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Socio-political view on the Felda Global IPO

Khor Yu Leng is an independent analyst and the writer of Khor Reports, specialising in agribusiness in Southeast Asia and frontier markets for global corporate clients. She was trained as a political-economist at Oxford University and the London School of Economics. Recent client reports include updates on large-scale oil palm projects in West and Central Africa and on Myanmar’s mineral processing and port facilities. Yu Leng is also working on a book project on the history of agriculture frontier developments in Southeast Asia.

Q: With the IPO, how do you think this will benefit the settlers? What are the risks of the IPO?

Khor Reports answer: The market considers the Felda Global listing to be a Malaysia general election play which promises gains to those who hold IPO shares. It is touted as the second largest listing this year after Facebook. Many view the Felda Global IPO as being “designed to succeed.” Malaysian institutional investor support (dominated by state-controlled pension and investment funds) is expected to be strong. There is market chatter that pins hopes on the traded price reaching the RM5.50-6.00 per share range. Thus, there could be potential handsome gains for those subscribing for the shares, priced at RM4.65 each; but the medium to longer term market views are more cloudy.

The Felda settlers can benefit from 100% guaranteed-financing by local banks, to subscribe for IPO shares; they have a special allocated tranche of 91.2 million shares or 2.5% of the company. Marketing agents are actively promoting subscription at the Felda settlements. In addition, on a pre-IPO basis, the administration of Prime Minister Najib has promised to pay each settler family RM15,000 as a windfall. In the context of the estimated net monthly settler income of say RM2,500 (on a minimal work, share cropping basis, but likely even higher under different operating modes), the IPO could generate substantive gains worth 6 months of income to each settler family. The bulk comes from the special windfall. With 112,635 settlers and if fully subscribed, the average IPO allocation could be 810 shares per settler, generating perhaps a few hundred ringgit of gain from the IPO itself.

The short term gains to the Felda settlers are substantive; but will they have to trade-off some of the large annual financial supports directly or indirectly received from Felda entities which are going to be listed? Such data has not been disclosed, so there is no analysis of whether the short-term pay-offs exceeds any long-term reduction in support or any reduced long-term investments in Felda businesses within Malaysia. Thus, on a longer time horizon, the Felda settler could either be a net gainer or net loser from the Felda Global IPO. More information disclosure for a study is needed.

Furthermore, political opponents of the ruling coalition have said that the Felda settlers have a moral right to the lands which are going to be leased by Felda Global for 99 years. These lands were alienated to Felda for the purpose of its resettlement program but they were not allocated to settlers on the usual basis of 10 acres per family. Instead, the extra land was retained by Felda and operated as commercial plantations, with proceeds effectively used in support of settlement and other activities, as well developing downstream and related businesses. Thus, Felda settlers, their children and others who might be in want of agricultural land have lost the last hope for access to Felda’s land bank via this listing. Assuming 10 acres per settler, the plantation land leased to Felda Global could instead accommodate some 80,000 new Malaysian settler families, if Felda were to resume its original mission.

Analysts have pointed out two major medium-term risks in Felda Global. First, the tree age profile of the oil palm plantations has surprised the market as it is relatively poor; 51% are above 21 years old. The plantations business does not seem to have been optimized for the listing and the aged tree profile reflects past top level decisions to divert cashflow from normal operations to non-core investments. For instance, Felda raised eyebrows when it bought a tower in the politically-connected Naza groups’ prestige Platinum Park development for a new headquarters, instead of building on its own land close to the city center. Felda Global’s investors will have to sit patiently through a big replanting exercise that will require huge capital expenditure; starting with an estimated at RM2.6 billion for the next five years. Second, Felda Global’s structure is convoluted, exposing its earnings to risks: first, Felda Global will sell its fresh fruit bunches (FFB) to Felda Holdings; then Felda Holdings mills the FFB to produce crude palm oil (CPO); then Felda Holdings sell the CPO back to Felda Global; then Felda Global sells the CPO to third parties and Felda Holdings’ refineries. All these “in-out” transactions will be done by Felda Holdings, as the marketing agent for Felda Global.

Q: Since Felda was first started in 1956, how has it helped the Malay community living in rural areas? How do you think Felda will continue to contribute to the palm oil industry?

Khor Reports answer: Felda was designed with the objective of providing a minimum monthly income of RM300-350 to poor and landless folk, via their resettlement to initially grow rubber and later oil palm on 10 acre plots in newly developed master-planned estates, almost entirely in rural Peninsular Malaysia. In all but the very first settlements, the smallholder estates were cleared and developed by contractors. The settlers would have had to pay back the loan on their plot and operating costs but Felda subsidized management and overhead costs and invested in new related businesses. Despite relatively low commodity prices for much of the period, the minimum income was exceeded with only very short periods of time when income support had to be provided. But as commodity prices rose, so have settler incomes. In the palm oil segment, average net monthly incomes is recorded as RM1,040 in 1979, RM1,846 in 2004, and it is thought to exceed RM2,500 at present under the share-cropping arrangement now favoured by many of the rapidly ageing Felda settler population.

The gains have been quite widespread. Nearly 120,000 families were resettled by Felda. The population benefiting is estimated at about three quarters of a million, or 4% of Malaysia’s population in 1990 when resettlement efforts were at their tail end. Felda built recreational facilities, schools, and training centres and diversified into numerous upstream and downstream activities to raise revenues. Felda controlled 811,140 hectares of land, with 57% belonging to settlers and the rest directly owned and operated as commercial plantations. In 2004, Felda settlers owned 10.8% of Malaysia’s plantations directly and Felda owned another 9.5%.

The key challenge for Felda settlers is its ageing population, which poses a real problem in the sustainability of the settlements. Many settler children have attained high levels of education and have moved to towns to work, leaving many elderly settlers opting to hire foreign labour to share crop, or else choosing Felda to run their holding, also using foreign labour. The need to replant and to raise yields required investments or costs that would impinge on short term incomes, something that elderly smallholders have been loath to do. Felda is not alone among resettlement programs in having these major second-generation problems. Felda has tried to forestall the problem of the reduction in holding sizes by inheritance to several children, by legislating against this. So far, the longevity of the Felda settler has meant that the pressure has not been great. However, pent-up demand for rural landholdings is expected to increase with rising settler mortality and the relatively slow growth of Malaysian urban net incomes since the Asian Financial Crisis of the late 1990s versus that of rural incomes driven by the commodity boom.

With the Felda Global listing, Felda is making a final transition from an agency focused solely on poverty alleviation and rural development to a real commercial plantation company. In theory it is cutting many ties with its settlers and its original mission; by leasing away its highly important, most profitable, cash cow, the commercial plantations. However, political imperatives are likely to mean that Felda will retain a watchful eye and assist its settlers. Felda Global has relatively limited expansion possibilities for its Malaysia land bank, unless it focuses on Sarawak and marginal or idle land nationwide. If Felda Global lives up to its moniker it will be setting its sights overseas. It promises to invest in plantations in countries like Cambodia and in Africa. Hopefully, in so doing, it will not eschew necessary investments within Malaysia to boost and intensify its yields and production from its existing estates.

Q: How does Prime Minister Datuk Seri Najib stand to gain politically from the IPO and the windfall payments to settlers?

Khor Reports answer: Felda settlers have become a privileged group in Malaysia’s rural community by decades of able efforts by a professionally and independently run Felda. However, Felda has become increasingly politicized in more recent times. Political patronage will always be high as Felda has over 112,000 settlers who vote in 54 parliamentary seats and 92 state seats. Federal politicians have also diverted East Malaysia resources to benefit the Peninsula’s population; Felda’s commercial plantation has large land holdings in East Malaysia, but with no settlers.

Felda settlements are well known as UMNO strongholds. But the second and third-generation are said to be more open in their political thinking. Early on, the proposed IPO and restructuring of Felda had been of concern to Anak, an association of the children of Felda settlers. Anak tried to block suspected moves on the Felda investment cooperative (the KPF), which has 51% controlling ownership of many Felda businesses (but not the key commercial plantations). Najib’s administration has been cautious: it did not push for a more coherent restructuring of Felda for the listing, and this is suggestive of a fear of confrontation. Such a move would likely have required consultation with the KPF. The Felda Global listing involves non-KPF controlled assets, and a 49% minority stake in Felda Holdings (owning mills, refineries, bulking installations, distribution and products).

By a careful and selective shuffling of Felda assets, which has given Felda Global its crown jewel and a convoluted structure, Najib has evaded the need for a lengthy and open debate on the future fate and trajectory of the Felda mission. The IPO has been fast-tracked and it appears to be a political coup de grace: the RM 15,000 windfall, a special IPO tranche in an expected “sure win” listing, and the hands-off approach to the KPF (and possible additional sweeteners for the KPF to come?) have been received positively by the Felda settlers, who do not seem to have questions about longer term prospects and issues. Thus, the IPO should shore up support for the ruling coalition in its existing Felda strongholds. Prime Minister Najib also adroitly addressed potential intra-family tension by promising to split the RM15,000 windfall in thirds; with one portion each going to the settler, his wife and his children. But will this expensive exercise of political largesse prove to be more than just a defensive move; will it boost the ruling coalition’s wider prospects in rural Malaysia?

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