Cheers! Have a rent-seeking beer label…

Making your way in the world today
Takes everything you’ve got;
Taking a break from all your worries
Sure would help a lot.
Wouldn’t you like to get away?

(Extract of lyrics from the “Cheers” theme song)

Times are bad and everyone wants to get ahead in the world….

Today, while Malaysians were protesting in the heart of Kuala Lumpur against the sharp and painful oil price hike, comes news about what sounds like another rent-seeking operation. Beer makers Carlsberg and Guinness-Anchor are locked in a standoff over controversial security labels with a little-known firm Kod Efisien, which was awarded the concession. Kod Efisien later passed this concession to another firm, Lembah Sari. And guess who is a director in Lembah Sari…

From the Singapore Business Times, 13 June 2008

Beer makers still in security label standoff

Since 2003, they have refused to play ball with concession holder

By S JAYASANKARAN
IN KUALA LUMPUR

THE Malaysian units of beer giants Carlsberg and Guinness-Anchor are at war with a private company that has a monopoly on security-labelling alcohol to help cut smuggling. And the federal government is stuck in the middle.

Carlsberg and Guinness-Anchor have refused to play ball with the company Kod Efisien since 2003 when it was given the concession to security-label locally produced beer and cigarettes to stem smuggling fuelled by high excise duties.

In public, the beer companies maintain that they ‘are still in negotiations’ with the government.

But industry officials say privately that both companies would consider taking the dispute to court if push came to shove.

The beer makers argue that as foreign multinationals there is nothing they cannot do more efficiently than a middleman.

They also say steep duties mean Malaysian beer prices are among the world’s dearest – and that security labelling would make them ever dearer.

‘If the money was going to the government, we would not mind as much,’ an official told BT. ‘But this is just going to a private-sector third party.’

Kod Efisien claims savings from reduced smuggling would more than compensate the companies. But there is little evidence that the labels cut smuggling.

When the firm first began labelling cigarette packs, smuggling dropped 50 per cent.

But it has since bounced back to 17-20 per cent of the industry, says the Confederation of Malaysian Tobacco Manufacturers.

The beer makers’ recalcitrance has put the government in a spot and raises questions about Kuala Lumpur’s ability to enforce its own rulings. Stretched to its logical conclusion, the government could revoke the companies’ licences.

But both firms are listed in Malaysia and have been operating here since before independence. It is not clear if any move on their licences could stand up in court.

The controversy spotlights one of the least attractive features of Malaysian business that emerged during the tenure of former premier Mahathir Mohamad and has continued unabated since – the creation of ‘rent-seeking’ businesses that profit from the provision of unsolicited services to profitable companies.

This has been compounded by the manner in which concessions have been dished out – almost always in an opaque manner without open, competitive bidding or public debate, and of course to companies with influential shareholders.

In this case, the award was even rotated among different companies.

In August 2006, Kod Efisien’s concession to security-label cigarette packs was simply passed to another private firm, Lembah Sari, without any explanation, negating arguments that Kod Efisien was providing unique technological benefits to the cigarette companies.

Industry officials said that Lembah Sari continued to supply the same security equipment and ink supplied by Kod Efisien – from Swiss-owned Sicpa Holdings.

According to documents lodged with the Companies Commission of Malaysia, Kod Efisien is capitalised at RM2 million (S$840,000) and is owned by Hashim Abdul Wahab and Aminuddin Harun, two relatively unknown figures. For the year to end-April 2006 – its last published accounts – the firm made a loss of over RM215,000 on revenue of RM54 million.

Lembah Sari is capitalised at RM1 million but its ownership structure is unclear as the shares are owned by other private companies.

Even so, its directors include Haris Onn Hussein, the youngest son of the third premier and brother of the Education Minister, and Zulkifly Rafique, a prominent lawyer in Kuala Lumpur.

For the year ended December 2007, the company made a net profit of RM1.7 million on revenue of RM25.6 million.

Not bad, RM1.7 million profit!

Now, you tell me, does this “security labelling” sound like a genuine business or does it smack of rent-seeking? If indeed it is necessary to have such security labels, why not let it be handled by a government-owned entity, so that any profit goes to public funds?

In an immediate reaction, a senior investment analyst with a leading stock-broking firm, still upset with keris antics, told me: “If this story is true, the highly respected (late) Tun Hussein Onn would be disappointed at how his two sons have turned out.”