Oleh/By		:	DATO' SERI DR. MAHATHIR BIN MOHAMAD 
Tempat/Venue 	: 	PETRONAS MANAGEMENT TRAINING 
			INSTITUTE, BANGI 
Tarikh/Date 	: 	07/01/91 
Tajuk/Title  	: 	PROGRAMME ON PROJECT APPRAISAL AND 
			RISK ANALYSIS MANAGEMENT FOR BANKERS 




 Tan Sri Ahmad Sarji,
     President, The Harvard Club of Malaysia;
Distinguished guests;
Ladies and gentlemen.
    For  decades  Harvard  University has been renowned for
its excellence in the field of  studies  involving  business
and the management of business.  Today, thanks to the initi-
ative of the Harvard Club of Malaysia, in collaboration with
the  Harvard Institute for International Development and the
Institute of Bankers Malaysia, a  selected  number  of  non-
Harvard graduates will be able to participate in and benefit
from  the  famous  Harvard case-study method of teaching.  I
would like to extend a warm welcome to the participants from
our ASEAN neighbours, Indonesia, Singapore and Thailand.   I
hope  you will enjoy not just this course but also your stay
in Malaysia.  By the end of this programme, I  am  sure  all
the participants will emerge better equipped with the latest
techniques  as well as become "hands-on" competent on the PC
in project appraisal and risk analysis management.  The cor-
porate sector and the financial world is  becoming  increas-
ingly   competitve  and  complex  and  technologically  more
sophisticated, and so technical competence  in  project  ap-
praisal  and  risk management are essential to the efficient
conduct of modern business.  I applaud this move to  provide
high-quality  technical  training in this area and hope that
this Harvard training programme will not be the last.
Ladies and gentlemen,
2.   Talking about economic advancement, I am  glad  to  say
that  Malaysia  had  recorded  yet another year of excellent
economic performance in 1990.   Despite the  challenges  and
uncertainties  in  the world economy caused by the crisis in
the Gulf, Malaysia managed to retain economic stability  and
a largely inflation free growth.
3.   It  may be assumed that as a net oil exporter, Malaysia
should of course be able  to  do  this.    But  in  reality,
Malaysia  like  other countries in the region and elsewhere,
faced inflationary pressures that  could  negate  the  gains
from  higher  oil prices.   Malaysia warded off inflation by
refusing to increase retail petrol prices in step  with  the
rise  in  crude  oil  prices,  which  at  one  time exceeded
US$40/-.   Had Malaysia raised  fuel  prices,  the  cost  of
transport  and  other  goods would have gone up.  As is well
known, once goods and services  increase  in  price  due  to
whatever  reason  it almost never returns to original levels
even when the causes are removed.  Because Malaysia  contin-
ued  to  retail petrol at roughly the prices prevailing when
crude was below US$20/- there was no increase in the cost of
goods and services.  Thus when crude came down to more  rea-
sonable  levels  there was no problem  with prices remaining
at a high level.
4.   The price paid for this strategy was  loss  of  revenue
for  the  government and the smuggling out of petroleum pro-
ducts.  But this is considered a small price to pay for con-
taining inflationary pressures.
Ladies and gentlemen,
5.   The outlook in the immediate  term  remains  favourable
for  Malaysia.    Even  when  the expected slowdown in world
trade and growth is factored in, the Malaysian  economy  can
reasonably  be expected to continue to coast along to record
another creditable performance in 1991.  Having managed  the
initial  disruption of the Gulf crisis, Malaysia can now en-
joy the yield from better prices for  crude.    More  impor-
tantly,  domestic  sources  of  growth, particularly private
investment outlays and consumption spending  have  been  ex-
panding  strongly since 1988 and should have enough built-in
momentum to carry the economy through in the  next  1  to  2
years.
6.   In  this  regard, the sustained surge in investment in-
terest has been  particularly  encouraging,  with  over  $21
billion  ringgit  worth of projects already approved by MIDA
during the first nine months of 1990.   Equally  encouraging
have been the indicators on consumer spending, which contin-
ued to register strong double-digit growth.
7.   The  surge in domestic economic activity and continuing
favourable economic expectations have inevitably given  rise
to  some  areas of concern.  First, there is the fear of in-
flation, in particular, the build-up of inflationary  expec-
tations,   which  --  if  left  unchecked  --  could  become
self-fulfilling.  As a government, we have begun to use fis-
cal measures to ease the situation.  But in the final analy-
sis, what we need to do is to be more productive if we  want
to  consume more.  That is really the only way to combat in-
flation -- i.e. higher production with higher  productivity.
Second,  because  of  continuing economic growth, our labour
market has become much tighter, leading to pockets of short-
ages and some wage pressures.
8.   Increases in wages are not bad for the economy.  Indeed
they promote greater consumer spending  and  generally  con-
tribute  to  wealth  creation.    But wage increases without
commensurate or improved productivity will almost  certainly
result  in  a  wage-price  spiral in which of course the in-
creases in wages become meaningless.  Workers and management
must always bear this in mind.   Inflation as a  reason  for
wage increases is suicidal but wage increases because of in-
creases  in  productivity  should not be resisted by manage-
ment.  The government would like to see Malaysian wages rise
with increasing productivity.
Ladies and Gentlemen,
9.   Apart from the threat of inflation, the buoyant economy
has also created a third problem in that our  infrastructure
facilities have shown early signs of strains in keeping pace
with  the ever increasing demands of a rapidly growing econ-
omy.   In some of  the  more  densely  developed  industrial
areas, such as the Klang Valley, infrastructural constraints
have become more visible.  To cope, the government will need
more  funds  than  can be reasonably expected from the usual
revenue   sources.      Excessive   borrowing   to   finance
infrastructure  will  land the government in tight financial
situations later on.
10.  To overcome this financial constraint and  yet  provide
the required infrastructure on time, the government will use
privatisation  to  the  maximum.   This way government money
will be expanded only on  infrastructure  with  no  possible
commercial  potentials,  as for example rural roads, schools
and clinics.  Industrial estates, ports, airports, toll ways
etc, will be built and operated by  private  enterprise  and
will  be  paid  for  largely by those who use them directly.
Our experience has convinced us that privatisation pays  and
we  intend  to  resort to it as much as possible.  We do not
see why a car owner in a remote small town  should  pay  for
highways  and  city by-passes which he will hardly ever use.
Certainly if the financing of  these  infrastructure  is  by
public  funds,  as  for example higher petrol tax, the small
town car owner will share the burden equally without equally
sharing the benefits.  Privatisation is therefore a more eq-
uitable approach towards  providing  infrastructure  rapidly
without diverting funds needed for normal development.  Bor-
rowing  will  have  the  same effect of spreading the burden
without spreading the benefits equitably.
11.  Despite the problems which are a consequence  of  rapid
growth,  I  am  confident that the Malaysian economy will be
able to march forward with confidence.   The banking  sector
has  so  far  played  its  role well in financing the growth
process.   As the credit situation  tightens,  the  banker's
role  in  funding  Malaysia's next phase of growth towards a
broad-based industrialised economy  becomes  more  critical.
Experience  in  the  1980s have taught bankers to be wary of
character lending or collateral lending.  Many are finding a
need to go back to basics -- hence, the quest for  expertise
and  the upgrading of skills.  In particular, this calls for
effective management in risk analysis and project appraisal.
12.  The government is torn between a desire to  be  liberal
and  the need to control banking in order to protect the in-
dustry and the people.  As is well-known, banks just  cannot
be allowed to go bankrupt as other businesses can.  The col-
lapse  of  even  a small bank has such wide implications and
effect on the economy of a nation that government is  forced
to  intervene.   Interventions cost a lot of money -- public
money.  If the Government is to be responsible  with  regard
to the performance of banks, then it must wield some author-
ity.   This is to ensure that banking prudence is not just a
catchword but is actually practiced.  Still this  Government
believes  in  minimal control, which of course means bankers
must exercise self-control and be professional.  Any move to
upgrade banking skills and  professionalism  will  therefore
have the Governments unstinting support.
13.  When,  during the recession, many bank clients got into
difficulties, the creation of Funds by  the  Government  did
not  only  help  the client of the banks to recover but they
also help the banks to recover their loans.  In other  words
in  rescuing  the  borrowers the Government is also rescuing
the banks.  Banks should therefore acknowledge this by being
willing to forego such sources of profit  as  penalties  and
the  interests on interest.  Bankers should also accept that
during bad times they themselves must suffer some losses.
14.  This does not mean that bankers must be  too  forgiving
towards  their  clients.    The degree of forgiveness should
match that of the Government towards the banks.    Neverthe-
less  good  bankers must have some foresight and not lend so
much to so few people that  their  fate  becomes  tied  com-
pletely to the fate of these clients.
15.  Foresight  is a scarce commodity.  No one predicted the
invasion of Kuwait for example.  One or two  did  of  course
but  they  were regarded as quite mad when they foresaw such
nonsense.  But it does not require occult  capabilities  for
bankers  to  reduce  or spread their exposure.  By acquiring
certain skills they can reduce the role of instinct and gam-
ble in their dealings.  This is where expertise and  experi-
ence  in  the  techniques  of  project  appraisal  and  risk
management come in.
16.  Despite the sustained upswing in  the  economy  in  the
past  four years, there is still a large overhang of problem
loans, a legacy of the 1985/86 severe recession.  The  proc-
ess  of loan rehabilitation, whether with or without Govern-
ment financial assistance, is still an area of major concern
to the banking community.  Yet the viability of many stalled
projects should improve significantly with the economic  up-
turn, despite the Gulf crisis.  We badly need special skills
at  reviving  many  stalled projects, particularly the aban-
doned housing projects.
17.  On the other hand being over-cautious with new ones are
not good either.  I believe bankers should  always  be  pre-
pared  to "go the extra mile" in order to achieve an amiable
and mutually beneficial solution to the projects placed  be-
fore  them.    Foreclosure or bankruptcy proceedings, like a
war, can never be the best solution for  both  parties,  and
can  at times be even destructive to the economy as a whole.
I would urge the banking community to constantly upgrade its
appraisal skills and management techniques in loan rehabili-
tation and in the management of corporate turnaround in par-
ticular.   The successful  turnaround  of  stalled  projects
would  help  conserve  the nation's scarce pool of entrepre-
neurs, restore productive capacity and in the final analysis
help economic growth.
Ladies and Gentlemen,
18.  Efforts should also be directed at promoting new indus-
tries, particularly those with innovative and new ideas.  In
business, success cannot always be attained  simply  by  re-
peating  what  has been done successfully.  Economies of na-
tions will stagnate if there are no new ideas or  approaches
to  business  and  products.   On the other hand bankers are
conservative people although they usually describe their at-
titude as prudent.  They tend to be wary and unsupportive of
new things.  Consequently if bankers are to have their  way,
nothing  new  will  enter the business scene and the economy
will stagnate and even regress.
19.  Clearly there is a need for bankers to be  more  adven-
turous and to provide venture capital for selected projects.
The  skills in the selection of such projects must be devel-
oped by every bank and they must keep  close  watch  on  the
performance  of the projects they finance.  Such skills usu-
ally come through experience  but  experience  is  a  costly
teacher.    It is important therefore for those who have had
the experience to pass them on through  the  numerous  tech-
niques of teaching that have been developed by such business
schools as the one at Harvard.
20.  Bankers  cannot  depend  exclusively on collaterals and
track records.  On the other hand those people with  innova-
tive  ideas and products must understand that knowing how to
do or make things does not mean that a  profitable  business
can  result  if the capital is available.  If there are rich
inventors, it is because somebody else took their inventions
and marketed them.   Left to themselves  the  inventors  can
only  fiddle in their laboratories.  Ford did not invent the
car nor Ray Kroc the hamburger.  They are basically success-
ful marketeers.  But in their own way they  were  innovators
and banks must learn to recognise and support innovators.
21.  Risk  analysis  should  not be confined to quantitative
and tangible factors only.  Indeed, the borrower's character
should be of paramount importance.  An entrepreneur who  has
the  vision,  dynamism  and  the spirit to fight against all
odds should never be overlooked.   This,  unfortunately,  is
rarely included in the credit decision process.
22.  Besides  the  borrower's  character,  another important
factor should be customer loyalty.   People  do  not  easily
forget  those  who deny them aid in times of need.  A banker
once said that a good client is a rare precious  asset;  in-
deed,  it  is  quite impossible to find one who does not al-
ready have his own banker.  Often, the only way to  get  one
is to steal one or alternatively, to "grow" one.  In a young
emerging  nation like Malaysia, I am sure there is no short-
age of enterprising people  for  the  bankers  to  cultivate
their  own  pool of loyal clients.  Bankers have to learn to
be more far-sighted.   Professionalism and  expertise  would
certainly help in the process.
Ladies and Gentlemen,
23.  For its part, the Government has set aside $250 million
ringgit under the New Entrepreneurs Fund to provide low-cost
financing  opportunities  to the new breed of indigenous en-
trepreneurs.   As at the end  of  November  1990,  only  $21
million  ringgit  have been approved under the scheme to fi-
nance 127 new projects.  With the present economic  upswing,
there  should  be no shortage of fertile ground for new ven-
tures.  What is needed are bankers who  have  the  foresight
and  vision  as  well  as  the  skills  to take the risk and
nurture budding entrepreneurs from the cradle.
24.  To me, the slow utilisation  of  the  Fund  reflects  a
shortage  of  this new breed of bankers rather than the lack
of budding entrepreneurs.  I would urge the banks to step up
their efforts to help new enterprises get  off  the  ground.
Emerging  small  and medium size enterprises should be given
the opportunity to start up and to grow  --  they  represent
vital links in the economic backbone of the country.
25.  To  this  end, I note that regulatory restrictions have
already been relaxed for some time to allow banks to invest,
within  prudent  limits,  in  the  shares  of  newly  formed
start-up  manufacturing concerns.  Such a form of equity fi-
nancing allows the implementation of promising projects with
long gestation periods without the burden of having to  meet
early  demands  for  repayment, as would be the situation in
traditional lending.
Ladies and gentlemen,
26.  The Government has recognised the important  role  that
venture  capital  can  play in expanding and diversifying an
industrial base and has provided attractive  tax  incentives
for  venture capitalists.   The market also rewards the ven-
ture capitalists for the risk they  undertake  by  providing
the  opportunity for capital gains that would arise from the
initial public offering of the shares of a  successful  com-
pany.    But,  before  this can happen the Bankers must play
their role and take reasonable risk,  for  which  they  must
equip  themselves  with  the skills of proper investment ap-
praisal and risk analysis techniques.  I believe the  oppor-
tunities  offered  in  this  programme will go a long way in
building expertise in a very exciting area of financing.
27.  In this regard, the Government would also like  to  see
the  capital  market  deepen and broaden further in order to
enhance the efficiency and risk-bearing capacity of the  fi-
nancial  system.   For some time now, concerted efforts have
been directed at developing the corporate bond market to en-
able large corporations to raise  funds  directly  from  the
capital market in a flexible manner and at lower cost.
28.  Our  first credit rating agency, Rating Agency Malaysia
Berhad, which was  incorporated  in  November  1990,  should
start  operations this year.  This rating agency is expected
to boost investors' confidence in the Malaysian bond  market
and provide the necessary impetus to the corporate sector to
raise long term funds directly from the market.
29.  Concurrently,  the  government  is also encouraging the
development of a financial futures market, to allow for  the
more  efficient  management  and distribution of risks.  The
availability of a wide range of hedging instruments  can  be
expected  to  enhance  the risk-bearing capacity of a market
oriented economy.  This would help increase  capital  forma-
tion,  raise  savings and promote economic growth.  With the
increasing sophistication of the capital  market,  the  need
for  expertise in risk management and project appraisal will
undoubtedly become more urgent in the coming  years  as  the
choice of financing and hedging instruments widens.
30.  Lest  it  be thought that a sure recipe for success de-
pends solely on professional  skills  and  technical  compe-
tence,  I  should  emphasise  that  these  are but necessary
ingredients; and on their own, they are not sufficient.   We
need  honesty and integrity in our bankers.  Indeed, I would
go so far as to say that the fruits of our labours  in  sus-
taining economic growth in the past three decades would come
to  naught,  if  there is a widespread absence of these fine
human qualities in our bankers, businessmen and  the  people
as  a whole.   The managers of our financial institutions in
particular, as mobilisers and custodians of  public  savings
and  the  channel  to  provide the oil for the wheels of our
economy, are expected to display the highest  integrity  and
sense of honesty in their endeavours.
31.  I  am  told  that at the Harvard Business School today,
all MBA students must take basic courses in Business Ethics.
This is a good sign and augurs well  for  the  future.    It
should  not  be accepted that honesty is essentially a moral
choice, and morals and business do not mix.  I believe  that
morals are an integral part of business.
32.  Economists  and game theorists do tell us that trust is
enforced in the market place through retaliation and reputa-
tion.  In fact, I would go further to say that those who en-
gage in fair dealing will prosper.   Ultimately, the  caring
society  we  are  trying  to foster in Malaysia is one where
businessmen and entrepreneurs choose virtue and honesty  be-
cause we want to believe in ourselves and want others to re-
spect and believe in us.
33.  Businessmen  should  keep  their promises because it is
the right thing to do, not because it is good business.  Any
society that is not built on trust cannot last.  I can  find
no  better  way  than conscience to explain why trust is the
best basis for any business relationship.  Fortunately,  the
environment  we live in Malaysia honours honesty, whether or
not it is profitable.  Right is right and  wrong  is  wrong.
There can be no two ways about this.
34.  On  this  note,  ladies  and gentlemen, I now have much
pleasure in officially declaring this course on "Project Ap-
praisal and Risk Analysis Management for Bankers" open.