What to do about Malaysia’s GLCs

Globally, Malaysia ranks 5th-highest in terms of GLC influence on the economy

By JAYANT MENON / pic by TMR

About a month before Malaysia’s parliamentary election in May, then-Opposition leader Tun Dr Mahathir Mohamad raised concerns over the role that government-linked companies (GLCs) were playing in the economy, being “huge and rich” enough to be considered “monsters”.

Data support his description — GLCs account for about half of the benchmark FTSE Bursa Malaysia KLCI, and they constitute seven out of the top 10 listed firms in 2018.

They are present in almost every sector, sometimes in a towering way. Globally, Malaysia ranks fifth-highest in terms of GLC influence on the economy.

Calls to do something about GLCs have increased since the election following the release of more damning information, although most of it relates to the GLCs’ investment arm: Government-linked investment companies (GLICs).

Recent reports confirmed that the former government had been using Bank Negara Malaysia and Khazanah Nasional Bhd to service the debt obligations of 1Malaysia Development Bhd (1MDB).

The GLCs have not been immune from scandals either. The most recent relates to the unresolved land scandal involving the Federal Land Development Authority.

There have also been a series of massive bailouts of GLCs over the years, the cumulative value of which is disputed, but could be as high as RM85 billion.

All of this led to M Bakri Musa, a prominent critic, to proclaim that “GLCs are a nest for plunderers”, and that the government should “sell them all”.

Although this may be extreme, it does raise a critical question — what, if anything, should the government do? Some experts have proposed the formation of an independent body with operational oversight for GLICs after institutional autonomy is established and internal managerial reforms are introduced.

Unlike most GLCs, GLICs are not publicly listed and face little scrutiny.

The same applies to the various funds at the constituent state level, which need to be looked at too.

For GLCs, the answer is less straightforward. Prime Minister Dr Mahathir claims that GLCs have lost track of their original function.

Before the Malaysian government decides on what to do, it needs to examine the role GLCs should play — as opposed to the role they currently play — and to examine their impact on the economy.

In Malaysia, GLCs were uniquely tasked to assist in the government’s affirmative action programme to improve the absolute and relative position of the Bumiputeras. The intention was to help create a new class of Bumiputera entrepreneurs — first through the GLCs themselves and then through a process of divestment.

Given the amounts of money involved and the cost of the distortions introduced, the benefits to Bumiputeras were unjustifiably small and unequally distributed.

The approach of using GLCs as instruments of affirmative action failed because it led to a rise in state dependence, widespread complacency and even corruption as Dr Mahathir himself has recognised in his memoir, A Doctor in the House, and again more recently.

There is also empirical evidence that GLCs have been crowding out private investment, a concern raised in the New Economic Model as early as 2011.

Additionally, recent revelations showed Malaysia’s debt position may be more precarious than first thought.

The new government has correctly highlighted the need to include certain off-balance-sheet items and contingent liabilities such as government guarantees and public-private partnership lease payments in any complete assessment of debt outstanding.

The use of offshoot companies and special-purpose vehicles in the deliberate reconfiguration of certain obligations mean that traditional debt calculations underestimate Malaysia’s actual debt. All these factors combine to place new impetus on reconsidering the extent of government involvement in business.

Divestment will not solve Malaysia’s debt problem, but it can help if there are good reasons to pursue it. So, how should the government proceed?

It is important to recognise at the outset that there is a legitimate role for government in business — providing public goods, addressing market failures or promoting social advancement.

But a GLC that crowds out private investment in a sector with no public or social function, or one that is inefficiently run, should be a candidate for divestment.

In this regard, one has to carefully study why GLCs should be present in retail, construction or property development, for instance.

In assessing performance, one needs to separate results that arise from true efficiency versus preferential treatment that generates artificial rents for the GLC.

The latter is a drain on public resources and a tax on consumers.

Divestment in this case will likely provide more than a one-off financial injection to government coffers — it will provide ongoing benefits through fiscal savings or better allocation of public resources.

The divestment process should be carefully managed to ensure that public assets are disposed at fair market value, and the divestment process does not concentrate market power or wealth in the hands of a few. This has allegedly happened with privatisation efforts in the past.

The new government has committed itself to addressing corruption and improving the management of public resources. As part of this process, one must re-examine just how much government is involved in business.

This is one of the many tasks that the Council of Eminent Persons is undertaking in the first 100 days of the new government. To be done correctly would require a careful study of GLCs and their impacts.

This is what Malaysians should expect — and indeed demand — of the “New Malaysia”.


Jayant Menon is the lead economist in the Economic Research and Regional Cooperation Department at the Asian Development Bank. The views expressed are of the writer and do not necessarily reflect the newspapers’ owners and its editorial board.