Monday, May 31, 2010

Subsidies make Malaysians a 'spoilt' lot

I borrowed the annoying and grating title from the news report here. It is annoying because it reflects an uninformed and highly condescending school of thought that assumes that Malaysians chose to be widely subsidised.

Did Malaysians choose to be subsidised?

Or, was it the past political masters who decreed, in their infinite wisdom or, infinite folly, that the path to popularity was by way of introducing consumption subsidies a'la Brunei and the Arab states?

DR. R.THILLAINATHAN wrote a useful historical excursus into this matter of government policies that introduced consumption subsidies that escalated and ballooned to the present unwieldy structure. You may wish to read the paper here. I urge you to read it.

To whomever it may concern, please stop calling Malaysians a "spoilt lot" because we never asked for consumption subsidies.

We were coping fine with our personal struggles and, we would have found our own comfortable level of living.

We did not ask to be subsidised.

Now that the shit has hit the fan; now that the Malaysian Government cannot cope with dishing out subsidies, I am not about to go on a witch-hunt. I am not interested in chasing after retired political masters. That is a job for other politicians, if they wish to do so.

Like every other Malaysian I am interested to see how this "subsidy addiction" that is not of our asking is managed by the Malaysian Government as it is currently constituted.

The immediate thing that I want to say is that the laboratory (not "lavatory" although many Malaysians mispronounce it, whether deliberately or otherwise) conducted by Idris Jala and his team has somehow avoided educating the Malaysian public about how Malaysia has arrived at the the brink of bankruptcy due to subsidies.

That is why, a historical context is needed...unless the present Administration does not think that Malaysians are intelligent enough to appreciate the need to know how the shit has hit the fan...or, unless the present Administration does not want to incur the wrath of political masters past whose shadow still writs large...

Whatever be the reason, just stop calling Malaysians a "spoilt lot" because that is absolutely unfair and untrue and annoying and grating on our nerves.

Wednesday, May 26, 2010

Early Buffettology

Way back in March, 1982, Warren Buffett was not an immediately recognisable brand name. But, he was already a significant investor with an equity portfolio of USD600 million. Compared to Berkshire's current asset value of USD300 billion and a market capitalisation of USD150 billion, that 1982 equity portfolio may seem a trifle small.

Such a view would belie the importance of content and substance over form.

In a letter dated 5th March 1982, Buffett had written to a legislator warning against the rise of derivative securities products. Anyone who has read my earlier posts on derivatives will know how sceptical I am about this dubious securities instrument.

So, I was delighted to read that Buffett had held a similar view way back in 1982 when derivatives began to gain some measure of ascendancy. In that maiden wave, derivatives reached its apogee with the likes of Michael Milken and junk bonds.

I was even more delighted to discover that to enlighten the said legislator, Buffett had equated derivatives to gambling products offered in places like Las Vegas.

Here's an extract of Buffett's letter as reported:

In the 1982 letter Buffett argued that the "propensity to gamble is always increased by a large prize versus a small entry fee, no matter how poor the true odds may be. That's why Las Vegas casinos advertise big jackpots and why state lotteries headline big prizes." By small entry fee he was referring to the cost of buying or selling an option or futures contract on the S&P 500 index, a small fraction of the index's market value.

"In securities," Buffett argued "the unintelligent are seduced by low margin requirements through which financial experience attributable to a large investment is achieved by committing a relatively small stake." Harking back to the wild markets of the 1920s when the boom in stocks was accentuated by 10% margins, Buffett warned that "10% down payments" are simply a way around the margin requirements and will be immediately perceived as such by gamblers throughout the country." In ending the four-page letter Buffett warned that "the net effect of high-volume futures markets in stock indices is likely to be overwhelmingly detrimental to the security-buying public and, therefore, in the long run to capital markets generally."

If that is Buffett's damning observation of derivative products, there is hardly any doubt as to his views on gambling as an activity.

Wednesday, May 19, 2010

Hit Me Again! The Gambling Brain

I have always thought very lowly of the propensity of people to make wagers. It has never made any sense to me.

I have always eschewed chance and favoured certainty. If that makes me a boring person, then so be it.

While taking risks are part and parcel of the business world, those of you who are involved in new business development would understand what I am saying when when I say that in spite of inherent risks in embarking on new business ventures, sound acumen requires us to turn our minds to the reduction and minimisation of risk so that the chances of success (i.e. profitability) is more certain than not.

In this sense, the recent award (or, for the pedantic reader, re-award) of the sports betting licence by the Malaysian Government and, the subsequent corporate exercise, resulted in a positive market reaction (even if it has created indignation among socio-religious groups). The rewards of gambling to the promoters of gambling are a certainty.

On the flipside, the rewards of gambling to the gambler is uncertain; hence the public opprobrium on the perils of gambling.

So, here we are.

Sharon Begley, Newsweek's science editor wrote this interesting piece that focuses on the behaviour of gamblers and how promoters of gambling prey on specific behaviourial patterns exhibited by gamblers. The focus of the piece is on slot machine design. But, it has equal relevance to any form of gambling:

When there is a commercial motivation to understand and exploit the human mind, business gets there before science. Case in point: the power of near-misses to keep gamblers glued to a slot machine.

As anyone who has come oh-so close to winning a computer solitaire game and been unable to resist clicking "new game," or who has found it harder to walk away from a slot machine after spinning two bells and a lemon (a near-miss) than after getting a bell, a lemon, and a three-bar (a total miss), knows, near-misses are like crack. The reason, according to a paper in the current issue of The Journal of Neuroscience, is that near-misses raise activity in the exact same reward circuitry of the brain as wins do. And in a finding that offers insight into problem gambling, the brains of problem gamblers react more intensely to near-misses than casual gamblers do.

The reward circuitry runs on the neurotransmitter dopamine, which has been widely, if simplistically, called the brain's reward chemical. It is such an all-purpose molecule that it underlies the pleasure we get from (and, for some, the addictiveness of) drugs, alcohol, sex, chocolate, gambling, and (for the psychopaths among us) even causing others pain.

For their study, led by Luke Clark of the University of Cambridge, researchers recruited 20 volunteers. Their gambling habits ranged from buying a lottery ticket occasionally to making regular bets on sports. The volunteers played a computerized slot machine with two spinning wheels. When two pictures matched, the volunteer won 50 pence (about 75 cents). No match, no payoff. At the same time, the volunteers had their brain activity measured by fMRI, functional magnetic resonance imaging .

As expected, wins activated the reward pathways in the region called the midbrain. But so did a loss in which the second icon was right above or below the one that would have matched the icon on the first wheel—a near-miss. Since the bursts of dopamine indicated by the brain activity bring a sense of reward and keep people coming back for more, the fact that they are as intense as the bursts that follow a win suggests an explanation for the power of near-misses to keep people gambling. Although losing feels subjectively lousy, near-misses nevertheless spritz the brain with the dopamine that makes a behavior addictive.

The psychology behind this seems to be that people who play slot machines or the lottery, where wins and losses are the result of pure chance, often mistakenly believe that skill is involved. This illusion of control ropes gamblers into trying their luck after a near-miss. Compulsive gamblers have it worst: their brains reacted much more to near-misses than did the brains of casual once-a-month lottery players.

In a paper last year in the journal Neuron, Clark and his collaborators laid the groundwork for the latest finding. There, they reported that although near-misses while playing a slot machine felt less pleasant than wins (duh), they increased the desire to play just as much as long as players felt they had some control over their spins—supporting the idea that the illusion of skill underlies the phenomenon. (When the slot machine was rigged so that the computer chose what icon appeared on the first wheel, and thus what the second wheel would have to match for a win, players felt less control than when they were allowed to choose the left icon. Players seemed to feel that if they were permitted to choose, say, an orange as the icon to match, they had a higher chance of winning.) Near-misses, by activating the same circuitry that winning money does, "invigorate gambling through the anomalous recruitment of reward circuitry," Clark and his team wrote. But that study used ordinary people with no particular gambling habit, mild or intense. The current one shows that near-misses have even greater power over problem gamblers.

A little digging finds that although neuroscientists may be just figuring out the power of near-misses to keep gamblers playing, slot-machine makers have known about it for decades. In a 2008 study, scientists analyzed how "slot machine manufacturers use virtual reels and a technique called 'award symbol ratio' to create a high number of near misses above and below the payline"—that is, so that the losing icon appears right above or below the winning cherries, lemons, or whatever. Thus we see yet again that when there is money to be made by understanding the brain, business beats science.

Tuesday, May 18, 2010

Sime Energy Redux

I just discovered that contrary to my earlier post on the Sime Energy debacle which was premised, in part, on the assumption that the working group was formed way back in 2008, the working group was actually formed in October 2009. So, it took nearly 8 months between the formation of the working group to Sime's recent action to remove the CEO.

One question that needs to be asked (and, I'm being rhetorical) is why Zubir, as CEO, was not able to deal with the debacle as a corporate leader with full executive powers would have had to. Instead, the Sime board had to form a working group to deal with the matter.

Obviously the Sime board had formed the view that the CEO had failed to manage the matter, leading to his removal.

Was the Sime board misled by senior executives to lull them to a sense of complacency on this issue between 2008 to the time when the working group was formed?

If the answer is in the affirmative, then, the perpetrators should be brought to book as soon as possible.

Anything less would not be satisfactory to investors and stakeholders.

And, I should add that given the great complexity of the Sime Energy debacle and, the high possibility of cover-ups by the perpetrators and, worse still, destruction of evidence, the present Sime board led by Tun Musa Hitam should be urged and pressured to hasten the investigation process so that the necessary legal proceedings are put in motion on an urgent basis.

This is the priority. Whatever the Sime board, as presently constituted, does after the legal proceedings are put in motion and successfully prosecuted is another matter.

The Sime board should rise to the occasion at this critical juncture and act fast before the trail of corporate abuse goes stale and the culprits are allowed to go away scot-free.

In this manner, Sime's board will be demonstrating to all investors and stakeholders that the Sime Group stands for good corporate governance.

As the saying goes, it is better to be late than never.

Monday, May 17, 2010

Aussie skilled migrant list to shrink; cooks, journalists axed

When I read this media report on Australia's minor revision to their immigration classification, I was somehow reminded of Douglas Adams and his seminal work, The Hitchhiker's Guide To The Galaxy.

pix from here

Hitherto, cooks and hairdressers acupuncturists, private dance teachers, illustrators, piano tuners, journalists and naturopaths are some of the occupations under the category of valued vocations under Australia's skill migration programme.

It appears to have dawned on the Aussie government that Australia actually needs to attract skilled migrants of the highest calibre and deliver people with "real skills" to meet "real need" in their economy. Hence the removal of 219 occupations including the cooks and hairdressers acupuncturists, private dance teachers, illustrators, piano tuners, journalists and naturopaths mentioned.

There is a chapter in The Hitchhiker's Guide where a supposedly dying planet of a highly advanced civilization organised a mass migration in three arks. The three arks were classified as Arks "A", "B" and "C" respectively.

The "A Ark" was supposed to contain leaders, the "C Ark" to contain workers, and the "B Ark" to contain middle-men. The "B Ark" was filled with bodies, such as frozen telephone sanitizers, hairdressers, and advertising account executives.

It becomes apparent that the stories of impending doom were nonsense, and the A Ark and C Ark were never launched.

This leads me to wonder how many Malaysian emigres to Oz were Ark B-types...

Sunday, May 16, 2010

Sime's Energy debacle: Failure of corporate governance?

Was it not John F. Kennedy who said, "Victory has a thousand fathers, but defeat is an orphan"? And, so it came to pass that the erstwhile Sime Group CEO, Datuk Zubir, was made an orphan in the wake of a provisioned loss of RM964 million.

This near-billion Ringgit provision is constituted by RM200 million from the Qatar Petroleum (QP)project, RM159 million from the Maersk Oil Qatar (MOQ) project, RM459 million from the MOQ marine project and, RM450 million from the Bakun Hydroelectric project. All of which comes under the Sime Energy Division.

How that happened is an interesting tale that is likely to be kept under a shroud of secrecy until stakeholders and public pressure demand a full disclosure. It may be that one highly charismatic and persuasive Division CEO prevailed over his superiors through sheer charm and wile. Or, it may be something else.

What we know is that way back in 2008, Sime's internal audit team had red-flagged the QP project to the Sime audit committee at group level.

The reaction was the formation of a "work group" comprising Sime Group-level directors. In other words, in true "Yes Minister"-style, a committee was set up to look into the issue.

Why it took between 2008 to May, 2010 for major action to be taken is, in my view, as serious a matter as the issue of the losses itself. (Errata: I just learnt that the working group was actually only formed in October 2009. So, to be fair, the working group has worked at an urgent pace given the complexity of the matters at hand.)

It is also reported that the Chief Financial Officer Tong Poh Keow had recommended provisions to be made for the losses. This was not done. Had it been done, investors and stakeholders would have been alerted to the escalating losses. Why the provision was not made is also a mystery. Some may tersely surmise an attempt to bury the issue or, worse still, an expression of sheer naivete that by ignoring the issue and, leaving it to the "work group" the issue will, in Zen-like fashion, go away into another Universe.

So, while some may now say that it took great courage for the Sime Group board of directors to get rid of Zubir and, before that, the Sime Energy CEO, the question that will linger for a long while is, why it took so long?

Why did a high-powered "work group" that was tasked to look into the growing financial debacle of QP (and, very likely the brief expanded to include MOQ and Bakun) take such a long time, almost 2 years, to take any action?

The Sime honchos can argue until the cows come home that since action is now being taken, investors and stakeholders should have any fears allayed. It may not play out in this way.

Granted that the decisions made at Sime Energy were done prior to the great merger of Sime, Golden Hope and Guthrie. But, it will not escape the notice of many that corporate exercises are de riguer in corporates the size of Sime Darby. It happens all the time. The difference is in the magnitude, that's all.

The concern here is the issue of failure of corporate governance at 2 levels, namely:
  • The obvious matter of strengthening the governance of new project proposals, especially, the risk management issues. No doubt, ex post facto, this is in place to more rigorously examine new project proposals.
  • The less obvious and, more immediate matter is, how a multinational corporation like Sime dealt with the issue. Why did it take so long before facts could be gathered and necessary advice obtained? This is especially intriguing when the blogosphere was already rife with chatter about the QP and MOQ debacle for nearly 2 years.
There is a lively indignance out there in the public domain that is demanding to see more heads rolling. There is also a growing point of view that the Sime Group board should fall on their own swords and resign in toto. Clearly, people are not in a charitable mood.

I, for one, prefer to bite my tongue and, call upon Sime's corporate leaders to come up with more disclosures and provide more background and context to the debacle so that investors and stakeholders can make a more informed decision.

This is the time to say more rather than less. In a sense, if one has come out of the closet fully nude, one may as well point to each wart and explain it!

One final matter that needs looking at, not just at Sime but, within the corporate and regulatory community is whether independent, non-executive directors need to be given a more substantive role and, be remunerated in commensurate terms with greater responsibilities?

In an organisation the size of the Sime behemoth, independent, non-executive directors should be devoting at least 20 hours a week and, working very, very closely with the Internal Audit Department so that the chain of command is independent of the line and division managers.

As I understand it, in most large corporates, Sime included, the Internal Audit Department reports directly to the CFO and, nominally to the board of directors. There are so many possible conflicts of interest in this structure that I don't even know where to begin.

That said, I should end with a reminder that, in this saga, it was the Sime internal auditor that red-flagged the matter from the outset.

The real story, as the journos would say, is why it took the Sime Group-level senior management AND the board of directors soooo long to gather facts and, make hard decisions. That is the story that needs to come out at some point.

Tuesday, May 11, 2010

Dr M: Malaysia can grow without relying on FDIs

I agree with Dr M's observation, as reported in the Business Times, that given the right push and support, home-grown companies can grow to become successful global players, with spin-offs that will benefit the country and its people.

Dr M also made an important observation that local companies and corporations are well-run, but they do not get enough support from the government.

He made an interesting point, "Support is not in terms of cash, but if they need RM1 billion to expand, the government can help reduce the interest on financing. It won't cost the government much but the returns to the government is greater," when fielding a question on Vision 2020 after delivering a talk at The Malaysian Institute of Chartered Secretaries and Administrators (MAICSA) 50th Anniversary Lecture in Kuala Lumpur yesterday.

I have knocked the seeming obsession that we have with FDIs many a time.

If we were to trouble ourselves to study how Japan and Korea addressed the challenges of economic development we will find the source of Dr M's inspired observations.

The government must facilitate and foster homegrown entrepreneurship. Malaysia has a vast talent bank of business and managerial talent. Many may have left our fair shores. But, many more remain. These are the talent pool that needs to be encouraged and given the opportunities.

Dependence on FDIs will only make us a nation of employees.

Friday, May 7, 2010

PLUS, Touch ‘N Go mull replacing tolls with gantry system

When I read this report entitled PLUS, Touch ‘N Go mull replacing tolls with gantry system my immediate thought was:


It'll save a lot of money in medication and medical consultation on stress, high blood pressure, hypertension ... you get the picture.

And, economic opportunity cost of time wasted in highway toll queues.