Lesser Government in Business: an Unfulfilled Promise? by Wan Saiful Wan Jan Policy Brief NO

Brief IDEAS No.2 April 2016 Lesser Government in Business: An Unfulfilled Promise? By Wan Saiful Wan Jan Policy Brief NO. 2 Executive Summary Introduction This paper briefly outlines the promise made by Reducing the Government’s role in business has the Malaysian Government to reduce its role in been on Prime Minister Dato’ Sri Najib Tun business as stated in the Economic Transformation Razak’s agenda since March 2010, when he Programme (ETP). It presents a general argument launched the New Economic Model (NEM). The of why the Government should not be involved NEM called for a reduction in Government in business. It then examines the progress intervention in the economy and an increase made by the Government to reduce its role in economic liberalisation efforts. The NEM in business through data showing Government furthermore, acknowledged that private sector divestments in several listed companies. growth in Malaysia has been hampered by “heavy Government and GLC presence” and This paper then demonstrates how this progress is offset by two factors – (i) the increased shares of Government-Linked Companies that there is a serious need to “reduce direct (GLCs) in the Kuala Lumpur Composite Index (KLCI) and (ii) the state participation in the economy” (National higher amount of combined GLC and GLIC asset acquisitions as opposed to asset disposals. This paper concludes with the argument Economic Advisory Council (NEAC), 2009). that the Government has not fulfilled its promise but in fact, has done the exact opposite. The increased shares of Government- 01 Linked Companies (GLCs) in the Kuala Author Two Factors Lumpur Composite Index (KLCI). Wan Saiful Wan Jan is the Chief Executive of the Institute for Democracy and Economic Affairs Offseting (IDEAS). He is also Director of the Southeast Asia Network for Development (SEANET) and Chairman of the Government’s Istanbul Network for Liberty. Progress The higher amount of combined GLC and GLIC asset acquisitions as opposed 02 to asset disposals. 2 Lesser Government in Business: An Unfulfilled Promise? www.ideas.org.my 3 Policy Brief NO. 2 The NEM agenda to create a more liberalised economy was again pursued in July 2011 Government then bought MAS back from Conflicts of interest is one of the reasons Three pronged approach to when the government launched six strategic reform initiatives (SRIs) under the ETP. One of Tan Sri Tajudin when the company was why in a free market economic system, improving Malaysia’s economic the ETP’s main targets was to boost Malaysia’s competitiveness by reducing the Government’s competitiveness: nearing bankruptcy. The airline continued the role of government in business should As the nature of politics is to role in business, i.e, the Strategic Reform Initiative number 5: Government’s role in to suffer losses and in 2005, it suffered a be limited. As the nature of politics is to business (ETP Annual Report 2011). To attain this goal, a three-pronged approach was adopted: loss of RM1.5 billion. This was before Datuk gain popularity in order to win votes, gain popularity in order to 1 Seri Idris Jala was appointed as the new politicians may be more interested in win votes, politicians may be CEO. During his tenure, MAS’ fortunes making political decisions as opposed to (1) Clearly establish the Government’s role in business. improved as the company recorded profits economic ones. This means, decisions are more interested in making (2) Develop and implement a divestment plan for Government-Linked for two consecutive years. Despite this made based on a ‘short-term bias’ where political decisions as opposed Investment Companies (GLICs). turnaround, the current state that MAS is short-term concerns are prioritised instead (3) Establish clear governance guidelines for Government/Ministry and Clearly establish in has prompted questions of sustainability of long-term ones because the former to economic ones. State-owned companies. the Government’s role in business and on what Datuk Seri Idris did when he boosts the image of the politician in the was at the helm of the airline. Many other eyes of his or her voters (Gordon, 2009). 2 instances point to alleged Government The objective of rationalising the Government role in business was to avoid crowding influence over the running of MAS, such Besides, government involvement in business out the private sector, improve the Government’s fiscal position and increase the liquidity as its catering contract being awarded to directly conflicts with its role as a regulator. of Malaysia’s capital markets (ETP Annual Report 2011). the brother of a former Prime Minister The government, being the entity that and its unions having close ties with the creates the laws for people to do business, In terms of divestments, a total of 33 companies were identified to be divested either Develop and implement ruling United Malays National Organisation can frame these laws to favour themselves, through listing, paring down or outright sale. As of December 2014, the Government had a divestment plan for Government- (UMNO) party. The latter resulted in resulting in an uneven playing field for the Linked Investment Companies (GLICs) successfully divested 32 companies out of the 33 targeted (ETP Annual Report 2014). overstaffing which contributed to problems private sector players in the market. This of inefficiency (Jeremy Grant, 2014). There would discourage businesses from entering This success looks as if the Government has fulfilled its promise with a report by the 3 are plenty of examples that can be cited the market, resulting in decreasing economic Performance Management and Delivery Unit (PEMANDU) even stating that the in relation to the inefficiency of MAS, but competitiveness. One cannot make the divestment strategy, particularly the listing exercise, improved profitability and efficiency. the above two are sufficient to illustrate rules, be the referee, and play the game the conflict of interest that exists when at the same time (Gordon, 2009). However, a closer look into the Government-Linked Companies’ (GLCs) stakes at the governments run businesses. 1 Establish clear governance FTSE Bursa Malaysia KLCI Index (KLCI) , and GLC acquisition exercises, shows that the guidelines for Government/Ministry results are mixed. This is especially if we take into account the objective and State-owned companies. of avoiding crowding out the private sector. 1.2 Crowding out the private sector This paper explores the Government’s divestment and acquisition exercises in greater detail and provides insight as to whether or not the target to reduce the Government’s The Malaysian Government has acknow- market and market capitalisation of the has a discernible negative impact on non- role in business has been achieved. ledged the negative impact of GLC and Kuala Lumpur Composite Index (KLCI) GLC investment in Malaysia. There is a GLIC dominance on the economy. respectively (Menon & Ng, 2013). possibility that firms tend to invest less when the share of GLC revenue in a The NEM explicitly states that in some The dominance of GLCs has been cited particular industry is large. Conversely, 1 industries, heavy Government and Govern- as one of the main factors affecting the when GLCs do not dominate the industry, ment Linked Company (GLC) presence has decrease in private sector investments the impact on private investment is not discouraged private investment (NEAC, (Menon & Ng, 2013). Menon and Ng’s study significant (Menon & Ng, 2013). 1.1 Issues with governance and conflict of interest 2009). In the Malaysian context, the demonstrated the large difference between Government’s role in business is most the amount of investments made by GLCs These arguments highlight the importance evident in the case of GLICs and GLCs. compared with non-GLCs. In terms of of reducing the Government’s role in business. Since 2015, the Government of Malaysia as its purchases of Government courted controversy. Malaysia Airlines fixed assets, GLCs on average are about Furthermore, the Government has promised has been embroiled in a scandal involving land at a price allegedly lower than (MAS) was another problematic company. GLC influence on the Malaysian economy is nine times larger than the median of to do so in the NEM and the ETP. However, 1Malaysia Development Berhad (1MDB), a the market value. Prime Minister The nightmare began during the tenure of pervasive. The Government estimates that non-GLCs. Furthermore, GLCs also tend whether or not this promise has been strategic development company wholly Najib Razak’s role in the company has also Tan Sri Tajudin Ramli in 1994 (Anand, GLCs employ around 5% of the national to invest a higher proportion of their fulfilled is a question that will be explored owned by the Malaysian Government. raised questions of conflict of interest and 2015). The former CEO took out loans workforce while controlling approximately earnings compared with non-GLCs. They in the remaining sections. Questions have been raised on its assets, corruption (Michael Peel, 2016). from several GLCs to buy a controlling 36% and 54% of the domestic equity also found that GLC presence in general the Government’s guarantee of the loans stake in MAS, only to suffer losses as a that the company took as well 1MDB is not the only GLC that has result of the 1997 financial crisis. The 1 The FTSE Bursa Malaysia KLCI Index comprises of the largest 30 companies by full market capitalization on Bursa Malaysia’s Main Board. 4 Lesser Government in Business: An Unfulfilled Promise? www.ideas.org.my 5 Policy Brief NO. 2 What are GLCs and GLICs? The divestment exercise appears to be reflected in the GLICs’ aggregate stake in 30 GLCs. The GLIC’s aggregate stake in the stocks of 30 GLCs listed in the KLCI had GLCs are defined as companies that or make major decisions (e.g.

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