Privatization in Malysia: Regulation, Rent-Seeking and Policy Failure
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Privatization in Malaysia Regulation, rent-seeking and policy failure In recent years, privatization has fallen out of favour in many countries because the underlying political factors have not been well understood. This book examines Malaysia’s privatization programme, focusing on how political constraints resulted in the failure of four major privatizations: the national sewerage company (IWK), Kuala Lumpur Light Rail Transit (LRT), national airline (MAS) and national car company (Proton). It considers why developing countries such as Malaysia might want to embark on pri- vatization, the factors that lead to policy failure and what is needed to make it work. It shows clearly that political motives driving privatization often dominate purely economic considerations, and thus it is necessary to analyse privatization within the specific country context. It argues that failure in the Malaysian case was due to political considerations that compromised insti- tutional design and regulatory enforcement, leading to problems associated with corruption. It concludes that privatization does not necessarily improve incentives for efficiency or enhance the finance available for capital invest- ment, and that successful privatization depends on the state’s institutional and political capacity to design and manage an appropriate set of subsidies. Overall, this book is a comprehensive examination of privatization in Malaysia, providing important insights for understanding the political economy of this process in other developing countries. Jeff Tan is a political economist at the School of Oriental and African Studies, University of London. His other research interests are in regulation, state capacity, industrial policy, institutions and governance. Routledge Malaysian Studies Series Published in association with Malaysian Social Science Association (MSSA) Series Editors: Mohammed Hazim Shah, University of Malaya Shamsul A.B., University Kebangsaan Malaysia Terence Gomez, United Nations Research Institute for Social Development, Geneva The Routledge Malaysian Studies Series publishes high quality scholarship that provides important new contributions to knowledge on Malaysia. It also signals research that spans comparative studies, involving the Malaysian experience with that of other nations. This series, initiated by the Malaysian Social Science Association (MSSA) to promote study of contemporary and historical issues in Malaysia, and designed to respond to the growing need to publish important research, also serves as a forum for debate on key issues in Malaysian society. As an academic series, it will be used to generate new theoretical debates in the social sciences and on processes of change in this society. The Routledge Malaysian Studies Series will cover a broad range of sub- jects including history, politics, economics, sociology, international relations, geography, business, education, religion, literature, culture and ethnicity. The series will encourage work adopting an interdisciplinary approach. The State of Malaysia Health Care in Malaysia Ethnicity, equity and reform The dynamics of provision, financing Edited by Edmund Terence Gomez and access Edited by Chee Heng Leng and Simon Feminism and the Women’s Movement in Barraclough Malaysia An unsung (r)evolution Politics in Malaysia Cecilia Ng, Maznah Mohamad and tan The Malay dimension beng hui Edited by Edmund Terence Gomez Governments and Markets in East Asia Privatization in Malaysia The politics of economic crises Regulation, rent-seeking and policy Jungug Choi failure Jeff Tan Privatization in Malaysia Regulation, rent-seeking and policy failure Jeff Tan First published 2008 by Routledge 2 Park Square, Milton Park, Abingdon, Oxon OX14 4RN Simultaneously published in the USA and Canada by Routledge 270 Madison Ave, New York, NY 10016 This edition published in the Taylor & Francis e-Library, 2007. “To purchase your own copy of this or any of Taylor & Francis or Routledge’s collection of thousands of eBooks please go to www.eBookstore.tandf.co.uk.” Routledge is an imprint of the Taylor & Francis Group, an Informa business © 2008 Jeff Tan All rights reserved. No part of this book may be reprinted or reproduced or utilized in any form or by any electronic, mechanical, or other means, now known or hereafter invented, including photocopying and recording, or in any information storage or retrieval system, without permission in writing from the publishers. British Library Cataloguing in Publication Data A catalogue record for this book is available from the British Library Library of Congress Cataloging in Publication Data Tan, Jeff, 1965– Privatization in Malaysia : regulation, rent-seeking, and policy failure / Jeff Tan. p. cm.—(Routledge Malaysian studies series ; 6) Includes bibliographical references and index. 1. Privatization—Malaysia. 2. Privatization—Malaysia—Case studies. 3. Malaysia—Politics and government. I. Title. HD4300.6.T36 2007 338.95951′05—dc22 2007012482 ISBN 0-203-93480-6 Master e-book ISBN ISBN10: 0–415–42821–1 (hbk) ISBN10: 0–203–93480–6 (ebk) ISBN13: 978–0–415–42821–7 (hbk) ISBN13: 978–0–203–93480–7 (ebk) Dedicated to my parents, Tan Siew Soo and Yeoh Siew Hong Contents List of tables ix Acknowledgements xi Abbreviations xiii 1 Introduction: why privatize? 1 2 Privatization, rents and rent-seeking 7 Why privatize in developing countries? 10 Why may privatization fail? 18 What is needed to make privatization work? 33 3 Institutional and political failure: privatization in Malaysia 39 Why did Malaysia privatize? 41 Malaysia’s privatization programme (1983–2000) 52 Why did privatization fail? 64 Conditions for successful privatization 72 4 Universal access and private provision: Malaysia’s national sewerage system 78 Challenges 80 Background 82 Performance 84 Problems 90 Conclusion 103 5 The myth of privatized urban rail: Kuala Lumpur Light Rail Transit 106 Challenges 107 Background 111 Performance 114 viii Contents Problems 123 Conclusion 131 6 Perverse incentives: Malaysia Airlines 133 Challenges 135 Background 139 Performance 140 Problems 147 Conclusion 156 7 Rents and industrial upgrading: Proton 158 Challenges 161 Background 164 Performance 167 Problems 179 Conclusion 186 8 Summary and conclusion 188 Notes 196 References 206 Index 225 Tables 3.01 Malaysia: Number of privatized projects by sector, 1991–2000 56 3.02 Malaysia: Number of privatized projects by mode, 1983–2000 57 3.03 Malaysia: Revenue from corporate taxes, 1970–2000 59 3.04 Malaysia: Private investment, 1970–2000 62 3.05 Malaysia: Public sector development expenditure, 1976–2000 63 3.06 Malaysia: Malay ownership of share capital 64 3.07 Malaysia: Privatization beneficiaries and political affiliation 74 3.08 Malaysian case studies: Challenges 76 4.01 IWK: Performance summary, 1994–2000 85 4.02 IWK: Sewerage systems operated and maintained, 1994–2000 86 4.03 IWK: Sewerage coverage targets, 1997–2022 86 4.04 IWK: Sewerage treatment plants meeting effluent standards, 1999–2000 89 4.05 IWK: Original sewerage charges (household customers), 1994 93 4.06 IWK: Original monthly sewerage charges (non-household customers), 1994 94 4.07 IWK: Ownership changes and share prices 98 4.08 IWK: Tariff and ownership changes 100 4.09 IWK: Tariff revisions, 1995–1999 101 4.10 IWK: Losses from tariff revisions and non-payment of bills, 1996–2000 102 4.11 IWK: Financial performance, 1995–2000 103 5.01 Kuala Lumpur LRT: Financing 115 5.02 Kuala Lumpur urban rail: Breakdown of construction costs 118 5.03 Regional urban rail systems: Selected indicators 119 5.04 Urban rail systems: Regional fares, 2003 120 5.05 Kuala Lumpur LRT: Projected and actual daily ridership 121 5.06 Kuala Lumpur LRT: Daily ridership estimates and actual numbers needed 121 5.07 STAR: Profit and loss 122 5.08 PUTRA: Profit and loss 122 5.09 KL Monorail: Profit and loss 123 6.01 International airlines: Revenue and expenditure, 1990–1999 136 x Tables 6.02 Asia Pacific airlines: Revenue and expenditure, 1990–1999 136 6.03 Regional airlines: Average performance, 1990–1993 and 1994–1997, selected indicators 143 6.04 MAS: Leverage ratios and debt, 1990–1997 145 6.05 MAS: Liquidity ratios, 1990–1997 145 6.06 MAS: Operating profit (loss) as a percentage of operating revenue, 1990–1997 146 6.07 MAS: Debt burden and aircraft orders, 1990–2000 151 7.01 Malaysia: Passenger car tariffs, 1992–2003 165 7.02 Malaysia: Auto industry import duty structure, 1992–2003 166 7.03 Proton: Profitability, 1991–2000 169 7.04 Proton: Liquidity and leverage ratios, 1991–2000 170 7.05 Proton: Production capacity, 1992–2002 170 7.06 Proton: Potential capacity, 1996–2002 171 7.07 Proton: Exports, 1992–2002 172 7.08 Proton: Export potential, 1996–2000 173 7.09 Proton: Impact of reduction of import and excise duties on car prices with partial duties and no duties 175 7.10 Proton: Domestic market share, 1993–2003 176 Acknowledgements I would like to thank the British Council for the British Chevening Scholar- ship which allowed me to undertake my PhD. I am very grateful to Mushtaq H. Khan for agreeing to supervise my research at the School of Oriental and African Studies (SOAS), and for his insight, stimulating discussions, and faith in me. I am also indebted to Jomo K.S. for his invaluable guidance, constant support, encouragement and feedback. Finally, I want to thank Edward Terence Gomez for his time and support in getting my research published. Abbreviations AFTA Asian Free Trade Agreement AFTK Available freight tonne kilometres APTK Available passenger tonne kilometres ARP Area road pricing