Wednesday, June 30, 2010

Excerpt - Abstract : The Unofficial Appropriation of Forest Rent by Rulers in Southeast Asia 1970-99


"Natural resources are easy for governments to tax, as they embody high amounts of windfall profit or "economic rent." According to resource economics, it is optimal for governments to collect as revenues nearly all of the economic rent earned by resource extractors. For example, the Indonesian and Malaysian governments collect revenues from oil producers equal to 80 to 85 percent of economic rent.

The actual level at which these same governments collect economic rent from rain forest timber is generally quite small: 26 percent in Indonesia and 18 percent in the East Malaysian state of Sarawak. In contrast, experts claim that the capture of rent is quite high in the East Malaysian state of Sabah, where 88 percent of timber rent is collected. The dissertation seeks to explain this seemingly wide variation.

The study argues that government agencies fail to collect timber rent at optimum levels because they are prevented from doing so by rulers who use their positions to build and maintain hidden ties to the timber industry through which they appropriate vast amounts of timber rent. Conversely, the study argues that governments that succeed in collecting timber revenue are able to do so because they possess the institutional capacity to prevent rulers from absconding with timber rent.

Proving whether or not rulers are appropriating timber rent is accomplished through archival research, primary documents, and five years of field work to identify all forest areas licensed to the largest timber conglomerates in Indonesia, Sarawak and Sabah. This research is corroborated and supplemented through structured interviews to find out whether rulers, their families, proxies, business partners, and political supporters and financiers run or own these timber concessions.

The study concludes that in Indonesia, Sarawak, and surprisingly, Sabah as well, each head of state has multiple ties to timber concessions. Moreover, rates of timber rent capture in Sabah are not nearly as high as believed by experts. This dissertation estimates that the three governments failed to collect 40 billion dollars in timber revenues over thirty years. "

Actual Doc (372 pgs) :Why Governments Fail to Capture Economic Rent:The Unofficial Appropriation of Forest Rent by Rulers in Southeast Asia 1970-99


Why Governments Fail to Capture Economic Rent: The Unofficial Appropriation of Rain Forest Rent by Rulers in Insular Southeast Asia Between 1970-99

David W. Brown's dissertation which details the corruption and linkages in the timber industry in Sabah and Sarawak can be found here :-

I will try to put the whole thing online in my next post.

Malaysiakini editorial on Taib Mahmud

What Taib Mahmud can't buy

Steven Gan | May 28, 07 3:33pm

It is when you're near death that the vultures begin to circle above. Powerful politicians at the tail end of their careers understand this well.

Abdul Taib Mahmud may be a strongman in Sarawak, but he knows he will have to call it quits one day. At 71, and having been in power for 26 long years, that day is drawing near.

No wonder Taib is beginning to see haunting shadows everywhere. Otherwise he wouldn't be spooked by an innocuous report on allegations that he and his family were linked to a timber kickbacks scandal.

After all, this is not the first time he has been accused of corruption. In the old days, he would have ignored them and they would’ve died a natural death. But those pre-Internet days are gone.

That he sues an Umno newspaper, Utusan Malaysia, is also perhaps his way of warning Putrajaya not to - as in ex-premier Dr Mahathir Mohamad's words - 'kacau' (disturb) him.

But there's another reason for the lawsuit. It is a clever ploy to bar everyone, in particular the fledgling opposition in the Sarawak state assembly, from discussing the matter.

When the state assembly convened on May 14 - the first of such sittings this year - Taib took the unusual step of making a 10-page personal statement to deny his involvement in the scandal.

The speaker of the assembly refused to entertain any questions on the matter after Taib's speech.

The next day, the assembly speaker announced that Taib had already filed writs of summons in the High Court againstmalaysiakini, Utusan Malaysia and two opposition leaders, and as such any discussion would now be considered sub judice during the eight-day sitting.

Thus, the matter is permanently closed until the case goes court - a process which could take years.

From rags to riches

While Taib is king of the hill in his neck of the woods, he knows that the Sarawak chief minister serves at the pleasure of Putrajaya - they’re the ones who really call the shots.

His uncle, Abdul Rahman Yakub, quit as chief minister in 1981 after he fell out of favour with federal leaders. Taib, who was then a rising star and serving a stint in the federal cabinet, was sent back to Kuching to take charge.

Rahman took up the ceremonial post of governor but intended to pull the political strings from his new office. Not surprisingly, there was soon bad blood between the veteran politician and his protege Taib.

Six years later, Rahman engineered an attempted palace coup dubbed as the Ming Court Affair - named after the Kuala Lumpur hotel where the plotters had their secret meeting.

Rahman thought he had the upper hand over his nephew when more than half of the state assemblypersons pledged allegiance to him and vowed to move a vote of no confidence against Taib.

But Taib survived when then premier Dr Mahathir Mohamad, the real kingmaker, made it clear that he was standing by the incumbent. The coup fizzled out.

The family feud, in a nutshell, was about access to Sarawak's rich natural resources - timber, oil and land.

At the height of the war of words between the duo, Taib accused Rahman of giving away a whopping 1.25 million hectares of logging concessions worth RM22.5 billion to his family and cronies in his 11 years at the helm.

But having terminated the concessions disbursed by his uncle, Taib himself awarded an even bigger portion of the state’s resources to his own family and his set of cronies - 1.6 million hectares in total, or about the size of 26 Singapores.

The ensuing wholesale logging is arguably the most systematic destruction of the world's oldest rainforest. Faced with criticism, then state environment minister James Wong pooh-poohed the idea that deforestation could lead to global warming. The climate change, he said, would be ideal for playing golf.

And as the great forests of Sarawak dwindled in the 1990s, Taib's family moved on to other lucrative businesses by snapping up, among others, the once state-owned company, Cahya Mata Sarawak (CMS).

This conglomerate controls much of what goes on in Sarawak through its monopoly of cement, steel, timber, construction, financial services and banking.

Anyone who wants to do serious business in Sarawak may most probably have to deal with CMS or any one of its scores of subsidiaries. The company is cash rich too - two months ago, it sold its controlling stake in the debt-laden RHB bank to pension fund EPF for RM2.25 billion.

Among those holding key posts in CMS are Taib's Australian-born wife Laila, sons Sulaiman and Mahmud Abu Bekir, and brother Onn Mahmud.

Plenty for ACA to probe

The Anti-Corruption Agency, in the wake of the timber kickbacks scandal, has dusted off its files on Taib. We understand that the agency is not limiting its probe to the scandal alone. If that's the case, they have plenty to investigate.

Surely one place to start is the alleged abuse of power and conflict of interests, among others, in the award of government contracts to CMS. There were other allegations too.

Take the case of Wisma Sanyan - Sarawak's tallest building. Located in a city not known to be in dire need of office space, the 28-storey tower in Sibu was built by a company linked to Taib's brother, Tufail Mahmud.

Tufail did not fail. Indeed, the project was a guaranteed winner despite an office glut in Sibu. After it was built, state government agencies promptly took up eight floors of the tower block.

A similar complaint had been lodged against neighbouring Sabah chief minister Musa Aman over the Wisma Bandaraya scandal. It's the same story, only that Wisma Sanyan is - like everything else in Sarawak - 10 times bigger.

The question on everybody's lips is how Taib, who was so poor that his early schooling was sponsored by his estranged uncle, now has an accumulated family wealth of at least RM2 billion?

The powers-that-be are fond of throwing the challenge of ‘show the evidence’ to those making allegations of corruption. Prove it, they say. Clearly Taib's lawsuit against malaysiakini is an opportunity for us to do just that.

As one of the richest politicians in the country, Taib can afford to hire the best lawyers to fight his case. Malaysiakini will not be able to match his legal firepower. But we have truth on our side. And that's something surely money cannot buy.

A start, Cahya Mata Sarawak

From the Melbourne Age from in 2003

Being well connected goes a long way in Malaysia
May 15 2003

In some parts of Malaysia, business and politics are inextricably linked, writes Michael Backman.

The Sarawak State Government gave two road construction contracts worth a combined $M79.86 million ($A32.59 million) to the Malaysian company CMS Group last week. Last month, it gave CMS an even bigger contract, worth at least $M1332 million over 15 years, to maintain all of Sarawak's roads. The group's most recent annual report says it is the largest and fastest-growing conglomerate in the state.

As well it might. It is, you might say, well connected. CMS Group chairman is Sulaiman Abdul Rahman Taib. His younger brother Mahmud Abu Bekir Taib is deputy chairman. Their father is Abdul Taib Mahmud. He is the Chief Minister of Sarawak and has been since 1981.

The Chief Minister's brother Onn bin Mahmud also sits on the board of CMS. Not only is Abdul Taib Mahmud Chief Minister, he's also the Resource Management and Planning Minister. That means he's also the Forestry Minister. And that's lucky because another brother, Mohd Tufail bin Mahmud, is co-owner of Sanyan Group, one of Sarawak's biggest timber companies. Sanyan Group recently completed the 22-storey Wisma Sanyan in the Sarawak town of Sibu. There is an office space glut in Sibu but, fortunately, the Sarawak Government took up eight floors.
One of Abdul Taib's biggest supporters is the Deputy Chief Minister and Finance Minister George Chan. Chan's daughter is married to Abdul Taib's son Sulaiman Abdul Rahman.
Sarawak is one of the richest states in Malaysia. It earns about $M6 billion a year from timber and timber products. It earns that again from crude oil, and double that from natural gas. It is one of the world's major pepper exporters too. Even this earns almost $M200 million annually.

CMS Group originally was a monopoly cement producer established to feed the building boom then under way in both states. In 1989, the Sabah Government sold its stake and the Sarawak Government decided that the company should list on the Kuala Lumpur Stock Exchange. Abdul Taib's family emerged as its controlling shareholders.

The cement company was transformed into a conglomerate as a result of a host of government contracts.

CMS now encompasses more than 40 subsidiaries that operate in banking, securities and derivatives, cement and construction materials, steel, construction and road maintenance, property development, and services. Other recent government contracts include CMS's appointment in mid-1997 as joint developer of a $US1.5 billion ($A2.4 billion) low-cost housing project in Kuching.

In 2001, Malaysia's Federal Government awarded CMS a $M581 million contract to build a 178 kilometre road in the state. In January this year, CMS was given a five-year contract to supply roofing materials to a state-owned company for the construction of almost 11,000 low-cost housing units. CMS also has a $M150 million government contract to ease tidal flooding along the Sarawak River, a $M47 million government contract to upgrade a local airport, and other contracts to build hospitals.

"Abdul Taib's party forms a core component of Prime Minister Mahathir's ruling coalition."
Abdul Taib has a special place in Malaysian politics. His party is a component of Prime Minister Mahathir's ruling coalition and, come election time, Abdul Taib consistently delivers all or most of Sarawak's seats in the national Parliament to Mahathir's coalition.
In 2001, the Federal Government allowed CMS Group's banking unit Bank Utama to acquire RHB Bank to become one of Malaysia's 10 core banks. A past chairman of Bank Utama is Mahathir's Agriculture Minister, Effendi Norwawi. He also serves as vice-president of Abdul Taib's United Sarawak Bumiputera Party.

Last year, CMS missed out on a contract to build Sarawak's $M9 billion Bakun Dam. But it was not a total miss. The main component of any large dam is concrete, for which CMS has a near monopoly in Sarawak.

Economics - Trickle Down

In my studies of economics one example of trickle down economics has remained in my mind.

This is the example

If someone gets a business opportunity to earn 100,000 profit and he wants a car which cost 20,000, he is able to buy one and the car seller/distributor earns 20,000. The car seller then distributes part of this 20,000 as wages to his workers as well payment to his suppliers/car company with the remaining as profit.

However if 5 people get a business opportunity to make 20,000 then all of them are able to buy cars, the car seller is able to pay more to his employers, the car manufacturer makes more money and more money is circulated in the economy.

This is the same 100,000 except in one case 1 person gets everything and in the other it gets distributed to more than one person and more wealth is distributed overall into the economy from the consumerism of more people.

More or less, this is the difference between an open economy (relatively since a truly open economy also has external competition)and one where there is a monopoly or established connected rent-seeker able to seize/get given all opportunities for itself. Wealth will be concentrated in the hand of the few rather than being spread around and everyone in that society will be left worse off.

Established monopolies/rent-seekers dealing with the state are also less competitive and this higher cost of course is passed to the state which ultimately has less money to spend on social amenities (schools, roads etc).

So the few get wealthy and a lot of people lose out.