According to an article entitled "The Government's Methodology" in The Sun:
Deputy Minister in the Prime Minister's Department Datuk Abdul Raman Suliman said par value was used in the calculation [of share ownership for the purposes of the NEP] because it could give a general view on the initial paid-up capital for the whole corporate sector.Well, what's wrong with Par Value?
"Market values can be used but only for listed companies. For unlisted companies, market values cannot be used because they are always changing and influenced by factors that do not reflect the true value of the shares and companies' performance, such as window dressing.
1. Par value is meaningless in today's financial markets.
Take for instance, Berjaya Toto. It is being traded on the KLSE at a range of RM4.40-4.60 (October 2006) when the par value of the share is merely RM0.50. It is a simple case where the market value of the shares (and ostensibly the company itself) is worth nearly 9X its par value.
What using par value does is undervalue the company back to the value of its original capital injection at its formation (this initial capital is valued at par value). This ignores all the value created and assets gained by the company's operations since its formation.
Therefore, in the EPU's eyes, there is no difference between a very valuable listed share like Maybank (market value RM11.30 & a par value of RM1) and a much less valuable one in a dormant Sdn Bhd (Pvt Ltd) company which is worth exactly the 1 ringgit it has in it's bank account (market value RM1 & a par value of RM1)!
I can't say, without more analysis of the EPU's data, whether such a ridiculous conceptual base will swing the final percentages towards the non-bumi's or bumi's favour, but suffice it to say that the calculations from the application of the EPU's methodology can only be characterised as totally inconclusive and misrepresentative of the true situation.
2. Par value doesn't differentiate between the funding structures of the companies.
What this means is that a RM1,000,000 company funded entirely out of shareholders funds (initial capital injection) is worth RM1,000,000 to the EPU's methodology.
But a RM1,000,000 company funded out of RM2 shareholder funds and a RM999,998 govt loan is only worth RM2 using the same methodology.
It ignores the basic concepts of resource and control. Both companies have the same capacities or resources to buy a million ringgit of assets or pay a million ringgit of salaries. And both shareholders (one who contributed a million ringgit and the other who contributed 2 ringgit) have the same powers and rights to control that million ringgit of assets or employees.
The more astute readers of this blog will realise that the former is suggestive of the funding structure of a self-funded non-bumi enterprise and the latter is suggestive of a bumi company that is assisted by the NEP (albeit with some exaggeration to underline my basic belief that non-bumi companies are mainly self-funded and bumi ones are govt funded. And it also makes the calculations below a lot more intuitive).
For the sake of illustration, let's suppose that these 2 companies are the only ones in the market. Therefore according to the EPU's NEP methodology, the market is defined as below:
Total Market: RM1,000,002
Bumi Value: RM2
Non-bumi Value: RM1,000,000
Bumi %: zero or negligible
Non-bumi %: 100%
As absurd as this may seem, this is exactly what the limited disclosure of the EPU's methodology prescribes. Doesn't it mean that the NEP will have to produce 150,000 bumi 2-dollar companies worth RM1,000,000 each so that their calculation will yield a "bumi ownership share" of 30%?
Like the first reason above, this has the effect of making the EPU's calculations totally inconclusive and misrepresentative of the true situation. Only this time, my intuitive conclusion is no longer neutral. I reckon it results in the gross underestimation of the bumi share in the economy.
Can the methodology be improved? Of course it can, and in one of my next posts in the near future, I will reveal my thinking on how the share ownership can be better calculated with the information already available to the EPU. The proposal will be based on the concept of Beneficial Control of an entity and Net Tangible Assets (NTA).
A little bit more was said by our Deputy Minister regarding how 30% should actually be 60%?!
Quizzed by opposition Abdul Raman said based on the composition of bumiputra in the country, the objective of the bumiputra equity ownership should be 60%. Thus, he said the 30% bumiputra equity ownership objective set under the New Economic Policy (NEP) should not be questioned.My friend, 30% is already a nearly unattainable goal given the deeply biased methodology the EPU has used, 60% will practically ensure that the NEP is aptly the Never Ending Policy.
"The 30% is the minimum objective. If we follow the racial composition, it has to be 60%. If we want to look at this emotionally, then we (bumiputra) are also not satisfied," he said.
Btw, what about foreign investors? Shouldn't the bumi's 60% be somewhat less in order to accomodate the foreigners? Or should their investments come out of the non-bumi's "allocation" only?