THE CORRIDORS OF POWER

Raja Petra Kamarudin



Last month, on 26 January 2007, Malaysia Today published a story called ‘Old man, new toys’ in this same column, The Corridors of Power. In that article we said as follows:

Do you know that Abdullah just bought his own jet, an Airbus A319, which you and I are paying for at a cost of more than US$60 million? The Airbus A319 is registered in the name of Penerbangan Malaysia. Now, I wonder how much more it is going to cost us to operate and maintain it every month.

The Malaysian Government’s latest aircraft, believed to have been ordered in mid-2005, is being refurbished for VIP configuration at Switzerland’s premier aircraft maintenance facility, the Basel-based Jet Aviation. The A319 CJ (Corporate Jet) is the latest addition to the Malaysian Government’s VIP fleet, currently operated by the Royal Malaysian Air Force.

(Access the full story here).

On 30 January 2007, Reuters reported: Malaysian Prime Minister Abdullah Ahmad Badawi kicked up a storm on Monday after ordering a new $50-million luxury jet despite a promise to rein in spending since he took office three years ago.

The Airbus A319, ordered by state leasing firm Penerbangan Malaysia Bhd, will be used by the prime minister, the king and other top leaders, a source close to the deal told Reuters. Delivery is set for July after it is fitted out in Switzerland, the source said. “The purchase was confirmed last year," the source said. "It will join an existing VVIP fleet.”

(Access the full story here)

That same day, Bernama reported Abdullah Badawi as denying the news reports that he had ‘bought’ an executive jet and explained that the government had only ‘leased’ the aircraft from Penerbangan Malaysia Berhad.

Bernama want on to say: The prime minister pointed out that the plane was not for his use alone. “The jet is for use of the government, not the prime minister (only),” he told a news conference at the KL International Airport upon his return from London after having attended the World Economic Forum (WEF) in Davos, Switzerland.

Elaborating, Abdullah said: “The aircraft belongs to Penerbangan Malaysia Berhad; it was (bought with) their money. We just leased it like how MAS (Malaysia Airlines) leases aircraft from them.”

(Access the full story here)

Now, note what Abdullah Badawi said on 29 January which was reported by Reuters, Bernama, The Star, etc., the following day:

1) He denies buying the Airbus Corporate Jet (A319 CJ) executive jet.
2) He explained that the aircraft was actually bought by Penerbangan Malaysia Berhad (PMB).
3) The Government will only be leasing it from PMB.

Abdullah said, “The aircraft belongs to Penerbangan Malaysia Berhad; it was (bought with) their money. We (the Government) just leased it like how MAS (Malaysia Airlines) leases aircraft from them.”

In his ‘clarification’, Abdullah Badawi failed to clarify that PMB is a 100% subsidiary of Khazanah Nasional. Khazanah Nasional, in turn, is the wholly-owned investment holding arm of the Government of Malaysia and is empowered as the Government’s strategic investor.

(See here for more details on Khazanah Nasional)

As trustees to the nation’s financial assets, Khazanah Nasional’s main objective is to promote economic growth and make strategic investments on behalf of the Government which would contribute towards nation building.

The Prime Minister, who incidentally happens to be Khazanah Nasional’s Chairman, pointed out that the plane was not for his use alone. “The jet is for use of the government, not the prime minister (only),” said Abdullah.

With this so-called ‘clarification’ by Abdullah Badawi, it appears like the issue of the Government-Khazanah splurging some RM200 million on a luxury private jet is now all water under the bridge. After all, Abdullah Badawi has explained that the jet is not for his ‘personal use’ and it was not ‘bought’ but ‘leased’. On the other hand, the ‘buyer’, PMB or Khazanah, has chosen to remain silent on how this purchase could contribute to its aim of promoting economic growth and making strategic investments on behalf of the Government.

And, with that, the matter ends here, or so Abdullah Badawi thinks. But no, Malaysia Today is not going to allow the matter to end here and treat it as all water under the bridge. The matter is very much still alive and we are going to resuscitate it further and show Abdullah Badawi for the phoney that he is.

What Abdullah Badawi did not explain in that ‘clarification’ of his is that the government’s purchase of the executive jet will go through a series of ‘uncommon arrangements’, for want of a better term, unlike the other existing Government VIP jets. Currently, the Government, through Tentera Udara Di-Raja Malaysia (TUDM) or the Royal Malaysian Air Force (RMAF) operates a fleet of four VIP jets attached to No. 2 Squadron based in RMAF Subang. The current fleet includes:

1) 1 Boeing Business Jet (BBJ)
2) 1 Bombardier Global Express
3) 1 Dassault Falcon 900B
4) 1 Fokker F-28

Under this arrangement, the RMAF is responsible for all aircraft operation and maintenance works while the management comes directly under the Prime Minister’s Office (the PMO determines who gets to fly which aircraft).

Previously, the order was:

1) BBJ (The Agong)
2) Global Express (The Prime Minister)
3) Falcon (The Deputy Prime Minister)

The Fokker, an ageing aircraft that can seat about 40 passengers, is normally reserved as a backup for when the others may be unavailable. However, lately, under the Abdullah Badawi Government, such order is seldom strictly adhered to. Often the Prime Minister is seen travelling with his entourage on the BBJ (the latest flight being the Prime Minister’s recent visit to Thailand). Abdullah is also known to have used the BBJ for his personal use such as holidaying with his family and entourage of close friends and business associates.

All the aircraft in the VIP fleet carry the ‘M-’ registration prefix which denotes that it is a military aircraft (civilian aircraft carry the 9M prefix -- e.g., 9M-MRA, which is the registration of a MAS Boeing 777-200). Hence: the BBJ (M53-01), Global Express (M48-02), Falcon (M37-01) and Fokker (M28-01).

All aircraft in the existing fleet are owned by the Government and operated by the RMAF. They are crewed and maintained by the RMAF, unless technical specifications require maintenance to be carried out by the respective manufacturer. But the new Airbus Corporate Jet defies common practise. Abdullah Badawi said the Government would be leasing it from PMB. Malaysia Today understands that for this to take place, for the first in a long time, the aircraft will be maintained under civilian registration. The last of such arrangement took place in the early 80s when Malaysia Airlines operated a VIP-configured Boeing 737 that was leased to the Government.

What is intriguing is who will then operate the jet? Under aviation rules, 9M registered aircraft cannot be flown by military pilots who do not possess the necessary Air Transport Pilot’s License (ATPL), nor can the aircraft be maintained by the military.

This leaves Abdullah’s new jet in the hands of civilian operators.

As PMB does not state in its charter ‘operating aircraft’ as part of its business, it is highly likely that a new company will be set up specifically to manage and maintain the A319. Interestingly enough, it is understood that a senior Malaysia Airlines pilot has been identified as a potential candidate to operate the aircraft. No stranger to twin-engine operations, the pilot has since left the national airline and is awaiting his new appointment as Abdullah Badawi’s personal captain.

As no further details are forthcoming on the terms of lease from the Government or Khazanah, Malaysia Today lists below the common leasing terms and conditions for aircraft practised worldwide. (Note: the LESSEE in this case being the Malaysian Government):

ACMI - Aircraft, Crew, Maintenance & Insurance

Under this term, the LESSOR provides the aircraft, one or more complete crews (plus engineers) including their salaries and usually allowances, all maintenance for the aircraft and insurance, which usually includes hull and third party liability.

The LESSOR will charge for the block-hour and depending on the aircraft type sets a minimum guaranteed block-hours limit per month. Whether the airplane flies or just sits on the ground, the LESSEE must still pay the amount for the minimum guaranteed block-hours.

The LESSEE has to provide all fuel, landing/handling/parking/storage fees, crew HOTAC (Hotel, Transport and Accommodation) including meals and transportation as well as visa fees, import duties where applicable as well as local taxes. Furthermore, the LESSEE has to provide passenger/luggage and cargo insurance and in some cases need to cover the costs for War Risk. On top of that, the LESSEE has to pay the over flight/navigation charges. This point is a bit complicated. When flights are operating they use a flight number, which is issued to airlines by the ICAO (International Civil Aviation Organisation).

In order to cover the costs of air traffic control services, states over-flown will send a bill to the owner of the flight number, which can be readily identified by its code. The aircraft owner will probably have a code, but will not want to use it because he will end up paying the bills. Therefore, an ACMI lease requires that the LESSEE provide his own flight number, so that the bills can be directed to them. Thus, an ACMI lease can usually only take place between two ICAO member state airlines unless other arrangements have been made between LESSOR and LESSEE.

Wet Lease

This is basically similar to ACMI as explained above. The period can go from one month to usually one to two years. Everything less than one month can be considered as an ad-hoc charter.

Damp Lease

This is similar to the ACMI and Wet Leasing arrangement. However, the lease does not include cabin crew which must be provided by the LESSEE. This can only be done if the cabin crew receives SEP (Safety and Emergency Procedures) training by the LESSOR in order to be acquainted with the differences of the airplane.

Dry Lease

Dry Lease is the lease of the basic aircraft without insurances, crew, maintenance, etc. Usually, Dry Lease is utilised by leasing companies and banks and requires the LESSEE to put the aircraft on his own AOC and provide aircraft registration. A typical Dry Lease starts from two years onwards and bears certain conditions as far as depreciation, maintenance, insurances etc. are concerned. This depends on the geographical location, political circumstances, etc.

There are generally two types of Dry Lease; an Operating Lease and a Finance Lease.

Operating Lease: generally a lease term that is short compared to the economic life of the aircraft being leased. An operating lease is commonly used to acquire aircraft for a term of two to seven years. With an operating lease the aircraft does not appear on the Lessee’s balance sheet.

Finance Lease: also known as a Capital Lease, it is defined when on of the following conditions are met:

1) At the end of the lease term the Lessee has the option to purchase the aircraft at an agreed price.

2) The lease payments are more than 90% of the market value of the aircraft.

3) The term of the lease is over 75% of the aircraft’s usable life.

With a Finance Lease the aircraft appears on the Lessee’s balance sheet, as it is viewed as a purchase.

Given the various options above, what then will be the Government’s lease terms? Watch this space for our next instalment.

ADDENDUM

1) Khazanah Nasional Berhad

Khazanah Nasional is a driving force in shaping selected strategic industries in Malaysia, nurturing their development and doing so with the objective of pursuing the nation's long-term economic interests.

As we move forward, Khazanah Nasional is entrusted to explore strategic investment opportunities in new sectors and new geographies. We aim to manage our investment portfolio to realise their long-term potential, and at the same time investing in what we believe would be future winners.

Our current investments are distributed among various industries, mainly; finance, telecommunications, utilities, communication services, information technology and transportation. We are also venturing into other promising sectors with the vision to lead and develop strategic industries.

Vision and Mission

Khazanah Nasional will be regarded as a leading regional strategic investment house that drives superior corporate performances with high standards of achievement in sectors that are deemed strategic to the nation's economy.

We are committed to building a globally competitive Malaysia using the right Human Capital and maintaining the highest professional ethics. We shall develop a high level of integrity and professionalism with the aim of earning the trust of those with and for whom we work.

Our Culture

We look to cultivate a team committed to nation building as its common bond. This culture defines us as individuals who, collectively, enrich the institution by energising it with ideas, expertise and talents that come from a myriad of disciplines.

History

Khazanah Nasional is the investment holding arm of the Government entrusted to manage the commercial assets held by the Government and to undertake strategic investments. Khazanah Nasional was incorporated under the Companies Act 1965 on 3 September 1993 as a public limited company and commenced operations a year later.

Save for one share owned by Pesuruhjaya Tanah Persekutuan (the Federal Land Commissioner), all the share capital of Khazanah Nasional is owned by the Minister of Finance, a corporate body incorporated pursuant to the Minister of Finance (Incorporation) Act, 1957.

The primary objectives of Khazanah Nasional are:

1) To hold and manage the investments entrusted to it by the Government of Malaysia; and
2) To undertake new investments in strategic opportunities, in the new sectors and new geographies.

Khazanah has investments in over 50 major companies. These companies are involved in various sectors such as:

• banking
• semiconductor
• steel production
• airport management
• automobile and
• motorcycle manufacture
• power
• broadcasting
• infrastructure
• investment holding
• port development and
• management
• property
• electronics
• telecommunications
• research technology and
• venture capital

Strategy - Introduction

Key themes of Khazanah Nasional's mandate as a strategic investment house include:

1) Creating sustainable value
2) Raising national competitiveness
3) Cultivating a culture of high performance

These are to be achieved via four strategic pillars; namely:

1) Legacy investments: streamline, restructure, nurture
2) GLC transformation: Increase shareholder and strategic value
3) New investments: New sectors, cross border
4) Human Capital Management: Active leadership management

The framework for change in Khazanah Nasional’s mandate announced by the Prime Minister in May 2004 is within the broader context of the very important task of improving national competitiveness. This is especially pertinent in view of the increasing pressures of liberalisation and globalisation.

Khazanah Nasional is to take on a proactive role to catalyse the transformation of the Government-Linked Companies (GLC) into high-performing entities that are better prepared for a more liberalized world. GLCs are companies that have a primary commercial objective and in which the Malaysian Government has a direct controlling stake. The GLC transformation program is part of an ongoing effort by the government to drive the development and grow the Malaysian economy by enhancing the performance of the companies under its control.

In this respect, Khazanah’s role as an active strategic investor now involves driving and creating greater shareholder and strategic value. The first involves financial returns, the second, generally, in terms of enhancing capabilities. This may involve, where appropriate, taking calculated risks on behalf of the nation in new sectors and new geographies that are deemed important in terms of penetration, linkages and potential for the nation's long-term competitiveness.

2) Penerbangan Malaysia Berhad

PMB was incorporated in July 2002 as a wholly owned subsidiary of the Minister of Finance Inc. following the Widespread Asset Unbundling (WAU) restructuring of Malaysia Airlines. It commenced operations on 16th August 2002 with the appointment of Y.Bhg. Dato' Gumuri Hussain as Managing Director/Chief Executive Officer.

As a result of Malaysia Airlines’ restructuring in November 2002, PMB acquired the economic interest in all of the aircraft owned by MAS and is leasing them back to Malaysia Airlines; and takes over the ownership of the domestic operations. However, Malaysia Airlines continues to operate the domestic operations on behalf of PMB.

In addition, PMB has taken over the long-term liabilities of Malaysia Airlines and presently holds 69.34% of the issued paid up capital of Malaysia Airlines. PMB is currently a wholly owned subsidiary of Khazanah Nasional Berhad.

The restructuring exercise marks a turning point in the airline's history and has been described by analysts as a unique development in the industry, at least in Asia, creating the first 'asset-light' national carrier in the region. The WAU restructuring exercise which also created the existence of PMB, was awarded the Asian Corporate Finance Deal of the Year by Air Finance Journal in 2003.

The core businesses of PMB include amongst others, the acquisition, sale and leasing of aircraft and aircraft engines, investment holding and ownership of the domestic airline business.

Other than Malaysia Airlines, Aircraft Business Malaysia Sdn Bhd is also a subsidiary of PMB which concentrates in the acquisition, leasing, charter and sale of aircraft and aircraft engines.