This article first appeared in Forum, The Edge Malaysia Weekly on October 19, 2020 - October 25, 2020

For one reason or another, government-linked companies (GLCs) continue to make the headlines. Whether it is questionable new appointments or controversial merger proposals, the debate on GLCs is a permanent feature of our country’s political economy. When other countries look at Malaysia, it is not just the number of GLCs that is surprising, but the fact that we have no single agency overseeing all of them.

In Malaysia, we are more familiar with the term GLC than state-owned enterprises (SOEs). Unlike other countries which use the term SOE, we use GLCs to refer to enterprises with commercial objectives and have the government as the majority shareholder, either directly or indirectly via government-linked investment companies (GLICs) such as Khazanah Nasional Bhd and the Employees Provident Fund (EPF).

The term SOE is broader and in Malaysia’s case includes GLCs, GLICs, statutory bodies and government agencies. GLCs are distinct from other SOEs as they are incorporated as companies under the Companies Act 1965 and considered as “commercial” because they engage in markets where competition occurs or could occur.

As GLCs have a huge presence in the economy, accounting for 42% of the total market capitalisation of the stock exchange, a clear policy on these entities is essential. GLCs also play an important role in achieving social objectives as demonstrated during this pandemic when they were mobilised as part of the government’s “ecosystem” to support vulnerable groups.

In an Organisation for Economic Co-operation and Development survey of 31 countries, half of them have a central entity that exercises ownership in SOEs. This includes China’s State-owned Assets Supervision and Administration Commission of the State Council (SASAC), India’s Department of Public Enterprises (DPE) and the Korea Institute of Public Finance (KIPF). These agencies set policy guidelines for SOE ownership and monitor their performance.

There are multiple benefits of having a central agency for GLCs. Periodic reviews of continued government ownership in the companies can be carried out systematically. In addition, setting up a coordinating agency will institutionalise the role of the state in managing GLCs. The agency will also clearly spell out the policy objectives of these entities and once this is set, the focus can progress towards monitoring their performances.

Such a central agency would exercise ownership rights over all GLCs and have the capacity and competency to effectively scrutinise and direct the appointment of the board of directors, set and monitor their respective objectives and vote at board meetings or annual general meetings on behalf of the government.

This central agency for GLCs will also be held accountable to the relevant representative bodies and have clearly defined relationships with applicable public bodies, including the Auditor-General’s Department.

The nation does not have a centralised entity that owns GLCs. Minister of Finance Inc (MoF Inc) owns 70 companies while other GLICs and statutory bodies own GLCs, such as Mara’s ownership of 57 companies, which are considered GLCs.

The companies owned by MoF Inc are managed and supervised by a division under the Ministry of Finance called Government Investment Companies (GICs). But other GLCs, such as the 57 companies owned by Mara or those owned by other GLICs and statutory bodies, are not supervised by a coordination agency or ministry.

In 2004, the government set up the GLC Transformation Programme to turn selected GLCs into high-performance companies. Despite 20 of these entities graduating from the programme, the guidelines produced under the programme did not extend to all GLCs.

This includes the manuals for procurement and governance best practices, which were published as recommendations but are not binding. The lack of institutionalisation of reform may result in sliding back on some of the reforms over time. A centralised agency can help to ensure the reforms stick.

However, there are some risks with creating one agency with so much power. First, GLCs come in many forms and structures and there is a long list of them with different performance levels. Some of the higher-performing GLCs that rank in the top 30 of the stock market are household names such as Tenaga Nasional Bhd, Petroliam Nasional Bhd’s (Petronas) listed companies and Telekom Malaysia. There are also the unlisted GLCs such as TH Hotels and Resorts and Mara Corporation.

The different levels of GLC performance and presence across sectors means the task of setting the goals and performance monitoring of GLCs is not easy. For example, the justification for these entities’ presence in the public transport sector is different from that in the property sector. There is less justification for government presence in competitive sectors with a high number of private providers such as hospitality. But this may not be as straightforward for the telecommunications sector.

Second, a blanket solution cannot be applied to all GLCs based on one-size-fits-all objectives and performance indicators. These must be defined on a case-by-case basis. Hence, it will be difficult to have a central agency exercising ownership over all GLCs.

Third, it is also risky to create a central agency as it may become a “central protection agency” of all GLCs. Instead of improving the monitoring of these entities, the agency may end up saving GLCs in distress. Creating another level of bureaucracy will also cost more taxpayers’ money and will become another layer to tackle in the future.

Hence, beyond having a centralised agency that owns all GLCs, what Malaysia needs is a clear and central direction in the government’s objectives for GLCs.

It is vital to have clarity in terms of the role of GLCs in the economy. The government should recognise the key role of these entities and communicate it clearly so that it can be achieved and monitored effectively.

The role of GLCs should be to support structural reform in strategic sectors and then to gradually exit those sectors when their presence is no longer warranted. The GLCs should be put on one of four paths — consolidation, privatisation, liquidation or corporatisation. The government’s focus behind setting a policy for the direction of GLCs must be to create an environment that is more conducive to entrepreneurship and market growth.

Periodic reviews of the government’s ownership of GLCs must be undertaken and progress of this policy has to be monitored. The government’s ownership in these entities can be divided into two: strategic and commercial ownership. The former means the government exercises control of the companies they invest in while the latter gives the companies complete independence in decision-making.

The government continues to play an important role in the economy, but it has to be clear whether that role is played through strategic or commercial ownership of GLCs. The government should be clear on its vision for GLCs and leverage their potential to support strategic sectors and promote entrepreneurship.

Nur Zulaikha Azmi is a research executive at the economic and business unit of the Institute for Democracy and Economic Affairs

Save by subscribing to us for your print and/or digital copy.

P/S: The Edge is also available on Apple's AppStore and Androids' Google Play.