my Say: Shuffling current value and creating new ones

This article first appeared in Forum, The Edge Malaysia Weekly, on January 27, 2020 - February 02, 2020.
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The Sherman Antitrust Act was enacted in the US in 1890 during the so-called Gilded Age — that period after the Civil War until about World War I — that saw rapid industrialisation, high economic growth, rising wages and an influx of immigration from Europe. The Act was designed to regulate against any activities that undermined competition, which was deemed central to economic growth — the kind of growth that made the US an economic superpower by the end of the 19th century.

One of the biggest industrialists during that period — and there were many — was John D Rockefeller, whose industrial empire, Standard Oil, controlled almost all oil production, refinery, marketing and transport in the US. On May 15, 1911, the Supreme Court ordered the dissolution of Standard Oil Company, ruling that it was in violation of the Sherman Antitrust Act. In US parlance, its monopoly was “a restraint of inter-state commerce”.

Standard Oil was broken up into more than 30 companies across the US. All the big oil companies today — from Amoco, Chevron and Mobil to

Texaco — are the result of the consolidation of these companies. The whole point of the break-up was to create competition. The benefits did not materialise immediately and there was, over time, consolidation of the over 30 companies into just a handful. There are technical efficiencies of scale and possibly of scope as well, and there are inefficiencies of concentration of market power. Clearly, the break-up went beyond what was economically efficient in the attempt to regulate market power.

Another famous use of the Sherman Act was the break-up of AT&T. The Bell telephone companies under AT&T had a monopoly on local calls in the US and the Act was again used in 1984 to break it up into seven regional companies.

In many ways, regulations are about the present. It is about competition and the protection of consumer welfare. It is not about value creation and growth. The real sources of growth are innovation and technological advances. Ending the monopoly on local calls in the US actually raised local prices while new technologies, new firms, new platforms and new business models in the long-distance business that AT&T was allowed to be in saw both growth as well as decreased prices.

The break-up of AT&T took place well before the pervasiveness of the internet and, therefore, before the advent of wireless and mobile communications which, in the end, were the driving forces behind innovation and value creation in the telecommunications industry.

In Malaysia, there seems to be a policy nowadays that government-linked companies (GLCs) need to be broken up as they are fat monopolies standing in the way of growth and are detrimental to consumer welfare. The departure point in this line of thinking is that GLCs are state-owned enterprises that have benefited commercially from their state parentage. Thus, the government has to divest itself of these companies and they must be broken up to encourage private investment.

All of this sounds reasonable, except the departure point is wrong. And it starts with the wrong use of the term itself. What is a GLC? It has been misused to refer to everything from a public-listed firm to statutory bodies to regulators to actual state-owned enterprises. For the purposes of this essay, I will refer to GLCs as those publicly listed companies whose shareholders include statutory funds such as the Employees Provident Fund (EPF), Permodalan Nasional Bhd (PNB), Retirement Fund Inc (KWAP), Tabung Haji and the Armed Forces Fund Board (LTAT).

Actually, these companies are not GLCs in the sense that they are state-owned enterprises. For starters the funds do not even belong to the government; they belong to their subscribers who depend on the performance of their investments for dividends. Their investee companies are public-listed companies; yes, some of them were public enterprises delivering public services but they have been privatised and their shares are publicly traded and the shareholders are drawn from all over the world.

These former natural monopolies have been privatised and the sectors they operate in have been liberalised. Beyond exiting as owners, the government has also exited as the regulator with the formation of industry regulators that regulate both the technical and the economic sides of the business. For these companies, there is clarity of what they are and independence from the government despite their lineage. The public sector is also relieved of any fiscal burden in ensuring that the services offered by these companies continue to be delivered.

If public policy prescription adopts a posture that these companies are policy instruments instead of commercial entities, then it would be destructive to the companies and, more critically, to Malaysia as an investment destination. As an example, Telekom Malaysia shares fell from their 2018 opening value of RM6.02 to a low of RM2.15 in October 2018, when a policy pronouncement — twice the speed at half the price — was made without looking at the details of the starting point and its policy trade-offs. The drop in the share price was equivalent to a RM15 billion loss in market capitalisation.

Malaysia Airports Holdings Bhd (MAHB), another privatised company, also suffered from uncertainty arising from its contract with the government to manage the country’s airports and the mechanism to finance capital expenditure. Its share price saw a high of RM8.80 in the last one year but has fallen to less than RM7 on the uncertainty over the airport funding model.

It is flawed to define the investment climate problem in Malaysia as one caused by an overwhelming presence of GLCs in the capital market, if GLCs are defined as investee companies of the statutory funds mentioned earlier. The combined size of the EPF, KWAP and PNB, for example, is in excess of RM1.3 trillion and the market capitalisation of Bursa Malaysia is only RM1.7 trillion.

One would expect that the better-performing companies listed on Bursa would attract the likes of these funds as investors, which should be the case. Without these funds, there would not have been the depth in the capital market in Malaysia that funded the privatisation policy as well as the growth of local firms.

The general economic problem in Malaysia is the relative decline in investments and, therefore, new capacities to do things. Among others, this translates into the lack of firms and the lack of firms needing capital which, therefore, translates into the lack of depth in the capital markets — there are not enough companies and not enough sizable well-performing companies for the available funds. Instead of going into equities, funds have been flowing into the debt market, which is slightly smaller than public equities at some RM1.5 trillion, but dominated by public instead of private debt securities. The imperative is to nurture more firms, new firms doing new things.

The policy priority should be to give investors enough confidence to put money into new things, to create new firms. The investing mood is not good now because policy pronouncements have introduced uncertainty instead of clarity, thereby contributing to risks. Investment funds are agnostic — they will go where returns are and those returns are risk-weighted. The FBM KLCI has been on a downward trend in the last two years and the index has dipped below 1,600 points of late.

Breaking up and shuffling assets between different owners is not a value-creating exercise. If such shuffling is policy mandated, it invites criticism of nepotism and even the most well-intended policy-driven divestments or mergers, as shown by the break-up of AT&T, for example, are sub-optimal. The preoccupation with the ownership of toll concessions, to me, is unproductive, as is the obsession with privatised former state enterprises such as Telekom Malaysia, Tenaga Nasional and MAHB.

Their privatisation was funded by and contributed to the deepening of the country’s capital markets — both the equity and debt sides of the market. These shaped the investment covenants and, therefore, the investment climate in Malaysia. Rather than reversing this trend, policy should build on this successful model. Strengthen the regulatory regimes for these “old” industries but look towards new things on the horizon for growth — new privatisation projects, new growth stories, new economic frontiers and more uplifting newsflow! We need growth and we need jobs.

What is more tenuous than the privatisation of public assets is the forced distribution of already private assets. That enters the realm of the dubious. It is not value creating, simply value distribution or, more accurately, redistribution of rents. We need a lot less of this.


Dr Nungsari A Radhi is an economist and the views expressed here are not related to any of his organisational affiliations

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