Insight: In Malaysia's election, a focus on rainforest graft

By Niluksi Koswanage

KOTA KINABALU, Malaysia (Reuters) - The island of Borneo may be all that stands between Malaysian Prime Minister Najib Razak and an unprecedented election defeat within weeks for his ruling coalition.

Borneo's two Malaysian states -- Sabah and Sarawak -- have been a bastion of votes for the National Front coalition headed by Najib's party, the United Malays National Organisation (UMNO).

The two states, among Malaysia's poorest despite vast natural resources, kept the National Front in power in 2008 even as a groundswell of support for the opposition deprived the government of its iron-clad two-thirds parliamentary majority.

That could start to change. Allegations of corruption in recent months have dogged the chief ministers of both Sabah and Sarawak, long-time rulers who hold vast sway over some of the world's largest tracts of tropical forests.

The National Front is favored to win the election that Najib must call by the end of April, extending its 56-year rule thanks to robust economic growth and its strong electoral machinery.

But it could be one of Malaysia's closest elections. Corruption scandals threaten to undermine one of Najib's central messages -- that he is making Southeast Asia's third-largest economy more transparent and competitive.

Sabah Chief Minister Musa Aman, who is also the state's top UMNO official, has been under scrutiny the past year after whistleblower website Sarawak Report published documents from the Hong Kong and Malaysian anti-corruption agencies.

The two agencies started investigating Musa in late 2008. The probe was based on a tip-off that the chief minister was extracting money from businessmen seeking timber concessions and funneling it to UBS bank accounts in Hong Kong and Singapore, sources close to the investigations said. They declined to say who gave the tip-off.

The Hong Kong anti-graft agency froze a UBS account managed by a lawyer on behalf of Musa, the sources said, and began a joint investigation with its Malaysian counterpart.

The agencies closed the case three years later and unfroze the funds after the Malaysian government publicly said the money was donations for UMNO, not bribes. The Malaysian government has not explained why political donations had to be routed through Hong Kong and Singapore.

Musa told Reuters in a statement that he has been cleared by both anti-graft agencies. However, an independent panel overseeing the Malaysian graft agency has recently requested the case be reviewed.

"These are the same old stories, rehashed over and over again," Musa said. "It is just the usual silly season before the general election, when the opposition gets up to their usual monkey business."

The opposition, which argues the fruit of Malaysia's brisk economic growth is largely concentrated in the hands of a well-connected elite, has vowed to keep pouring it on.

"How Musa manages Sabah in favor of the government rather than the people will certainly be a prominent part of election rallies on the opposition side," said Lim Kit Siang, a leader in the opposition coalition headed by former deputy prime minister Anwar Ibrahim.

HONG KONG TIMBER ACCOUNTS

The Hong Kong anti-graft agency told Reuters it investigated a number of Malaysian nationals, including a government official, for breaching the prevention of bribery ordinance in connection with the UBS accounts. It neither confirmed nor denied that Musa was the focus of the investigation.

Malaysia's anti-corruption agency said it provided assistance to its Hong Kong counterparts but declined to give details. Malaysian anti-corruption officials, speaking on condition of anonymity, told Reuters the leaked documents obtained by Sarawak Report were genuine and Musa was, indeed, the focus of the investigation.

Sarawak Report said the Hong Kong and Malaysian anti-graft agency documents it acquired showed that $90 million in illegal logging proceeds from Sabah were channeled to the UBS accounts. That prompted Swiss prosecutors to open a criminal money laundering probe into UBS last August.

The investigations into UBS and its relationship with Musa are continuing, a spokesman for the Office of the Attorney General of Switzerland said. UBS said it was fully cooperating with the authorities but declined to give more details.

As chief minister, Musa is in charge of the Sabah Foundation, which manages a state forest reserve covering 3,861 square miles, nearly half the size of New Jersey. The foundation allows timber companies to annually log a tiny fraction of that area. The logging proceeds are supposed to fund education and welfare projects in the state.

As chief minister, Musa signs off on all the logging permits that its board of directors agree to award to timber firms, or at least in one case, to a family member.

One of the Malaysian anti-corruption agency documents listed companies that won permits from the foundation. It shows the foundation awarded 2,000 hectares (7.7 sq miles) of primary forest to Musa's younger brother, Foreign Minister Anifah Aman, at a special board of directors' meeting on May 7, 2004.

The same Malaysian anti-graft document shows Musa consistently signed off on concessions that exceeded, or even doubled, the allowable timber cut. While not illegal, it shows the state was exceeding its own guidelines on deforestation.

Some of the companies on that list made payments into a UBS corporate account belonging to a former Musa associate, bank statements on the account obtained by Reuters shows. From the same account, withdrawals were made by the associate to fund Musa's sons who were studying in Australia, the statements show.

Two timber firms in Sabah transferred two payments totaling $4.04 million on August 16, 2006 into the corporate UBS account belonging to the former Musa associate. Six days later on August 22, the exact same amount was transferred into a personal UBS account belonging to Musa's lawyer. The Hong Kong anti-graft agency described that account as "held in trust" for Musa, according to the bank statements and investigation documents.

That same day, the firms won a 32,000 hectare (124 sq miles) timber concession and a contract to maintain a road to a logging camp, according to the Malaysian anti-graft agency document.

The owners of those two timber firms confirmed to Reuters that the $4.04 million transactions were "donations" to Musa and UMNO to secure the contracts. They requested their names and the names of their firms not be identified.

Malaysia's government has said all the funds in that UBS account were ultimately sent to UMNO as political donations. Other firms on the list of companies that received timber concessions could not be reached or declined to comment.

LESS LOGGING REVENUES

While there is no published data on how much forest has been cleared within the Sabah Foundation forest reserve, official data shows significant deforestation throughout the state.

In 1992, the state's total forest cover stood at 17,000 square miles, about half the size of Ireland. By 2011, it had shrunk to 13,900 square miles, based on the latest available data from the forestry department. Primary or virgin forests have been particularly hard-hit, declining from 1,595 square miles in 1992 to just 348 square miles in 2011.

With diminishing forests left to cut, logging revenues fell by half over five years to less than 250 million ringgit in 2011 ($80.6 million).

Musa has made a push for Sabah to diversify into agriculture and oil and gas, which helped state budget revenues hit a record 4.1 billion ringgit last year. But the state's unemployment rate remains at 5.4 percent, the highest of any state in Malaysia, where the national average is 3.0 percent.

Musa's popularity ratings have declined as well, to 45 percent in 2012 from 60 percent in 2009, according to a survey by the Merdeka Centre, Malaysia's most respected pollster.

CORRUPTION CHARGES

Law Minister Mohamad Nazri Aziz told parliament last October the funds in the UBS bank account held on behalf of Musa were political donations, without giving details about the source of the money or explaining why such funds had to be routed through foreign countries.

Based on evidence submitted by the Malaysian anti-graft agency, Malaysia's attorney-general found no indication of corruption or linkages with the Swiss government's investigation into UBS, Nazri said.

But an independent panel overseeing the Malaysian anti-graft agency has since written to the attorney-general requesting a review of his decision to close the case on Musa, a high ranking anti-graft official said at a public forum held by the Bar Council. The official did not disclose why the review was requested and declined to respond to Reuters requests for comment.

The attorney general did not respond to requests for comment.

As UMNO's party leader in Sabah, Musa is expected to find ways of raising money for the party - and to get out the vote.

"For UMNO, Musa is almost indispensable in Sabah. You lose him, you may lose your whole regime," said Oh Ei Sun, senior visiting fellow with Singapore's Nanyang Technological University and a former political secretary to Prime Minister Najib.

NAJIB AT RISK

The opposition, campaigning on an anti-corruption platform, is banking on winning 20 seats in Sabah and Sarawak in the election, which could put it within sight of a 112-seat simple majority in parliament.

Sarawak has also been under the spotlight over allegations of timber corruption. The Malaysian anti-corruption agency said it has been investigating Sarawak Chief Minister Abdul Taib Mahmud since 2011 in response to environmental activists' complaints about corruption in the forestry industry. That investigation continues and any new evidence will be taken into account, the agency spokesman said.

He was referring to environmental activist group Global Witness, which posted a video in March that went viral. It showed Taib's cousins and associates apparently offering thousands of hectares of forest land to the group's undercover investigators and formulating plans to book the land sales in Singapore to avoid Malaysian taxes. The cousins could not be reached for comment. (For the video, see: http://www.globalwitness.org/insideshadowstate)

Taib publicly denied the allegations raised as a result of the video. "I saw the so-called proof. It has nothing to do with me," he told local media. "Everything has to be done with government procedure."

In an interview with Reuters last Tuesday, Prime Minister Najib declined to discuss details of the investigations into the Sabah and Sarawak chief ministers, and said he was against corruption in "any form."

Asked about the Global Witness video, Najib said: "It's ok, everything will be investigated, and due process will take its course."

(Additional reporting by David Fogarty, Angie Teo and Stuart Grudgings in KUALA LUMPUR and James Pomfret in HONG KONG; Editing by Bill Tarrant)

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Britain should focus on roads, not rail - survey

LONDON (Reuters) - British manufacturing firms want the government to shift public infrastructure spending away from rail to focus on upgrading the road network, a poll published on Tuesday showed.

The survey, conducted by industry body EEF, showed that 72 percent of 209 firms who took part cited the road network as the number one priority for investment in transport, compared with just 6 percent for rail.

The current coalition and the previous Labour government put rail at the heart of their infrastructure plans. Both backed the 16 billion-pound Crossrail project in London and the 33 billion-pound "HS2" high-speed rail line that will connect the capital to cities in the north of the country.

Between the fiscal years of 2005/06 and 2011/12, public capital spending on rail increased more than twice as quickly as spending on roads. In 2011/12 the government invested 6 billion pounds in rail, compared to 4.6 billion in roads.

Chancellor George Osborne delivered a budget in March that experts warned would not be enough to fix the country's infrastructure backlog or promote economic growth.

The EEF also called for the creation of an independent commission to deliver infrastructure to take the politics out of long-term decision making.

Osborne said in his budget that he plans to "make greater use of independent advice", alongside the expertise of former London Olympics CEO Paul Deighton who now works in the Treasury.

The government will publish its updated transport strategy later this year.

(Reporting By Christine Murray; editing by Keiron Henderson)

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Trade relations in focus before China's Xi gives Africa speech

By Fumbuka Ng'wanakilala and George Obulutsa

DAR ES SALAAM (Reuters) - China's trade ties with Africa will be under the spotlight on Monday when President Xi Jinping outlines his country's relationship with the continent, which Beijing is increasingly turning to for both its resources and as a market place.

Xi's tour of Africa on his first overseas trip is seen as a reflection of the strategic importance of Africa's oil and mineral resources to the world's second biggest economy.

But while seeking to build on expanding economic relations, China's new leader faces concerns in Africa that the continent is being stripped of its raw materials for export while spending heavily on finished consumer goods from the Asian economic powerhouse.

Africans generally see China as a healthy counterbalance to the West's influence but, as the relationship matures, there are growing calls from policymakers and economists for a more balanced trade deal.

One of Xi's main aims could be to ease local fears China was in Africa purely for its resources, said James Shikwati, head of the Nairobi-based Inter Regional Economic Network think tank.

Gratitude for Chinese no-strings aid to Africa is increasingly tinged with a wariness about its intentions.

"China has been giving us a lot of development support, but they obviously want something in return," said university student Lisa Mgaya in Dar es Salaam.

"We should be careful with China."

LONG HISTORY OF CONTACTS

Chinese interest in Africa goes back centuries. In 1414 admiral Zheng He sailed with a fleet down the east coast of Africa to Malindi, on a voyage to proclaim the strength of China. He famously brought home a giraffe, astonishing the Chinese court.

Six centuries later, China is focused less on African exotica and more on energy and minerals. The east African seaboard is hot property after huge gas discoveries in Tanzania and Mozambique. Oil strikes have also caught China's eye.

Xi arrived in Dar es Salaam, Tanzania's commercial capital where he will deliver his speech, on Sunday and signed more than a dozen trade and cooperation deals with President Jakaya Kikwete's government.

The agreements included plans to co-develop a new port and industrial zone complex, a concessional loan for communications infrastructure and an interest free loan to the Tanzanian government. No details were given on the size of the loans or the monetary value of the projects.

He then travels to South Africa for a summit of leaders of the world's major emerging economies, known as the BRICS, on Tuesday and Wednesday, and could endorse plans to create a joint foreign exchange reserves pool and an infrastructure.

The proposal underscores frustrations among emerging markets at having to rely on the World Bank and International Monetary Fund, which are seen as reflecting the interests of the United States and other industrialized nations.

Nigeria's central bank governor, Lamido Sanusi, wrote in the Financial Times this month that the trade imbalance between China and Africa was "the essence of colonialism" and cautioned the continent was vulnerable to a new form of imperialism.

China will be keen not to be perceived as an imperial master.

"The legacy of (the) West is the feeling that Africa should thank them, and that Africa should recognize that it is not as good as the West," said Zhong Jianhua, China's special envoy to Africa. "That is not acceptable."

Xi's African tour ends in the Republic of Congo, from where China imported 5.4 billion metric tons (5.9 billion tons) of oil last year, just 2 percent of its total oil imports, but potentially the source of a lot more to feed its booming, energy-hungry economy.

(Additional reporting by Ben Blanchard in Beijing; Writing by Richard Lough; Editing by Stephen Powell)

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New China leader Xi meets U.S.'s Lew, focus on shared aims

BEIJING (Reuters) - Treasury Secretary Jack Lew will meet new Chinese President Xi Jinping on Tuesday at a critical time in relations between the world's two largest economies, with cyber hacking, the Chinese currency and market access high on the agenda for talks.

The meeting will be Xi's first with a senior foreign official since he was formally elected as president by China's parliament on Thursday. It is also Lew's first major trip since his confirmation, indicating the importance of the relationship.

Chinese Premier Li Keqiang, the head of government, pledged on Sunday to forge "a new type of relationship" with the United States and called for the end of a cyber-hacking row between the two countries.

A private computer security company said last month a secretive Chinese military unit was likely behind a series of hacking attacks targeting the United States. President Barack Obama raised the issue during a phone call with Xi last week.

Lew plans to press Chinese officials to stop cyber attacks directed at the United States. China, in turn, says it is the target of U.S. hacking attacks.

Li has said reform was necessary to deliver long-term economic stability and Lew will also push China to accelerate economic reforms.

Lew also wants Beijing to allow its currency to rise faster against the U.S. dollar and to take steps to increase market access for U.S. goods and to protect intellectual property rights better.

Later on Tuesday, Lew will meet Xu Shaoshi, chairman of China's National and Development Reform Commission, the economic planning agency that wields approval authority over major investment projects.

Lew will also meet newly-appointed finance minister Lou Jiwei, formerly head of China's sovereign wealth fund.

(Reporting by Anna Yukhananov; Editing by Paul Tait and Michael Perry)

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Focus on mission, stay true to the cross, pope tells cardinals

By Philip Pullella and Catherine Hornby

VATICAN CITY (Reuters) - Pope Francis on Friday urged leaders of a Roman Catholic Church riven by scandal and crisis never to give in to discouragement, bitterness or pessimism but to keep focused on their mission.

Since his election on Wednesday as the first non-European pope in nearly 1,300 years, Francis has signaled a sharp change of style from his predecessor, Benedict, and has laid out a clear moral path for the 1.2-billion-member Church, which is beset by scandals, intrigue and strife.

"Let us never give in to the pessimism, to that bitterness, that the devil places before us every day. Let us not give into pessimism and discouragement," he told the cardinals who chose him.

The Vatican on Friday strongly denied accusations by some critics in Argentina that Francis stayed silent during systematic human rights abuses by the former military dictatorship there.

Spokesman Father Federico Lombardi told reporters the accusations "must be clearly and firmly denied".

Critics of Jorge Bergoglio, the former Archbishop of Buenos Aires, allege he failed to protect priests who challenged the dictatorship earlier in his career, during the 1976-1983 "dirty war", and that he has said too little about the complicity of the Church during military rule.

Setting out a clear and forceful moral tone in the early days of his papacy, Francis on Thursday told the cardinals they must stick to the faith's Gospel roots and shun modern temptations, otherwise the Church risked becoming just another charitable group without its divine mission.

Francis has given clear signs already that he will bring a new broom to the crisis-hit papacy, favoring humility and simplicity over pomp and grandeur.

OFF THE CUFF

On Friday he spoke to the cardinals in Italian from a prepared text but often added off-the-cuff comments in what has already become the hallmark of a style in sharp contrast to the stiffer, more formal Benedict.

Francis called the princes of the church "brother cardinals" instead of "lord cardinals" as Benedict did. Lombardi said Francis was still taking his meals with other prelates in the Vatican residence where the cardinals stayed during the conclave. "He just sits down at any table where there is a free spot, with a great sense of ease."

Another notable difference from the formal Benedict is the new pope's outgoing nature and sense of humor.

On Friday, he hugged cardinals, slapped them on the back, broke into animated laughter and blessed religious objects one cardinal pulled out of a plastic shopping bag.

In another sign of humility, Francis stopped cardinals who tried to kneel before him.

But his message was serious. The role of Church elders, including himself, was to set an example and pass on faith and values to younger people without being distracted by the temptations of worldliness.

"We are in old age. Old age is the seat of wisdom," he said, speaking slowly. "Like good wine that becomes better with age, let us pass on to young people the wisdom of life," he said.

STUMBLE

During the meeting on Friday he briefly stumbled as he descended the steps in front of his throne to greet Angelo Sodano, dean of the cardinals, but he quickly recovered his balance.

He made a point of paying tribute to Benedict, who shocked the Church last month by becoming the first pontiff in some 600 years to resign instead of ruling for life, saying he had "lit a flame in the depths of our hearts" with his courage and example.

Morale among the faithful has been hit by a widespread child sex abuse scandal and in-fighting in the Church government or Curia, which many prelates believe needs radical reform.

Francis is seen as having a common touch and the communication skills that the aloof Benedict lacked.

Whereas Benedict delivered his first homily in Latin, laying out his broad vision for the Church, Francis adopted the tone of parish priest, focusing on faith.

"When we walk without the cross, when we build without the cross and when we proclaim Christ without the cross, we are not disciples of the Lord. We are worldly," he told the massed ranks of cardinals clad in gold-colored vestments.

"We may be bishops, priests, cardinals, popes, all of this, but we are not disciples of the Lord (if we don't follow Jesus)," he added, speaking slowly in Italian.

The new pope signaled immediately his intentions for the papacy when he adopted the name of St. Francis of Assisi, who gave up a life of privilege in the 12th century to follow a vocation of poverty.

He urged Argentines not to make costly trips to Rome for his inauguration next week but to give money to the poor instead.

No Vatican watchers had expected the conservative Argentinian to get the nod, and some of the background to the surprise vote has already trickled out, confirming that cardinals wanted a pastoral figure to revitalize the global Church but also someone who would get the dysfunctional Vatican bureaucracy in order.

French Cardinal Jean-Pierre Ricard told reporters: "We were looking for a pope who was spiritual, a shepherd. I think with Cardinal Bergoglio, we have this kind of person. He is also a man of great intellectual character who I believe is also a man of governance."

After more than a millennium of European leadership, the cardinals who chose Francis looked to Latin America, where 42 percent of the world's Catholics live. The continent is more focused on poverty and the rise of evangelical churches than questions of materialism, rising secularism and priestly sexual abuse, which dominate in the West.

Francis' inaugural Mass will be held next Tuesday, with many world leaders expected to attend.

(Editing by Barry Moody and Giles Elgood)

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Focus shifting in Congress from automatic cuts to dueling budget plans

By David Lawder and Mark Felsenthal

WASHINGTON (Reuters) - With little prospect of getting rid of the automatic spending cuts that kicked in on March 1, the Congress and the White House will move on to bigger budget battles this week as dueling Republican and Democratic proposals land in the House of Representatives and the Senate.

Neither budget plan is likely to be enacted. But the proposals to be submitted by Republican Representative Paul Ryan of Wisconsin and Democratic Senator Patty Murray of Washington should frame the debate over the government's taxing and spending priorities for the next few months and possibly into the 2014 Congressional elections.

The budgets from Ryan and Murray, who chair the budget committees in the two chambers, are widely seen as wish-lists unacceptable to the opposing party, underscoring the depth of the fiscal divide.

Ryan plans to unveil on Tuesday a slightly modified version of the budgets passed by the House in each of the past two years, cutting spending by $5 trillion over a decade and partially privatizing the Medicare health plan for retirees and dismantling President Barack Obama's healthcare overhaul law.

With the help of $620 billion in new tax increases on the wealthy as a result of the January "fiscal cliff" deal, Ryan's plan aims to balance the budget by 2023, compared with 2040 in his last year's proposal. But further tax increases are out of the question, he said on Sunday.

Murray has signaled that her budget will aim to give the economy some breathing room to allow faster growth in the next few years, while maintaining social safety net programs and making critical investments in education and research.

Her budget is not expected to achieve balance as Ryan's does, but will aim to shrink deficits down to a sustainable level that will allow debt as a percentage of the economy to start declining.

The plan will get there by eliminating some of the estimated $1 trillion in "tax expenditures" - subsidies paid through tax deductions, credits and other exclusions. Based on Murray's comments and recent Senate Democratic proposals to replace the automatic cuts, these loophole closures will focus on the wealthy.

"At a time when we absolutely must cut where we can, looking at ways we can close special tax breaks that aren't targeted to help the middle class or our economy just makes sense," Murray told a Senate Budget Committee hearing last week.

"There's no good reason, for example, that taxpayers currently subsidize millionaires more, when they purchase a second home, or a yacht, than they do middle-class families purchasing their first home."

Many Republicans, including Ryan, also want to close these loopholes, but they want to divert the savings to reduce tax rates. This sort of comprehensive tax reform, they argue, will create a simpler, cleaner tax code that will foster economic growth.

The budget proposals will focus on the 2014 fiscal year that starts on October 1, leaving in place the first $85 billion in automatic cuts - called the "sequestration" - at least for the time being.

A Senate Democratic bill to fund the government through the end of the current fiscal year will make no effort to replace the cuts, focusing instead on ways to grant agencies authority to better manage their expenditures.

"We know that coming up with the $85 billion to solve sequester has to be done at the leadership and presidential level," the bill's author, Senate Appropriations Committee Chair Barbara Mikulski of Maryland, said last week.

The White House on Monday acknowledged that elimination of the across-the-board spending cuts will likely come only as part of a larger, comprehensive budget deal with Republicans, many of whom are determined to keep the $85 billion in savings.

"So, our focus now, as the president has said, is on working with Congress" on the regular budget process, "and through that process hopefully produce a bipartisan agreement on deficit reduction," White House spokesman Jay Carney told reporters.

NEW STARTING LINES

The week marks "a transitional moment" for Congress, said one aide, because it represents a return to the normal legislative process of considering budget resolutions in both chambers.

For more than two years, Washington has lurched from crisis to crisis amid "leadership-brokered" deficit deals and stop-gap spending extensions.

The Democratic-controlled Senate has not passed a formal budget resolution in nearly four years.

By returning to so-called "regular order," the Republican-controlled House in particular aims to engage more lawmakers in the process of deciding how to cut deficits so that there is more support among rank-and-file members for the finished product.

The last two major deficit deals were reached at the last minute at the highest levels of the White House and Congress, staving off a potentially devastating debt default in 2011 and averting a massive tax increase on January 1.

Obama will continue his efforts to engage congressional Republicans and Democrats directly, by holding meetings with lawmakers this week.

Obama's shift to a "charm offensive" in dealing with members of Congress likely reflects a sense of public weariness from endless budget battles, said Steve Bell, a former staff director of the Senate Budget Committee and now with the Bipartisan Policy Center, a Washington think tank.

"It's important to change the subject away from debts and deficits and instead talk about things where you can make progress - immigration reform, for example, or on guns," Bell said.

With the effects of the automatic spending reductions yet to fully kick in, the president may be counting on public pressure to build on for an alternative to the deep cuts, Bell said.

In the meantime, the president can establish links with members of Congress of both parties and work on other issues.

(Editing by Fred Barbash and Mohammad Zargham)

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