the best mechanism to ensure that the interest of the public are fully protected especially in projects such as this, is via open, transparent and competitive tenders."

As Pua pointed out, the project involves the provision of a 20-year RM700 million soft loan to the concessionaire. The build-own-transfer contract, set to run for 37 years, would recover its costs in 12 to 13 years, according to the Masteel chief executive officer, Tai Hean Leng, meaning it has 25 years to make a healthy profit on the system.

"The question that needs to be asked to the Prime Minister's Department is, if the government has to fund 70 percent of the project, why bother privatizing it in the first place to a 37-year concession?"

Pua called for negotiations with Masteel to stop immediately and for the project to be tendered openly and competitively.

There is nothing to indicate that Masteel won't get the job done, unlike the National Feedlot Corporation. Shahrizat's husband, Mohamed Salleh Ismail, and other members of the family were ultimately charged with criminal breach of trust and violating the Companies Act in relation to allegations of misuse of RM49 million of the funds given to the company. According to a report by Malaysia's Auditor General, the money was steered into the purchase of things that had nothing to do with the project to slaughter 60,000 cattle annually.

The Auditor General found that the project had never come remotely close to meeting its goals. Subsequent allegations involved the purchase of condominiums in Singapore and Kuala Lumpur, travel for the family, a Mercedes-Benz sedan for Shahrizat and other items.

At least 23 of Malaysia's biggest companies appear to have been vehicles for Umno to siphon off vast amounts of money in government contracts as Mahathir's plans went awry. The companies and the people who run them are so hard-wired into Umno, the government and its investment arms that de-linking them would probably destroy the party.