This article first appeared in The Edge Financial Daily, on November 6, 2015.

KUALA LUMPUR: Malaysia has more reason to be a signatory of the Trans Pacific Partnership (TPP) agreement in light of the fact that government negotiators have successfully carved out and protected the bumiputera advantage when dealing with state-owned enterprises (SOEs) including Petroliam Nasional Bhd (Petronas).

Commenting on Chapter 17 of the agreement titled: ‘State-Owned Enterprises and Designated Monopolies’, Malaysian University of Science and Technology’s School of Business dean, Dr Yeah Kim Leng, said this will grant bumiputera companies and state-owned institutions an adjustment period to be market ready.

“It is more politically acceptable to have it carved out because you will have a grace period for these institutions to be able to compete on the global market. However, these institutions should be given a so-called end period to make the adjustment,” Yeah explained to The Edge Financial Daily.

Chapter 17 of the TPP restricts SOEs from granting favourable treatment to domestic companies against foreign companies.

Under Annex 17 F of the agreement, Permodalan Nasional Bhd (PNB) is not obligated under the terms of the chapter as long as it is providing investment plans for the public, investing the assets of the plans and is free from investment directions from the Malaysian government.

Similarly, Lembaga Tabung Haji is not obligated as long as it performs its investment plans for the purpose to allow individual Muslim beneficiaries to perform their religious pilgrimage to Mecca and is free from investment directions from the Malaysian government.

However, both entities must still abide by Article 17.6.1 and Article 17.6.3, whereby the government cannot grant non-commercial assistance that can hurt foreign companies’ business interest to the two entities or its subsidiaries.

Annex IV also provides limitations and conditions for Malaysian SOEs from following all the terms in Chapter 17, particularly on procurement and sales to and from bumiputera enterprises pursuant to implementing the Bumiputera Affirmative Action; Sabah and Sarawak enterprises promoting state economic development and small and medium enterprises.

The entities scheduled under Annex IV include: Majlis Amanah Rakyat (Mara), Unit Peneraju Agenda Bumiputera (Teraju), Ekuiti Nasional Berhad (Ekuinas) and all state-owned enterprises and designated monopolies.

Petronas is also exempted from many of the terms favouring domestic companies against foreign companies when it comes to sales and procurement when engaging in upstream activities with the exception of: seismic data acquisition; a few drilling services; cementing related services; gas turbines and related maintenance and repair services; control valve services; oil country tubular goods; induction motors services; distributed control system services; transformer services; structural steel; linepipes; and process pipes.

The Annex also allows Petronas to sell natural gas and its by-products at below market rates in Malaysia to ensure adequate supply and affordable prices and for the usage of natural gas vehicles.

Finally, the national oil and gas company is allowed to receive non-commercial assistance when carrying out government mandated projects in Malaysia outside the oil and gas sector that have social implications or economic development objectives, and in compensating the group for the sale of natural gas below market price under certain conditions.

Despite what seems to be good news for bumiputera stakeholders, the Institute of Democracy and Economic Affairs chief executive Wan Saiful Wan Jan had scathing remarks on the special carve outs.

“The government negotiated a lot of exclusion for quite a few of our government-linked companies (GLCs) and many of them are centred on the need to pursue the bumiputera agenda. On the one hand, it’s good that the government was consistent in the policies that they have, so that’s one of the red lines that they managed to negotiate a concession for.

“However, I’m not a big fan of the bumiputera agenda and my original hope was that the TPP will be a catalyst to end bumiputera preferential treatment. Clearly the government decided they would rather keep the preferential treatment and negotiated for that,” said Wan Saiful.

He opined that the government should have used this “opportunity” to rely on the TPP to structurally reform the economy and end the bumiputera preferential treatment within 20 to 30 years of signing the agreement.

Wan Saiful said he finds it an “insult” to bumiputera that the government managed to maintain the status quo as it creates a vicious cycle of dependency for bumiputera enterprises.

“It is saying that one particular ethnic group is not good enough to compete internationally and I disagree with that. I see that as an insult to that ethnic group because you are saying this group is genetically not good enough to compete at an international level.

“Unless you change that attitude you will perpetuate a dependency on the government which will create a vicious cycle of dependency and un-competitiveness for businesses run by bumiputeras. In the long run it’s simply not healthy to continue on a discriminatory policy.

“So, it’s about dependency, not fostering competitiveness and the policy will not encourage people to be innovative and self-sufficient and therefore it is overall not a good thing. We lost the opportunity to rid ourselves of that,” said Wan Saiful.