Malaysia’s capital of cronyism - Bloomberg

Written by Yoolim Lee Bloomberg News

Tuesday, 29 September 2009 19:25

After a stomach-churning takeoff from a 550-meter runway at Long Banga airstrip on the Malaysian side of the island of Borneo, the 19-seat plane soars over a green tropical wilderness. This is one of the world’s last remaining virgin rain forests. About 30 minutes into the flight to the bustling oil town of Miri, the lush landscape changes, and neatly terraced fields of oil palms take the place of jungle. Twenty years ago, this was forestland. Now, those forests are lost forever. The shift from rain forest to oil palm cultivation in Malaysia’s Sarawak state highlights the struggle taking place between forces favoring economic development, led by Sarawak state’s chief minister, Abdul Taib Mahmud, and those who want to conserve the rain forest and the ways of life it supports. During Taib’s 28-year rule, his government has handed out concessions for logging and supported the federal government’s megaprojects, including the largest hydropower site in the country and, most recently, oil palm plantations. The projects are rolling back the frontiers of Borneo’s rain forest, home to nomadic people and rare wildlife such as orangutans and proboscis monkeys. At least four prominent Sarawak companies that have received contracts or concessions have ties to Taib or his family. The government of Malaysia plans to transform the country into a developed nation by 2020 through a series of projects covering everything from electric power generation to education. The country’s gross domestic product, which has been growing at an average 6.7-percent annual pace since 1970, shrank 6.2 percent in the first quarter. In Sarawak, Taib’s government is following its own development plans that call for doubling the state’s GDP to 150 billion ringgit ($42 billion) by 2020. Sarawak Energy Bhd., which is 65 percent owned by the state government, said in July 2007 it plans to build six power plants, including hydropower and coal-fired generators. The state government also wants to expand the acreage in Sarawak devoted to oil palms to 1 million hectares by 2010, from 744,000 at the end of 2008, according to Sarawak’s Ministry of Land Development. Companies that formerly chopped down hardwood trees and exported the timber are now moving into palm plantations. A PLANE flies over oil palm plantations, where virgin forest once stood, on the Malaysian side of the island of Borneo on April 27, 2009. The shift from rain forest to oil palm cultivation in Malaysia’s Sarawak state highlights the struggle taking place between forces favoring economic development, led by Sarawak state’s chief minister, Abdul Taib Mahmud, and those who want to conserve the rain forest and the ways of life it supports. MUNSHI AHMED/BLOOMBERG MARKETS VIA BLOOMBERG Meanwhile, many of the ethnic groups who have traditionally lived from the land in Sara­wak—known as Dayaks—have filed lawsuits that aim to block some projects and seek better compensation. Sarawak’s ambitions could be hindered by a lack of good governance, which would shut out overseas investors, says Steve Waygood, head of sustainable and responsible investment research at Aviva Investors in London, which manages more than $3 billion in sustainable assets. “Even just the perception of corruption can lead to restricted inflows of capital from the global investment community into emerging markets such as Sarawak,” says Waygood, who wrote about reputational risk in a 2006 book, Capital Market Campaigning (Risk Books). “The largest and most responsible financial institutions are very careful to avoid funding unsustainable developments,” he says. Unilever, which buys 1.5 million tons of palm oil a year—4 percent of the world’s supply—for use in products such as Dove soap and Flora margarine, announced in May that it would buy only from sustainable sources. “Unilever does not source any palm oil directly from Sarawak,” says Jan Kees Vis, Unilever’s director of sustainable agriculture. “We buy from plantation companies and traders located elsewhere.” He says Unilever has committed by 2015 to buy all of its palm oil from sources certified by the Roundtable on Sustainable Palm Oil (RSPO), a group representing palm oil producers, consumers and nongovernment organizations that seeks to establish standards for sustainably produced palm oil. The Malaysian Palm Oil Association, a government-supported group of Malaysian plantation companies, is a member of the RSPO. About 35 percent of the world’s cooking oil comes from palm—more than any other plant, according to the US Department of Agriculture. And 90 percent of the world’s palm oil comes from Malaysia and Indonesia. The oil is an ingredient used in everything from Skittles candy to Palmolive soap to some kinds of biodiesel fuel. Palm oil futures have climbed 45 percent this year as of August 24 on concern that dry weather caused by El Niño may reduce output. Crude oil prices rose to a 10-month high of $74.24 a barrel, spurring demand for biodiesel. Malaysia lost 6.6 percent of its forest cover from 1990 to 2005, or 1.49 million hectares, the most-recent data available from the United Nations Food and Agriculture Organization show. That’s an area equivalent to the state of Connecticut. Neighboring Indonesia lost forestland at the fastest annual rate among the world’s 44 forest nations from 2000 to 2005, Amsterdam-based Greenpeace says. “Palm oil is the new green gold after timber,” says Mark Bujang, executive director of the Borneo Resources Institute in Miri, a city of about 230,000 people in Sarawak. “It has become the most destructive force after three decades of unsustainable logging.” While Malaysia’s palm oil exports have more than doubled to a record 46 billion ringgit in 2008 from 2006, according to the country’s central bank, the gain has come at a price. Development projects and palm plantations have displaced thousands of people, some of whom have lived for centuries by fishing, hunting and farming in the jungle. Almost 200 lawsuits are pending in the Sarawak courts relating to claims by Dayak people on lands being used for oil palms and logging, according to Baru Bian, a land rights lawyer representing many of the claimants. A handful of activists have been found dead under mysterious circumstances or disappeared, including Swiss environmental activist Bruno Manser, who vanished in the jungle in 2000. Cutting down rain forests to cultivate palms in Sarawak has consequences far beyond Malaysia, says Janet Larsen, director of research at the Washington-based Earth Policy Institute. The forests that are being destroyed help modulate the climate because they remove vast stores of carbon from the atmosphere. Chopping down the trees ends up releasing greenhouse gases. “These last remaining forests are the lungs of the planet,” Larsen says. “It affects us all.” Chief Minister Taib, 73, has multiple roles in Sarawak. He’s also the state’s finance minister and its planning and resources management minister—a role that gives him the power to dispense land, forestry and palm oil concessions as well as the power to approve infrastructure projects. Until last year, Taib held the additional role of chairman of the Sarawak Timber Industry Development Corp., which fosters wood-based industries in the state. Anwar Ibrahim, the former Malaysian finance minister who’s the head of the country’s opposition alliance, sees parallels between Taib’s rule and those of other long-standing leaders in Southeast Asia, such as former Indonesian President Suharto and former Philippine leader Ferdinand Marcos. “It’s an authoritarian style of governance to protect their turf and their families,” says Anwar, who was fired as deputy prime minister by then Prime Minister Mahathir Mohamad in 1998 and jailed on charges of having homosexual sex and abusing power. The sodomy conviction was overturned in 2004. Sim Kwang Yang, an opposition member of parliament for Sarawak’s capital city of Kuching from 1982 to 1995, agrees with Anwar’s assessment. “It is crony capitalism driven by greed without any regard for the people,” he says. Taib’s adult children and his late wife, Lejla, together owned more than 29.3 percent of Cahya Mata Sarawak Bhd., the state’s largest industrial group, with 40 companies involved in construction, property development, road maintenance, trading and financial services, according to the company’s 2008 annual report. Local residents jokingly say that the company’s initials, CMS, stand for “Chief Minister and Sons.” In total, CMS has won about 1.3 billion ringgit worth of projects from the state and the federal government since the beginning of 2005, according to the firm’s stock exchange filings. Taib declined to comment for this article. In an interview he gave to Malaysia’s state news agency, Bernama, on January 13, 2001, Taib said CMS’s ties to him had nothing to do with its winning government jobs. “I am not involved in the award of contracts,” he said. “No politician in Sarawak is involved in the award of contracts.” He told Bernama he doesn’t ask for special treatment of his sons. “I never ask anybody to do any favors,” he said. Mahmud Abu Bekir Taib, the elder of Taib’s two sons, is CMS’s deputy chairman and owns 8.92 percent of the firm, according to the annual report. Sulaiman Abdul Rahman Taib, the younger son and CMS’s chairman until 2008, holds an 8.94-percent stake. Taib’s two daughters and his son-in-law are also listed in the annual report as “substantial shareholders.” Taib, a Muslim who belongs to the Melanau group—one of about 27 different ethnic groups in Sarawak—entered politics at the age of 27 after graduating from the University of Adelaide in Australia with a law degree in 1960. He held various ministerial positions in Sarawak and Malaysia before taking over in 1981 as the chief minister from his uncle, Abdul Rahman Yaakub. Rahman, now 81, ruled Sarawak for 11 years. Taib, who has silver hair, appears almost daily on the front pages of Sarawak newspapers, sometimes sporting a goatee and a pair of rimless glasses, at the opening of new development projects or local events. He lives in Sarawak’s capital city of Kuching, an urban area of about 600,000 people on the Sarawak River. Its picturesque waterfront is dotted with colonial buildings, the legacy of British adventurer James Brooke, who founded the Kingdom of Sarawak in 1841 and became known as the White Rajah. Brooke’s heirs ruled the kingdom until 1946, when Charles Vyner Brooke ceded his rights to the UK. Sarawak joined the Federation of Malaysia on September 16, 1963, along with other former British colonies. At Taib’s mansion, which overlooks the river, he receives guests in a living room decorated with gilt-edged European-style sofa sets, according to photos in the July to December 2006 newsletter of Naim Cendera Holdings Bhd., which changed its name to Naim Holdings Bhd. in March. Naim is a property developer and contractor whose chairman is Taib’s cousin, Abdul Hamed Sepawi. He is also chairman of state power company Sarawak Energy and timber company Ta Ann Holdings Bhd., and is on the board of Sarawak Timber Industry Development Corp. and Sarawak Plantation Bhd. Naim and CMS jointly built Kuching’s iconic waterfront building, the umbrella-roofed, nine-story Sarawak State Legislative Assembly complex. Naim has won more than 3.3 billion ringgit worth of contracts from the state and the federation since 2005, its stock exchange filings show. Ricky Kho, a spokesman for Naim, said the company declined to comment for this article. Naim’s deputy managing director, Sharifuddin Wahab, said in an interview with Bloomberg News in July 2007 that the chairman’s family ties weren’t why the company won government contracts. “We have been able to execute our projects on time, we stick to the budget and the quality of what we hand over to the government is up to their expectations, if not more,” he said. “Our teams have always acted professionally” when working with the government, whether on large or small projects, CMS’s group managing director, Richard Curtis, said in an e-mail. “CMS is governed by the strict listing regulations of the Malaysian stock exchange,” he said, adding that the chairman and the group managing director are both independent. “The large projects carry with them an equally large risk, including a huge reputational risk, particularly for crucial projects by the government,” he said. “It is the government’s prerogative and discretion to award projects using a variety of approaches that includes open and closed tenders as well as directly negotiated processes, to the contractors and developers they feel will deliver the project as promised.” Malaysia’s reputation as a place to conduct business has deteriorated in recent years, according to Transparency International, the Berlin-based advocacy group that publishes an annual Corruption Perceptions Index. Transparency ranked the country 47th out of 180 in 2008, down from 43rd in 2007. Transparency also has singled out the Bakun Hydroelectric Dam, under construction on the Balui River in Sarawak, as a “monument of corruption.” The index lacks fairness, says Ahmad Said Hamdan, chief commissioner of the Malaysian Anti-Corruption Commission, because it doesn’t take into consideration the size of the population of the countries in the ranking, for example. “I’ve seen a lot of improvement in civil service in the past 10 years,” he says. Early this year, hundreds of dead fish started floating on the muddy river near the Bakun dam site. The fish were killed by siltation, which was triggered by uncontrolled logging upstream, Sarawak’s assistant minister of environment and public health, Abang Abdul Rauf Abang Zen, says. He says the Bakun dam has very strict environmental assessments and isn’t to blame for the siltation. In January, Tenaga Nasional Bhd., Malaysia’s state-controlled power utility, and Sarawak Energy said they won approval from the national government to take over the operation of the hydropower project through a leasing agreement. Sarawak Energy also won preliminary approval to export about 1,600 megawatts of electricity from the 2,400-megawatt Bakun project, once it begins operating, to Peninsular Malaysia. The remaining power will go to Sarawak. Taib announced a plan called New Concept in 1994. The aim was to bring together local people, with their customary rights to the land, and private shareholders, who would provide capital and expertise to create plantations. The plan called for companies to hold a 60-percent stake in the joint ventures, the state to own 10 percent and the remaining 30 percent to go to local communities in return for a 60-year lease on their land. That time period equals about two complete cycles of oil palm development. An oil palm typically matures in 3 years, reaches peak production from 5 to 7 years and continues to produce for about 25 years, says Nirgunan Tiruchelvam, a commodities analyst at Royal Bank of Scotland Group Plc in Singapore. The policy has led to some disagreements. In his interview with Bernama in 2001, Taib said land acquisitions by the state have led to “emotional” disputes because some people seek too much compensation. “We are not allowed to pay more than market value,” he told Bernama. He said people need to prove that they have traditionally lived in an area—for example, by providing an aerial photograph—in order for the state to grant them title to the land. “If there are disputes, they go to the court,” Taib told Bernama. Some local people say they received no compensation at all for their land. In Kampung Lebor, a village about a two-hour drive from Kuching, 160 families, members of the Iban group that was formerly headhunters, live in longhouses and survive by fishing and some farming. The Iban are Sarawak’s largest single group of Dayaks, who make up about half of the state’s 2.3 million population. In mid-1996, the state handed out parcels of land that overlapped with the community’s customary hunting and fishing areas to the Land Custody and Development Authority and Nirwana Muhibbah Bhd., a palm oil company in Kuching. In mid-1997, the authority and the company cleared the land with bulldozers and planted oil palm seedlings, according to a copy of Kampung Lebor’s writ of summons filed to the High Court in Kuching. “The government is cruel,” says Jengga Jeli, 54, a father of five in Lebor. “Fruit trees have been cut down. It’s become harder to hunt and fish. Now we are forced to get meat and vegetables from the bazaar, and we are very poor.” Jengga’s village filed a lawsuit in 1998 against Nirwana, LCDA and the state government in a bid to get compensation. The case was finally heard in 2006 and is now awaiting judgment, according to Baru Bian, who is representing the Iban in Kampung Lebor. Reginal Kevin Akeu, a lawyer at Abdul Rahim Sarkawi Razak Tready Fadillah & Co. Advocates, which is representing Nirwana and LCDA, declined to comment. The cases show that the development projects, including plantations and dams, haven’t helped poverty among the local people, many of whom live without adequate electricity or schools, says Richard Leete, who served as the resident representative of the United Nations Development Program for Malaysia, Singapore and Brunei from 2003 to 2008. “This is the paradox of Sarawak—the great wealth it has, the natural resources in such abundance, and yet such an impoverishment and the real hardship these communities are suffering,” says Leete, who chronicled Malaysia’s progress since its independence from Britain in his book Malaysia: From Kampung to Twin Towers (Oxford Fajar, 2007). “There has no doubt been a lot of money politics,” he says. In the rugged hills about 150 kilometers south of Kuching, some 160 Bidayuh families, known as the Land Dayaks, are clinging to their traditional habitat, while a dam is under construction nearby. They live by farming and fishing. With only a primary school in the village, children have to go to boarding schools outside the jungle to get further education, crossing seven handmade bamboo bridges and trekking two hours over the hills when they return home. The state has offered the Bidayuhs 7,500 ringgit per hectare, 80 ringgit per rubber tree and 60 ringgit per durian fruit tree in compensation for their native land, says Simo ak Sekam, 48, a resident of Kampung Rejoi, one of four villages in the area. In Rejoi, about half of 39 families have refused. “We don’t want to move because we are happy here,” Simo says. “We feel very sad because our land will be covered with water. The young generations won’t know this land. They won’t see the bamboo bridges.” The builder of the local reservoir is Naim Holdings—the company headed by Chief Minister Taib’s cousin. The government awarded Naim the 310.7-million-ringgit contract without putting it out for bids. Naim’s statement announcing the deal in July 2007 said it won the job on a “negotiated basis.” One of the most threatened groups is the Penan, nomadic people who live deep in the jungle on the upper reaches of the Baram River. On a steamy equatorial morning in late October 2007, Long Kerong village leader Kelesau Naan and his wife, Uding Lidem, walked two hours to their rice-storing hut. Kelesau, who was in his late 70s and who had protested logging activity in their area, told Uding he’d go check on an animal trap he had set nearby. He never came back. Two months later, his skull and several pieces of his bones, along with his necklace made of red, yellow and white beads, surfaced on the banks of the Segita River. Inspector Sumarno Lamundi at the regional police station says the investigation is ongoing. It was just the latest tragedy among activists working for the Penan since the early 1990s, when rampant logging took place. At least two other Penan were found dead, including Abung Ipui, a pastor and an advocate for land rights for his village. His body was found in October 1994 with his stomach cut open. Manser, the Swiss activist for the rights of the Penan, vanished without a trace from the Borneo rain forests in May 2000 and was officially declared missing in March 2005. Kelesau’s death has made the Penan willing to stand up for their survival. “We are scared of something terrible happening to us if we don’t resist,” says grim-faced Bilong Oyoi, 48, headman of Long Sait, a Penan settlement close to Long Kerong. Bilong, who wears a traditional rattan hat decorated with hornbill feathers, says his group is setting up blockades to resist logging activities. They are also working with NGOs to get attention for their plight and filing lawsuits. With the help of the Basel, Switzerland-based Bruno Manser Fund, an NGO set up by the late activist, Bilong and 76 other Penan sent a letter—which some signed using only thumb prints—to Gilles Pelisson, the chief executive officer of French hotel chain Accor SA. The letter urged Accor to think twice about partnering with logging company Interhill Logging Sdn. to build a 388-room Novotel Interhill in Kuching. The Penan community says Interhill’s operations in Sarawak have a devastating effect on them. Accor responded by sending a fact-finding mission to Sarawak to investigate Interhill’s logging activities. “If the worst-case scenario occurs and if no action plan is implemented, we will not continue with our partnership,” Helene Roques, Accor’s director for sustainable development in Paris, said in June. In mid-August, she said she expects “good results” by the end of September. No foreign investor has made a larger bet on Taib’s development plans than Rio Tinto Alcan, a unit of London-based mining company Rio Tinto Plc. A joint venture between Rio Tinto and CMS for a $2-billion aluminum smelter has been negotiating power purchase agreements with Sarawak Energy for more than 12 months, according to Julia Wilkins, a Rio Tinto Alcan spokeswoman in Brisbane, Australia. CMS meets Rio Tinto’s requirements as a joint-venture partner, she says. “CMS is a main-board-listed company with its own board of directors,” she says. “It has a free float of shares in excess of the minimum market requirement. The chairman and the group managing director are both independent.” Malaysia grants special economic advantages to the country’s Malay majority and the local people of Sabah and Sarawak states on Borneo, collectively referred to as Bumiputra—literally, sons of the soil. Still, the country is leaving behind many of its ethnic minorities, says Colin Nicholas, a Malaysian activist of Eurasian descent who has written a book about the mainland’s oldest community, The Orang Asli and the Contest for Resources (IWGIA, 2000). One person trying to help the Dayaks is See Chee How, 45, a land rights lawyer who became an activist after meeting Sim, the former opposition member of parliament in Kuching. In 1994, See witnessed an attack on Penan demonstrators who’d erected a roadblock to prevent logging trucks from driving through their land. A six-year-old boy died after security forces used tear gas on the demonstrators, he says. “They were completely powerless,” recalls the soft-spoken, crew-cut See, sporting a white T-shirt and a pair of jeans, in his office above a bustling market in Kuching. “They were depending on logging trucks to move around because their passageways had been destroyed by logging trails.” See now works with Baru Bian, 51, one of the first land rights lawyers representing the Dayaks in Sarawak. Nicholas says Sarawak’s people have to fight for their rights not only through lawsuits but by voting. “The biggest problem we have with indigenous people’s rights is that we have the federal government and state government run and dictated by people who have no respect or interest for indigenous people,” he says. “We need a change of government.” The prime minister’s office declined to comment. Opposition leader Anwar says change is possible. His alliance won control of an unprecedented five states in Peninsular Malaysia in a March 2008 election. Malaysian Prime Minister Najib Razak’s ruling coalition has lost at least four regional polls held this year. “I think this is a turning point,” Anwar says. Still, Taib’s coalition won 30 of Sarawak’s 31 seats in March 2008 parliamentary elections. That helped the ruling National Front coalition led by then Prime Minister Abdullah Ahmad Badawi retain a 58-seat majority, ahead of Anwar’s People’s Alliance. Sarawak is due to hold the next election by 2011. Taib defended his government’s program to turn forestlands into oil palm plantations as a way of improving living standards for the Dayaks at a seminar on native land development in Miri on April 18, 2000. “Land without development is a poverty trap,” he said, according to his Web site. Many Dayak people, who have seen their land transformed as a result of Taib’s policies and companies linked to him, say they are still waiting to see their share of wealth. IN PHOTO -- A PENAN man in traditional garb hunts using darts and a blowpipe on April 29, 2009, in the Sarawak region of Malaysia. Penan people have lived for centuries by fishing and hunting in the forest, but their way of life is now threatened by rampant logging and dam construction. MUNSHI AHMED/BLOOMBERG MARKETS VIA BLOOMBERG