Using SPACs to ease govt asset disposals

The reality is, the MoF must ultimately consider the disposal of its assets and holdings


Earlier this year, the Institute for Democracy and Economic Affairs (IDEAS) held its annual Liberalism Conference, themed on the rather timely subject of the role of government-linked companies (GLCs).

Timely because, as of today, the question is no longer merely on the ideological views of what role the government should play, but on the very cost on itself — especially considering the accumulated debts, material commitments and contingent liabilities arising from 1Malaysia Development Bhd, as well as its associated entities and projects.

The reality is quickly dawning that there are no other ways to get around this; the Ministry of Finance (MoF) must ultimately consider the disposal of its assets and holdings.

Indeed, during his Budget 2019 speech, Finance Minister Lim Guan Eng (picture) announced that a special task force would be formed to evaluate the companies owned by MoF Inc to reduce duplication and involvement in areas where the private sector is efficient and competent. So, the question now is not “if”, but “how”.

During the nation’s first round of privatisation in the 80s and 90s, the disposal method was rather straightforward.

The entity set to be privatised was corporatised, its value assessed, then shares were sold or issued either in an initial public offering (IPO), reverse takeover, or simply through an open bidding process — in case floating them in the stock market was considered premature.

The downside to this is the rather limited access of the public to what essentially is public property. Most of the offerings were taken up by high-net-worth individuals and institutional investors through private placements.

In fact, the biggest investors — the largest of which tend to be government-linked investment companies (GLICs) — hardly count as “private” even in the loosest sense.

Those offered to retail investors and employees represent a mere fraction of that; perhaps justified, considering our minority shareholders’ penchant for speculative trading.

It must also be noted that the government should not repeat the same mistake it did with Malaysia Airline System Bhd’s “widespread asset unbundling” exercise in 2002, whereby non-core assets of the struggling carrier were subjected to a sale lease back agreement with Penerbangan Malaysia Bhd or PMB (then a subsidiary of MoF Inc) — essentially an indirect bailout.

It might be tempting to do the same with GLICs, though it would be no different than shifting cash around. Another issue is that of market competition.

For every state-owned enterprise held, we can confidently say there is already an existing private sector analogue to it.

Acquisitions of these GLCs by their private sector counterparts will lead to the narrowing of the supply chain and cornering of those markets.

An example of this is Telekom Malaysia Bhd (TM) which, due to its monopoly of infrastructure inherited from Jabatan Telekom Malaysia, had become the de-facto arbiter of broadband access by other players such as Maxis Bhd and TIME dotCom Bhd.

The solution, therefore, is to establish entities that have a broad shareholder base (ideally public-listed companies), are privately funded (unlike PMB) and are not detrimental to market competition (including the creation of functional spinoffs).

And we do have these entities (or at the very least, they can be created) — special-purpose acquisition companies (SPACs).

In the simplest terms, SPACs are shell companies created to raise funds in the capital market to acquire firms within a specifically stated sector or industry.

The prime example of an SPAC in Malaysia would be Hibiscus Petroleum Bhd, founded in 2011.

Being the first SPAC in South-East Asia, it tested the integrity and oversight of capital market regulators, as well as the level of trust Malaysian investors were willing to put into them.

In 2012, it fulfilled its obligations through the acquisition of Lime Petroleum plc and made its mark in Malaysian corporate history.

The key to a successful SPAC is the presence of top management and directors who are highly experienced and qualified in the business sector that the SPAC is expected to operate in.

Any doubts on the ability of the management by prospective investors would immediately lead to the failure to raise funds, assuming the Securities Commission Malaysia had not vetoed them beforehand.

This provides a safeguard on a particular thorn in government privatisation and divestment exercises — cronyism. Having multiple SPACs competing to acquire government assets will not only ensure transparency, but also a healthy dose of meritocracy in the process.

But transparency in management is one thing, transparency as an entity is another. IPOs tend to only offer a fraction of newly issued shares to the public, with the lion’s share going towards private placements.

It is already a contentious issue as it is, but if a hypothetical SPAC is created to acquire entities that are public properties, it must — to some degree — remain broadly in the hands of the public as well.

Unfortunately, narrow offerings are a matter of expediency: We cannot expect AGMs to accommodate tens of thousands of shareholders!

Priority, therefore, should be given to institutional investors representing the broadest base of the Malaysian public (ironically, the largest of these are GLICs — the Employees Provident Fund, Retirement Fund Inc, Lembaga Tabung Haji and Permodalan Nasional Bhd).

On face value, this structure may seem convoluted; why would institutional investors hold shares in an SPAC to acquire public entities when they could have direct shareholdings in those entities? The answer goes back to the matter of transparency.

In the privatisation rounds of the late 80s and 90s investors both institutional and retail, they were given a take-it-or-leave-it choice on the composition of the management; in the case of a hypothetical SPAC-led privatisation, the horse is put before the cart.

An additional benefit is that the top brass in SPACs are expected to hold interests in the company as entrepreneurs, while those in conventionally privatised firms tend to be bureaucratic holdouts.

The other reason is that it would be easier to partition specific assets from an existing entity.

Let’s take TM again as an example; it is obvious now that privatising both the infrastructure operator and service provider as a single entity was a mistake — and the same can be said with Tenaga Nasional Bhd.

The closest hypothetical analogue would be to give a highway concessionaire a taxi service monopoly; needless to say, there is a conflict of interest.

The government should take this opportunity to redefine the relationship between the government and the private sector — which means to avoid any hint of favouritism (in case of privatisation by way of the well-connected); capitalise on entrepreneurialism (by leveraging on managerial talents from the private sector); and at the same time, increase market competition (by avoiding consolidation with existing private sector players).

It might seem convoluted and unnecessarily demanding, but failing to capitalise on any of these three opportunities will lead to the continuation of an economic system that ultimately relies on political patronage.

Wan Fadzrul Wan Bahrum is an affiliate of IDEAS. The views expressed are of the writer and do not necessarily reflect the newspaper’s owners and editorial board.