This article first appeared in The Edge Malaysia Weekly on October 9, 2017 - October 15, 2017
ON Sept 21, 2010, the government announced its goal to reduce its role in business, one of numerous reforms under the Economic Transformation Programme (ETP). Seven years on, however, this has not been meaningfully achieved.
In fact, many observers argue that the government’s involvement in business increased over that period, despite official numbers showing it had divested 33 identified government-linked companies (GLCs). For example, between 2011 and 2015, the government — via various government-linked investment companies (GLICs) — saw its share of the benchmark FBM KLCI companies’ market capitalisation rise from 43.7% to 47.1%, according to data compiled by the Institute for Democracy and Economic Affairs.
While there are multiple factors at work, one issue has been the nature of Malaysian politics, especially Umno, which has a culture of rent-seeking and patronage, says political economist Prof Dr Edmund Terence Gomez. Another challenge is aligning it with the affirmative action goals under the Bumiputera Commercial and Industrial Community (BCIC) agenda.
“It’s difficult to get [the reduction push] to conform to the BCIC policy — there are very few bumiputeras who have the capacity to take over these companies and turn them around. And if you start channelling them to a select group, it raises concerns about selective patronage,” he says.
Additionally, many of the biggest GLCs, such as those listed on Bursa Malaysia, are already well run by professional managers. In other words, there is no pressing need to divest them as the idea behind privatisation is to get the private sector to turn around ailing state-owned businesses, he says.
Another factor has been the continuous investments by GLCs during the divestment programme, says Jayant Menon, lead economist for trade and regional cooperation at the Asian Development Bank.
“There has been a spate of acquisitions of finance institutions and property developers by GLCs ... for instance, making it more of a diversification than a divestment programme,” Menon tells The Edge.
The government defines a GLC as a commercially driven company that is under the control of a GLIC.
There are seven GLICs at the federal level, including the Finance Ministry’s corporate vehicle — Minister of Finance Incorporated (MoF Inc) — Employees Provident Fund (EPF), Permodalan Nasional Bhd and Lembaga Tabung Haji (TH).
Technically, many of these GLICs represent the people, as opposed to the government. EPF, for example, mobilises Malaysian workers’ retirement savings while TH invests the savings of Malaysian Muslims who wish to perform the haj someday.
However, these GLICs are also perceived — fairly or unfairly — as state players in business as the government has a say in the appointment of their leadership, which raises the question of government influence over critical decisions.
To be fair, this remains mostly perception as many of the GLICs have been maintaining a good track record over the years.
“The GLICs have proved to be influential in maintaining corporate governance standards and financial performance in their investee companies, many of them classified as GLCs,” says Anushka Shah, assistant vice-president and analyst at Moody’s Investors Service.
“In recent times, concerns have arisen in the market over corporate governance and corruption stemming from 1MDB and Felda [Global Ventures Holdings Bhd], pointing to some constraints to government effectiveness in Malaysia. However, these do not seem representative of how the GLICs are run.”
But just how far the overall government involvement, both at the federal and state level, in business and economy remains unclear.
As a snapshot, MoF Inc alone has a majority shareholding in 65 companies, according to the Finance Ministry’s website. It is unclear if the list is exhaustive and includes subsidiaries controlled by the 65 firms.
MoF Inc also has one golden share each in 33 other companies, which gives special rights that include the appointment of their executive managements.
“These are GLCs at the federal level. We have not even gone down to the state entities,” says Lee Heng Guie, executive director of Socio-Economic Research Centre (SERC).
Crowding out effect?
Apart from opacity, the depth of the government’s involvement in business present potential issues. One of them is the inherent room for patronage and potential abuse.
At the federal level, much of the influence is seen to be concentrated in both the prime minister’s and finance minister’s roles. This has led to the practice of a sitting prime minister also holding the finance portfolio, which was started by Tun Dr Mahathir Mohamad in 2001.
“Since then, no prime minister has bothered to give up the finance minister’s post,” says Gomez. “Whoever controls the Ministry of Finance has an enormous source of patronage.”
Another prevalent practice has been the appointment of politicians to directorships at some GLCs, which was significantly reduced by the GLC Transformation Programme initiated by the then prime minister Tun Abdullah Ahmad Badawi in 2005.
The programme, targeted at GLCs under sovereign wealth fund Khazanah Nasional Bhd, was completed in July 2015. Among others, it introduced various checks and balances to professionalise the GLCs, Gomez says.
According to the ETP, the push to retreat from business participation on the government’s side is meant to avoid crowding out the private sector, especially in areas where the private sector is already operating efficiently.
A 2013 paper by the Asian Development Bank, co-authored by Menon, corroborates this concern. It highlights how GLC dominance in a sector negatively affects private investment, which has been sluggish since the 1997 Asian finance crisis.
“There is now clear empirical evidence that the growing presence of GLCs has been crowding out private investment,” says Menon. “This may also contribute to rising inequality, to the extent that it makes it more difficult for micro and small and medium enterprises (MSMEs) to compete domestically.
“With GLCs’ presence in sectors such as agriculture, beverages, food services and fisheries, where MSMEs tend to be concentrated, there is a significant risk that their survival is threatened by their huge rivals.”
Another rationale has been to improve the government’s fiscal position and increase liquidity in the capital markets. In a nutshell, state-owned enterprises running into difficulties would drain public resources, which could be better used elsewhere.
“We can see some GLCs at the state level that are not running well,” says SERC’s Lee. “If you keep needing to provide them funding or grants to help them survive, it will drain your resources.”
That said, many of the concerns about the government’s involvement in business require more data to be available before the full effects become clearer.
Among others, private investment has picked up since the ETP was launched. The government has attributed this to its emphasis on the private sector as the engine of economic growth.
“So, whether [government being in business] would lead to crowding-out ... at the moment, we need more hard evidence,” says Lee.
He adds that the concern about a crowding-out effect had assumed that investments by GLCs would also take up resources such as liquidity and talent, which would push up costs for the private sector as being sovereign-backed is an advantage in obtaining financing, for example.
“That’s the crowding-out effect we are worried about ... not just about the banking system or financial resources but also about the labour market,” says Lee.
The original idea was not for GLCs to compete with the smaller private businesses, says Gomez. Rather, the intention was to use big businesses to nurture smaller entrepreneurs via vendor development programmes such as the one that has been run by Petroliam Nasional Bhd for decades.
“I would argue that where they went wrong was they coupled that notion of creating linkages between big companies and small firms to affirmative action in business,” says Gomez, opining that had affirmative action not come into play, “the outcomes would have been far better for SMEs”.
The question of control
So, what should be the way forward insofar as the government’s involvement in business is concerned? The key issue to address is the ownership and, by extension, control over the GLCs and how that control is — or could be — used.
“Is it in the interest of driving economic growth, is it in the interest of nurturing domestic firms, is it in the interest of ensuring equitable growth and just development?” asks Gomez. “Or is it in the interest of patronage and rent-seeking, or in the interest of targeting certain groups only because they serve political interests to win elections?”
While many GLCs are already run by professionals, there remains a case for further institutionalising the way their operations are run and overseen. A logical way forward is to have the GLICs and GLCs accountable to Parliament via special oversight committees as proxy for the people.
“The management of public funds in carrying out nation-building objectives requires greater scrutiny. It is proposed that the GLCs be subject to checks and balances by the parliamentary oversight committees,” SERC’s Lee says, adding that another question to tackle is defining the government’s role in business in the Malaysian context.
This arrangement would circumvent issues that may arise from the perceived influence coming from the power of appointment that is held by the finance minister, for example, says Gomez. “And I would also argue that the select committees must be run by opposition members of parliament so that there is real check-and-balance.”
The other urgent need is for more disclosure on the extent of the government’s reach in the economic sectors. Only then would the public have a better understanding of what the impact is on the private sector and what further reforms are needed, he says.
On the private investment front, the government also needs to expedite its divestment programme, in addition to addressing its growing fiscal deficit, opines ADB’s Menon.
“While a growing fiscal deficit and rising dominance of GLCs may both be crowding out private investment, a genuine privatisation programme designed to reduce the role of GLCs would also address the fiscal constraint, providing a further boost to the investment climate,” he says.
But if things remain as they are, where does that leave us as a nation going forward?
“That’s the question we are asking ourselves. Our politicians are failing us because they are letting political issues dictate the way we move forward,” says Gomez.
Malaysia’s federal government-linked investment companies
1. Minister of Finance Incorporated
2. Khazanah Nasional Bhd
3. Employees Provident Fund
4. Lembaga Tabung Haji
5. Armed Forces Fund Board
6. Retirement Fund
7. Permodalan Nasional Bhd
Snapshot of Ministry of Finance’s corporate web (via Minister of Finance Incorporated)
Majority shareholding
1. 1Malaysia Development Bhd
2. Amanah Raya Bhd
3. Astronautic Technology (M) Sdn Bhd
4. Bank Pembangunan Malaysia Bhd
5. Bank Pertanian Malaysia
6. Cradle Fund Sdn Bhd
7. Cyberview Sdn Bhd
8. Export-Import Bank of Malaysia Bhd
9. Felcra Bhd
10. Halal Industry Development Corp Sdn Bhd
11. IJN Holdings Sdn Bhd
12. Indah Water Konsortium Sdn Bhd
13. Inno Bio Ventures Sdn Bhd
14. Institut Terjemahan dan Buku Malaysia Bhd
15. Jambatan Kedua Sdn Bhd
16. JKP Sdn Bhd
17. Keretapi Tanah Melayu Bhd
18. Khazanah Nasional Bhd
19. Kumpulan Modal Perdana Sdn Bhd
20. Malaysia Debt Ventures Bhd
21. Malaysia Digital Economy Corp Sdn Bhd
22. Malaysia Kuwaiti Investment Corp Sdn Bhd
23. Malaysia Rail Link Sdn Bhd
24. Malaysian Bioeconomy Development Corp Sdn Bhd
25. Malaysian Venture Capital Management Bhd
26. Mass Rapid Transit Corp Sdn Bhd
27. MIMOS Bhd
28. MyCreative Ventures Sdn Bhd
29. MyHSR Corp Sdn Bhd
30. Pembinaan BLT Sdn Bhd
31. Pengurusan Aset Air Bhd
32. Perbadanan Nasional Bhd
33. Petroliam Nasional Bhd
34. Prasarana Malaysia Bhd
35. Prokhas Sdn Bhd
36. Rangkaian Hotel Seri Malaysia Sdn Bhd
37. Sepang International Circuit Sdn Bhd
38. SIRIM Bhd
39. Small Medium Enterprise Development Bank Malaysia Bhd
40. SRC International Sdn Bhd
41. Suria Strategic Energy Resources Sdn Bhd
42. Syarikat Perumahan Negara Bhd
43. Technology Park Malaysia Corp Sdn Bhd
44. UDA Holdings Bhd
45. 1Malaysia Sukuk Global Bhd
46. AES Solutions Sdn Bhd
47. Aset Tanah Nasional Bhd
48. Assets Global Network Sdn Bhd
49. DanaInfra Nasional Bhd
50. East Coast Rail Link Sdn Bhd
51. GovCo Holdings Bhd
52. KL International Airport Bhd
53. Malaysia Development Holding Sdn Bhd
54. Malaysian Sovereign Sukuk Sdn Bhd
55. Pembinaan PFI Sdn Bhd
56. Pengurusan Danaharta Nasional Bhd
57. Perwaja Terengganu Sdn Bhd
58. Piramid Pertama Sdn Bhd
59. Pyrotechnical Managers Holding Sdn Bhd
60. SDE Solutions Sdn Bhd
61 Syarikat Jaminan Kredit Perumahan Bhd
62. Syarikat Jaminan Pembiayaan Perniagaan Bhd
63. Syarikat Tanah & Harta Sdn Bhd
64. Turus Pesawat Sdn Bhd
65. Wakala Global Sukuk Bhd
Associate companies
1. Asean Potash Mining Public Co Ltd
2. Danajamin Nasional Bhd
3. International Rubber Development Consortium Ltd
4. KUB Malaysia Bhd
5. Syarikat Perumahan Pegawai Kerajaan Sdn Bhd
Golden share (with special rights)
1. Aerospace Technology System Corp Sdn Bhd
2. Bintulu Port Holdings Bhd
3. Bintulu Port Sdn Bhd
4. Boustead Naval Shipyard Sdn Bhd
5. Commerce Dot Com Sdn Bhd
6. Felda Global Ventures Holdings Bhd
7. Felda Holdings Bhd
8. Hicom Holding Bhd
9. Johor Port Bhd
10. Konsortium Pelabuhan Kemaman Sdn Bhd
11. Kuantan Port Consortium Sdn Bhd
12. Malaysia Airport (Sepang) Sdn Bhd
13. Malaysia Airports Holdings Bhd
14. Malaysia Airports Sdn Bhd
15. Malaysian Airline System Bhd
16. Malaysian Maritime Academy Sdn Bhd
17. Mardec Bhd
18. Medical Online Sdn Bhd
19. MISC Bhd
20. National Aerospace & Defence Industries Bhd
21. National Feedlot Corp Sdn Bhd
22. Northport (Malaysia) Bhd
23. Padiberas Nasional Bhd
24. PDX.Com Sdn Bhd
25. Pelabuhan Tanjung Pelepas Sdn Bhd
26. Penang Port Sdn Bhd
27. Pos Malaysia Bhd
28. Projek Lebuhraya Usahasama Bhd
29. Sabah Electricity Sdn Bhd
30. Senai Airport Terminal Services Sdn Bhd
31. Telekom Malaysia Bhd
32. Tenaga Nasional Bhd
33. Westport Malaysia Bhd
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