Saturday, December 06, 2008

ValueCap Not For Bailouts?

Finance and Deputy Prime Minister Datuk Seri Najib Razak continued to insist that the RM5 billion injection of public funds into the Valuecap Sdn Bhd investment fund will not be used to either bail out the politically connected of any government-linked companies (GLCs) as reported in the media today.

His denial has come to calm public fears and unhappiness over the move to direct the Employees Provident Fund (EPF) to lend the RM5 billion to Valuecap.

However, his assurances lacks conviction for he has still begs many many questions.
  1. With so many credible foreign and local investment and fund managers with extensive experience in the local markets, why is it that the Government is not direct funds to these institutions to “value invest”? Why is it that the Government is directing these funds to a little known company, ValueCap, with uncertain, opaque and questionable track record to invest such a large sum of money?

  2. The fact that the original bond amounting to RM5.1 billion which will expire in March 2009 has been further extended beyond the terms of the agreement raises the question as why a company which has not been able to repay such an amount, be extended an additional RM5 billion? ValueCap is set to become one of the rare fund management company in the world which invests with nearly 100% of its investment capital sourced from loans and not from investors.

  3. After initial protests by the public on EPF's loan to ValueCap which is subjected to extensive risks, the Government took the most irresponsible step of becoming the guarantor to the loan. What that essentially means is that should ValueCap fail to repay the EPF, the tax payers will then bear the burden of the loan. 
This measure will also create a moral hazard situation whereby the fund managers will likely adopt a high risk investment strategy since there is no “downside” to the investment for the Government will bail them out in the event of failure.

In fact, the repeated attempts to provide verbal reassurance on EPF's RM5 billion injection by the Finance Minister clearly demonstrate continued public opposition to the measure since it was first announced more than a month ago.

Hence, Datuk Seri Najib should do what a responsible Finance Minster should do, that is to reverse the RM5 billion injection decision, and instead place appropriate pressure on the EPF investment board to improve the performance of its investment returns.
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