Public notice to demand government response in Parliament when it reconvenes on Nov. 6  to eight flaws to EPU methodology in using par value to compute 18.9 bumiputra corporate equity if EPU continues its thunderous silence 

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Media Statement
by Lim Kit Siang  
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(Parliament, Friday) :  Ten days ago, (17^th October 2006), I had called on the Economic Planning Unit (EPU) to give convincing and credible rebuttal to five flaws in  its methodology in using par value instead of market value to compute 18.9% bumiputra corporate equity, but up to now, there has been thunderous silence.

The five flaws represented a powerful case smashing to smithereens the methodology adopted by EPU in using par value to compute corporate equity ownership and distribution.

The accountant who authored the original article has sent to my blog a sequel of “More Flaws in EPU Methodology”, highlighting three more flaws in the EPU methodology, which I reproduce below.

Continued EPU silence to the “Eight Flaws” in EPU’s apparent methodology in using par value instead of market value to compute corporate equity ownership will not be a flattering reflection on the EPU’s intellectual prowess,  honesty or accountability.

I am giving notice that I will demand a full and proper government response  to these flaws to the EPU methodology when Parliament reconvenes on November 6 if EPU continues to maintain its silence.

The sequel to the earlier “Flaws in EPU’s apparent methodology” is as follows:

More Flaws in EPU Methodology

Example 6 – Static & Optional Defects in Par Value

The par value capital of Ali Sdn. Bhd. is $2 in 2006. Ali Sdn. Bhd. is awarded a long term contract to the year 2020 worth $100 million. Ali Sdn. Bhd. does not want to increase its par value capital for this duration of 14 years.

EPU Methodology :

The par value of Ali Sdn. Bhd. is $2 in 2006 and is still $2 in 2020. Ali Sdn. Bhd. has not progressed for the duration of 14 years. Therefore, Ali Sdn. Bhd. needs more assistance.

Flaws :

1. The par value capital is a static figure. If it is static, how can EPU use it to benchmark actual progress? This example shows that Ali Sdn. Bhd. has not progressed at all for the duration of 14 years despite of being generously aided - which obviously is wrong!
2. The par value capital is an optional figure i.e. it is up to Ali Sdn. Bhd. to increase its par value capital out of its own free will.  If it is optional, how can EPU use it as a target for the nation’s growth?

The example shows that, in spite of having progressed rapidly, the par value capital of Ali Sdn. Bhd. is unchanged from 2006 through 2020. If Ali Sdn. Bhd. doesn’t want to increase the par value capital, how can the 30% bumi target be ever reached?

The above fallacies clearly demonstrate that par value methodology cannot be meaningfully used to measure actual progress nor can it be used for target setting.

Example 7 – Distortion of True Picture

Ali started a shipping business called Ali Baba Sdn. Bhd. five years ago in 2000 with a par value capital of $2. Shortly after, it was awarded several long term contracts by the major GLCs to ship their produce throughout the world.

In the same year, Ali also incorporated a company in Panama called Ali Baba & Sons (Panama) Ltd. to provide all shipping maintenance, advisory and logistic services to Ali Baba Sdn. Bhd.

With its political connection, Ali Baba Sdn. Bhd. was able to secure a $500 million loan from Bank Islam in 2000.

In 2006, Ali Baba Sdn. Bhd made a huge loss of $500 million while Ali Baba & Sons (Panama) Ltd. managed to make a profit of $200 million through deliberate transfer pricing policy.

Unable to repay its bank loans and continue business, Ali Baba Sdn. Bhd. was folded up in 2006. This $500 million loan debt was fully written off as bad debt in Bank Islam.

Bank Islam, adversely affected by this bad debt along with accumulated bad debts from other companies, was forced to seek a bailout of $2 billion from the Government to prevent itself being folded up.

Meanwhile, Ali was relatively unscathed by these events because his company’s bank loan of $500 million was in effect paid by the Malaysian citizens through the bailout of Bank Islam.

EPU Methodology :

Using a par value methodology, the capital of Ali Baba Sdn. Bhd. was $2 in 2000 and extinguished to $0 in 2006. Ali Baba Sdn. Bhd. had lost $2 and was one of the many companies adversely affected by the Asian economic crisis. Therefore, the company should be given special assistance to help it stand up on its feet again.

After Ali Baba Sdn. Bhd. was folded up, Ali set up another company called Ali Nominees Sdn. Bhd. (using part of the monies from Ali Baba & Sons (Panama) Ltd.). It was awarded several long term contracts under a special scheme for companies affected by the Asian economic crisis.  It employed the same modulus operandi and starts the process all over again, except that this time, it obtained a $500 million loan from Bank Rakyat.....

Flaws :

1. Par value methodology distorts the true situation of the company and the nation. As this example clearly shows, the loss in regard to Ali Baba Sdn. Bhd. is only $2!

In fact, the true situation is much direr than the $2 par value loss. It conceals a $500 million loss by Ali Baba Sdn. Bhd. and another $2 billion bailout of Bank Islam using tax payer monies of all races!

2. Notice how through transfer pricing, profits can be hived into another foreign company, Ali Baba & Sons (Panama) Ltd without being accounted for by both EPU and Bank Islam. In law, Ali Baba & Sons (Panama) Ltd is a foreign company and a separate company from Ali Baba Sdn. Bhd.

By ignoring the true situation, the EPU methodology provides fertile ground for cover-ups and mismanagement without any accountability. If there are any lessons to be learnt or any remedial actions to be taken, it can only be done by seeing the true picture.

Example 8 – Flawed Sampling Methodology

The wealth of all Malaysians whether in the form of entities or persons can be categorized as below:

A.  Wealth of entities or persons which skewed towards BUMIS

1. A large number of GLCs which has majority bumi employees and award majority of contracts to bumis e.g. Telekom, Tenaga, Proton, MAS, UEM, Bumiputra Commerce, Affin, Bank Islam, etc.
2. National petroleum company Petronas and its group of companies.
3. Special land schemes set up for bumis such as FELDA, the world’s largest planted acreage, comprising of millions of acres of oil palm and rubber plantations.
4. Special share schemes set up for bumis such as ASB, PNB, etc offering shares in Amanah Saham Nasional, Amanah Saham Wawasan 2020, etc
5. Special cooperatives or bodies looking after the bumis majority interest e.g. MOCCIS, LTAT, Tabung Haji, etc which own a very substantial amount of properties and shares in public listed companies.
6. Individual bumis owning a substantial and majority of  landed properties in the Malay states like Perlis, Kedah, Kelantan, Trengganu, Pahang, Johore , Negri Sembilan, Sabah and Sarawak.

B.  Wealth of entities or persons not skewed towards any particular race

1. Partnerships, Sole-proprietorships, Cooperatives, Societies and other entities of all races.
2. Individuals of all races owning assets (landed properties, shares, bank savings, etc) outside Malaysia.
3. Individuals of all races owning assets excluding shares in Malaysia.

C.   Wealth of entities or persons skewed towards NON-BUMIS

1. Small, medium and large companies of all races.
2. Individual non-bumis owning majority of landed properties in the Non-Malay states like Penang, KL, Perak and Malacca.

EPU Methodology :

Out of the above wide spectrum of entities and persons, EPU only study a sample of 600,000 companies in category C1 above. For unexplained reason, it has excluded in its study the wealth of all those entities and persons in categories A, B and C2 above.

Flaws :

1. Existing laws recognize businesses can be operated not only through limited companies but also through partnerships, sole-proprietorships, cooperatives, societies and other business entities. Wealth is created through these business entities.

In addition, wealth (properties, shares, bank savings, etc) can also be owned by private individuals through acquisition or inheritance.

Wealth can be located in the country and outside the country.

Therefore, EPU study of only category C1 with the exclusion of A, B and C2 is seriously flawed as it does not represent the whole spectrum of wealth of the entire population of Malaysia. Concentration of wealth in the categories of A, B and C2 are very substantial and collectively may even exceed the wealth of category C1. But why are they excluded?

2. The study of the 600,000 companies in category C1 is picked from a skewed sampling population (towards Non-Bumis) and, therefore, the results derived must also be skewed and not representative of the whole population.
3. Within the companies in category C1, EPU took into consideration only the par value capital of these companies and not the market value which would have been a more correct reflection of wealth. Par value capital does not and cannot be a reflection of wealth and therefore the result derived is meaningless.
4. 600,000 companies studied by EPU is hardly a representation of 26 million Malaysians in the country bearing in mind 1 person can own 10 or perhaps 100 companies. The correctness of this statement is further supported by the exclusion in the study of the wealth of all those entities in categories A, B and C2 above.
5. Plantations form a vast part of Malaysia’s land mass. Malaysia is one of top producers of palm oil, rubber and other agriculture produce in the world.

Its land value is humongous in relation to the quantification of wealth. Yet ridiculously enough, the wealth of FELDA (world’s largest planted acreage) and huge bumi-controlled plantation GLCs such as Guthrie, Boustead, Golden Hope, Sime Darby, etc have been left out in the EPU methodology. Collectively, this group represents the majority of the plantation acreage and the wealth in Malaysia.

On the other hand, smaller non-bumi plantation companies such as IOI, KLK, Unico, Tanamas, Harn Len, Far East and many others may have been roped into the calculation!

If this is not selective manipulation of statistical data for one’s own agenda, then what is?

(27/10/2006)