Tuesday, March 14, 2006

The Malaysian Govt-Linked-Companies Experience - Malaysia Airports


The Bravura & Mis-steps

Some of our GLCs do well but many do poorly. Do we not have capable managers? Our spreadsheet analysis not credible enough? Execution problem? (Please read my blog on "execution risk"). I would like to run through the brief history of Malaysia Airports (MA), a GLC, and see where they'd gone wrong and what they did right. Khazanah Nasional Bhd owns 73% in the company. It is understood that getting MA in order is one of the Government investment arm's priorities.

KLIA started construction in 1995 and was completed in 1998 by the government, not by the people in management of MA. We needed the new airport. Cost came to RM10.7 billion and was borne by the government. The license to manage and operate KLIA was issued to MA in May 1998 for a period of 50 years. MA was listed in 1999. In its IPO prospectus, MA published the financial results from 1994-1998 (not including KLIA) as MA was already managing 19 airports in the country. The PAT: for 98 was RM341 million; for 97 was RM236 million; for 96 was RM357 million; for 95 was RM104 million; and for 94 was RM176 million. Pretty decent stuff.

Was it a question of timing or bad luck? The Asian financial implosion was pretty clear in 97/98, surely assumptions on air travel and business activity would be curtailed. Why was the F1 sepang circuit suddenly put under MA? Why did MA get involve in the management and operation of 1,740 hectare of oil palm on KLIA land?

The basic revenue streams for MA are simple: aeronautical - airport charges; and non-aeronautical - concession income, fees from parking facilities, sales revenue from retail outlets, rents/charges paid by other airlines and tenants. Its like running a property building, isn't it? If it stays that way, it is hard to go wrong.

Things went awry because assumptions on air traffic flow were way off. Other businesses were parked into MA (see above), making life hell for management of MA but cannot say "no" to Khazanah/MOF, right?! Did I mention the National Exhibition & Convention Center (NECC) also? This was apparently sold for RM145 million to recover cost incurred by MA.

The proposed sale of 30% MA to Schipol in 2003 would have been good but was called off. F1 circuit in Sepang was supposed to be sold off to Ministry of Finance for Rm389 million. Plus compensation for Senai airport would see RM70 million going to MA from the government. But wait, this is in 2003, all that is supposed to help MA pay for the outstanding concession fee of RM454 million to the government. Nothing happened - tai-chi negotiations...

These are so "unstrategic" and non-synergistic.

The restructuring of payments to government and sale of F1 circuit have been dragging on for so long. The numbers MA has to pay is RM856 million to the government as concession fee. The bloody F1 thingee is still in the air for RM390 million. Plus MA still has to pay lease rental charges for KLIA amounting to RM60 million per year (increasing at 4% annually), as well as 8% of KLIA's revenue. Under the terms of the concession agreement, MAHB is required to pay the Government RM1.3 billion for the KLIA concession in five instalments. But the lower-than-anticipated passenger movements at the international airport in its first few years of operations, coupled with the incentives given to the various airlines to lure them to KLIA, had dampened the airport operator's ability to strictly follow the payment schedule. That being the case, the balance payment of RM467.3 million will still be a strain on the company's cashflow.

That's why airport tax will rise by tomorrow, and lower airport tax will be levied on the Subang low-cost-carrier terminal, and I suppose some/part of the lease payments would be waived to compensate for MAS pulling out of some domestic routes (which MA is managing those airports). F1 circuit will probably absorbed by MOF in lieu of concession payments to the government. Maybe finally MA can come clean. Should be clearer skies for MA... finally.

Lessons From The Malaysia Airports' Experience:

1) management at MA seems to be powerless to counter "higher up" voices in terms of assets and the businesses they have to take up - we need to appoint capable people and then empower them to act, not pull the strings attched

2) just because it involves the government doesn't mean deals/payments/lease/agreements do not need to be resolved asap - in fact the government should set a leading example by honouring these agreements to boost the "good feelings" of doing business with government bodies. Things cannot go into tai-chi mode for a long time as parties involved get flustered and frustrated. Nobody likes to deal with that kind of business mentality. You don't want members of the business community to always think "Oh, well, its part of the cost of dealing with government bodies". That has to change

3) stop being a good mother - the government has to stop being a mother to all projects. GLCs have to be given the leeway to operate within their jurisdiction. When occassions arise, don't ask the richer son to give to the poorer son

4) improve business plans, projections, spreadsheet analysis and assumptions. Too many times, proposals have been kicked started on too-rosy projections with not enough hole-poking into assumptions. Don't just accept a biz plan and spreadsheet analysis just because the project was already okayed by "higher voice" - it will come and haunt us later. That's why Khazanah has to do so many "crisis management meetings" with GLCs, they step off the wrong foot in the first place. Do better at the initial stages, so that you have less to do later. Plus, when fundamentals change, we need GLCs to move fast enough to change business plan, or renegotiate contracts where possible - GLCs tend to move too slow

5) not just things coming from the top - we cannot have things being decreed from the top, set the GLCs free, don't ask them to absorb this, buy that, sell this and that. Let the GLCs set a proper business strategy for the business that they should focus on. Let each GLC be focused in what they do, not a mish-mash of stuff. Let them be accountable


6) when dealing with GLCs, make it more certain that parties involved know what's the likely outcome. There is so much uncertainty with MA for the past 3 years - will certain payments be waived, will taxes be increased, what will become of certain domestic airports, will they be able to sell the F1 circuit, etc... when it is difficult for independent investors to make a clean assessment of the prospects, dues, payments, terms of contract a company is involved in (because when it comes to GLCs, many things are FLUID).. then how do you expect to garner consistent institutional investor interest... no amount of international roadshows and showcasing will help to counter that

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