The privatisation of Malaysia Airline System in 1994 provides an object lesson in how not to sell off a country's public utilities.

Back in the 1950s, Malaysia Airline System (MAS) and Singapore Airlines (SIA) were all part of a happy family, belonging to a carrier called Silver Kris. Since Singapore's separation from the federation, and the split of the airline in 1972, the Siamese twins have suffered different fates since. While Singapore Airlines has gone on to become one of the world's best, and continues making strategic strides in the international aviation market, the Malaysian airline is inward-looking and mired in debt; and the liabilities have just fallen from private hands into the public's lap.

MAS was privatised in 1994 when Tajudin Ramli, a former banker whose business mainstay had been in telecommunications, acquired a 32% stake in the national carrier from the Government, paying eight ringgit a share. After the seeming privatisation, the airline's financial position deteriorated, suffering four consecutive years of losses from 1997. Earlier this year, in an effort to turn the company around, the Government paid the same amount it paid last time to buy the shares back from Tajudin. Since MAS' share price has fallen significantly since the first transaction, the Government's purchase price was at a premium of twice the 3.6 ringgit market price at that time. The airline is now effectively re-nationalised; investment house ING-Barings estimates that the Government and its related agencies, including the people's pension fund (Employees' Provident Fund), own about 85% of the carrier.

What went wrong with the privatisation of Malaysia's flag carrier? "During the 1980s, many national assets were privatised in a non-transparent manner, without an open bidding process," says Terence Gomez, a political economist at the University of Malaya who has done research on the privatisation program in Malaysia. The typical economic rationale for privatisation is to improve efficiency by injecting entrepreneurship into the enterprise or by allowing for competition. In Malaysia's case, privatisation is just "a means to an end", says Professor Gomez. The "end", which is often left unsaid, is to create a class of Bumiputera entrepreneurs to fulfil the wider objective of the New Economic Policy, an affirmative-action program aimed at redistributing wealth to ethnic Malays.
The manner in which the assets were sold to the Malay entrepreneurs gave rise to further problems. "None of those who have bought the government assets or have been awarded contracts are not well-connected to the incumbent politicians. Hence, the assets were handed over to a group of people who might not be best qualified to run them. The recent bailouts of these financially troubled companies further attests to the pitfalls of such crony capitalism," says Gomez.

Financially distressed corporations that have been rescued by the Government recently include the Bakun dam operator Ekran, the national sewerage company Indah Wata Konsortium (IWK), light-rail train operators Putra and Star, the former investment arm of ruling party UMNO Renong, and of course, Malaysia Airlines.

Tajudin Ramli is a protege of Tun Daim Zainuddin, the then finance minister and erstwhile financial adviser to Prime Minister Mahathir Mohamad. It is puzzling why Tajudin, who owned the country's first mobile-phone operator, Celcom, was picked to run the national carrier. "Tajudin did not know what it takes to run an airline," says Sachi Thananthan, the editor-in-chief of the Kuala Lumpur-based Asian Airlines & Aerospace magazine.

The lack of management expertise and fiscal discipline spelled trouble for the national carrier. First, Tajudin's couldn't-care-less attitude alienated employees and led to high staff turnover and the departure of experienced pilots. Second, the practice of nepotism meant that inexperienced people were often hired or promoted to fill top positions, according to sources familiar with the airline. This resulted in deteriorating service, and MAS was clearly trailing rivals such as Thai Airways and Singapore Airlines soon after Tajudin took over.

The airline bore the brunt of the rise in the fuel price when oil prices shot up to a 10-year high of $US39.05 a barrel last year. Unlike Singapore Airlines, Cathay Pacific and Qantas Airways, whose hedging policies allowed them to lock in future fuel prices, Malaysia Airline's operating costs ballooned. The company's net loss soared to 1.33 billion ringgit ($US342 million) in 2000 from 258.6 million ringgit the previous year.

MAS does not belong to any international alliances, such as Star Alliance and Oneworld. This affects its passenger load because business travelers rely on those alliances to earn frequent-flier points and to make seamless connections around the world.

A problem with all privatised assets in Malaysia is that the Government imposes certain obligations on them that often run contrary to the profit-maximising principle. "MAS began fulfilling its national integration obligations by providing air links between Peninsular Malaysia, Sabah and Sarawak in 1972. At the time, because Sabah and Sarawak were far less developed than Peninsular Malaysia, air was the most important means of transport to reach the eastern part of Malaysia. Flying routes to the rural areas and small towns that are not cost-efficient comes at a huge expense to the airline's bottom line," says Asian Airlines & Aerospace magazine's Thananthan. The airline has been cross-subsidising its international and domestic routes ever since. "Between 1991 and 1999, MAS incurred an accumulated loss of 2.48 billion ringgit, of which 1.25 billion ringgit, or 56%, was due to its domestic operations," says the magazine.

The Government recently gave MAS the approval to raise its domestic airfares within Peninsular Malaysia by 51%. Although this is expected to increase its revenue by about 100 million ringgit annually, it is insufficient to cover its losses from domestic operations. The bulk of the losses come from the routes to East Malaysia, which remain heavily subsidised. Despite the rise in fares, MAS' domestic airfares of 49 Malaysian cents per kilometre remain one of the region's lowest; compared to the Philippines' 52.5 cents, India's 71.8 cents, Indonesia's 95.6 cents, and China's 51.3 cents.

Some of the national carrier's international routes also don't make much economic sense. It is one of the few airlines in the region to provide links to developing countries such as Argentina and Brazil. These loss-making routes are for foreign-relations purposes to foster South-South integration, as encouraged by the Government, rather than for any profiteering objective, says Thananthan.

The Government's takeover of the controlling stake in the airline is unlikely to narrow the gap between MAS and its southern sibling, SIA. Although the carriers have fleets of a similar size, of about 100 aircraft, Singapore Airlines' financial stature dwarves that of Malaysia Airline. With a market capitalisation of $US8.1 billion, Singapore Airlines is more than 15 times the size of MAS. While Malaysia Airline is saddled with a long-term debt of 9.4 billion ringgit and a debt-to-equity ratio as high as 2.9, Singapore Airlines has an annual cashflow of more than $US1.1 billion. SIA is also expanding its reach into foreign markets by acquiring stakes in Virgin Atlantic and upping its control of Air New Zealand.

The vastly different condition of SIA compared with MAS implies that privatisation is not the most crucial factor in a company's performance; Singapore Airlines has managed to perform with flying colors despite being majority owned by the Singapore Government.

"The way in which privatisation is executed is critical, if the Government is to transfer assets to the private sector," says Professor Gomez. "Privatised assets should go to those best fit to manage them rather than those with the best political connections."