This article first appeared in The Edge Financial Daily on September 26, 2017

KUALA LUMPUR: Malaysian government-linked companies (GLCs) could do with more transparency, in accordance with one of the key guidelines of the Organisation for Economic Co-operation and Development (OECD) on the governance of state-owned enterprises (SOEs).

“In many countries, the expectation is that a SOE should be, at least, as transparent as the listed companies. The question is, why can’t all this information be made public?” said Lars Erik Fredriksson, chairman of OECD’s working party on state ownership and privatisation practices.

For example, the OECD recommends that SOEs follow international accounting standards, have an external audit, and produce annual as well as quarterly reports, he said in an interview with The Edge Financial Daily following a closed door meeting between the OECD and representatives from 13 Asian countries here recently.

According to a 2010 policy brief on SOE governance by the OECD, Malaysian SOEs, known as GLCs, contributed close to 15% of gross domestic product and 5% of national employment.

Wan Saiful Wan Jan, chief executive officer of the Institute for Democracy and Economic Affairs (Ideas), who was also present at the interview, noted that while previous efforts to transform GLCs have shown positive results, more needs to be done. “The rules at our stock exchange are actually quite robust, which means we don’t have to worry about listed GLCs. It’s the unlisted ones that we know nothing about.” 

He added that things got even murkier at the subnational or individual state level, where there was little disclosure and accountability from state development councils.

“There have been reforms in Malaysia, such as the Putrajaya GLC High Performance Committee that made real change in the profitability of 20 GLCs. But that’s 20 out of the unknown number of GLCs we have in this country,” Wan Saiful said.

He added that the challenge lay in implementing plans to separate political and commercial interests in GLCs.

“There is an explicit [OECD] guideline stating that you should not have active politicians acting on the board of directors for GLCs.

“Lucky for us, the government has acted on it [by removing] Felda Global Ventures Holdings Bhd’s chairman, Tan Sri Isa Samad … but we saw how that can get problematic,” he said.

Fredriksson said one quick and affordable action plan to make GLCs more transparent involves identifying all GLCs publicly, perhaps, via a website.

Apart from leading to other forms of mismanagement, political influence could be a problem if demands are placed on GLCs that do not reflect the company’s core business objectives, he said.

“The board of directors should have the competence to set the company’s strategy as well as to make independent decisions. If you intermingle the role of political powers and business powers, decision-making often does not function very well,” he added.

Other recommendations from the OECD included having an explanation or rationalisation of why the government was holding these companies, as well as putting in place a centralised monitoring system of the performance of SOEs.

“You might also want to look into how much assets are allocated to these SOEs — are they overcapitalised or undercapitalised?” Frederiksson said.

Although privatisation was a recommended process, he noted that the OECD would not be in favour of privatising a monopoly as consumers would be on the losing end due to high prices that can still be charged. “You might want to first open up the market for competition and ensure there is a level playing field,” he said.

As for the 10-year GLC transformation programme launched by Khazanah Nasional in 2004 for 20 selected GLCs, the OECD said in its report that though the selected companies recorded significant financial and operational improvements, other GLCs still underperformed relative to top regional sector peers.

For such cases, Fredriksson recommended that dialogue be entered into with the board in order to look into and manage such situations.

However, Wan Saiful noted that Malaysia’s problem was much more fundamental and tied it back to lack of transparency, which prevents the public from knowing about the financial performance of these companies.