Tag: government-linked companies

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Economics Politics & government

[2844] Evolution of corporate ownership in Malaysia

Terence Gomez is embarking on a massive project investigating quantitatively the influence of government-linked companies in the Malaysian economy. The dominance of government in business and in the economy is no mystery. What is special here is that he is analyzing the numbers more comprehensively than many had done before. He is currently focusing his research at the federal level but if I remember correctly, he plans to delve into state level bodies, looking into bodies like Kumpulan Perangsang Selangor, which are much less known than those like Khazanah Nasional.

Together with Jomo Kwame Sundaram, Gomez in 1997 wrote the go-to book — Malaysia’s Political Economy: Politics, Patronage and Profits — exploring the ownership of corporate Malaysia in the 1990s and its links to politics, namely Umno. To understand political financing during the Mahathir era, this is the book to read.

The scale of Gomez’s latest project on ownership is larger than anything available before. There have been work done on corporate ownership in Malaysia after his 1997 book but they provided only partial view of the whole story while nibbling at the edge.

Gomez in his lecture, which I attended at the University of Malaya earlier this year (and later at an event organized by the Institute for Democracy and Economic Affairs; Ideas is funding of the project) made the connection between previous ownership literature and showed how the majority ownership changed from the 1950s to the 2010s, the present time.

He is continuing the work pioneered by James Puthucheary, who back in the 1950s went through official colonial and Malayan documents to understand who owned what in the economy. Through that, he corrected the idea that the Chinese had controlled the economy when in fact it were the Europeans. Gomez mentioned Lim Mui Hui’s work as the other important literature in the 1970s tracing capital ownership in the Malayan-Malaysian economy in the early days of the New Economic Policy period.

Gomez in his lecture showed just as Puthucheary demonstrated decades ago that the British and other European bodies controlled the majority of the top Malayan companies in the 1950s. This changed in the 1960s and the 1970s when Chinese tycoons rose up in the list. By the 1980s and the 1990s, due to the implementation of the New Economic Policy and Mahathir’s industrialization drive, the list was dominated by Malay industrialists. The ownership list was also more diverse than it ever was, with Genting, Berjaya and YTL were among the biggest then.

But in the aftermath of the Asian Financial Crisis, something fundamental happened. Most of top Malaysian companies were owned by the government and no longer belonged to private individuals or groups. There were bailed out or acquired by the government through the Government-Linked Investment Companies. Gomez listed the usual seven: the Employees Provident Fund, Kumpulan Wang Persaraan, Permodalan Nasional, Lembaga Tabung Haji, the Armed Forces Fund, Khanazah Nasional and the Ministry of Finance Incorporated. Many of the Malay industrialist companies like UEM were now owned by the government.

Not all of those seven government-linked investment companies are the same. The EPF, for instance, is not strictly a government company, in the same Khazanah is. But nevertheless, the EPF does have an extremely strong presence in the Malaysian economy, in both the equity and the debt markets.

In a different talk of a more casual style, historian Khoo Kay Kim claimed the Germans controlled the Malayan economy before the First World War. Their influence diminished after their lost the war and was replaced by the Japanese during the interwar period. I have not read a proper document to ascertain the claim but I have read from various sources that Japanese companies were active in Malaya prior to the Second World War.

Gomez’s work has implications beyond economics. Control over of these government-linked corporations and entities enables political control and enhances political power, just has the Umno’s ties to various the 1980s-1990s Malay industrialists had kept the party’s machinery going. But unlike then, when those funds were private money from private companies (public companies privatized), the government today does enforce spending or procurement requirement to benefit certain parties. While Gomez did not cover 1MDB, the 1MDB corruption scandal, provides the starkest example of public resources being used directly and illegally to finance Umno’s (and even its president’s personal) requirement. The connection is starker and more corrupt now than ever before.

The evolution of corporate ownership in Malaysia simply does not inspire confidence, and the completion of Gomez’s work will truly show how big the beast has become.

Categories
Economics Politics & government

[2360] Competition Act is a farce

Competition puts a downward pressure on prices. It is one of the forces behind innovation. It enhances welfare. Therefore, initiatives aimed at creating a competitive market are worth supporting.

For those who truly believe in a free and competitive market, however, the Malaysian Competition Act passed last year deserves neither admiration nor respect. It is worthless.

How can one respect the Act when the government itself is unimpressed with the spirit of the Act?

This question is especially pertinent after the Najib administration recently granted Bernas with another 10-year monopoly over rice imports in Malaysia.

The Act will be enforced in 2012. One would expect any government that is sincere or serious about encouraging competition to prepare the ground. What we are seeing instead is business as usual. Instead, the government continues to grant monopoly power to a specific company without any regards for the Act.

Government-sanctioned monopoly is not a phenomenon exclusive to the rice market. In the sugar market, the government awards import quota to a limited number of sugar producers. Here is something that makes it even more interesting. Tradewinds effectively monopolizes the sugar market, and it is related to Bernas.

In Sarawak, there is CMS Berhad, which has a disproportionate access to government procurements and tenders. It is the grand monopoly of Sarawak and it is a prime target for a proper anti-trust law.

One must not forget the various government-linked companies. They are so large and so powerful that their ability to distort the market is not doubtable. What makes it worse is that, one would rightly expect these companies to sleep in the same bed as the government, at the expense of consumer welfare.

The government after all has an interest to see that these companies are profitable because the government is the shareholder. For companies that it only has an indirect relationship with, bad performance is just bad politics.

In the name of competition, a respectable anti-trust law must subject everybody under the same rules.

Yet, ”activities, directly or indirectly in the exercise of government authority” are excluded from the Act. Companies that obtain their monopoly power through a government authority like Bernas easily fit the bill. It is also easy to argue that GLCs will enjoy the exemption as well.

Even if that stated exemption does not cover those companies, the Competition Commission as established by the Act has wide discretionary powers to exempt anybody from the Act. With a perverse incentive system that exists within the government, selective prosecution will likely be the norm. Private firms that attain large market share through sheer ingenuity will be prosecuted in the name of competition while GLCs and companies like Bernas continue to be shielded from market forces by the government.

In short, not only does the Act not encourage competition, it is a tool to make the market less perfect.  This Competition Act is no anti-trust law. It is a discrimination law.

The truth is that competitiveness of the Malaysian market can be enhanced without this Act, which shamelessly masquerades as an anti-trust law.

Government policy created these monopolies and because of that, it is arguable that a proper anti-trust law is like taking a sledgehammer to a nut. Instead of expanding the role of government, a reduction can be just as effective as a proper anti-trust law. Such a retreat will definitely be more effective than the farce that is the Competition Act.

This is how a retreat should look like: The government to divest away from most GLCs, to institute an open and competitive process to most of its procurements and to stop granting monopoly powers to the likes of Bernas. Do all that and with a little luck, even a real anti-trust law might be redundant.

Mohd Hafiz Noor Shams. Some rights reserved Mohd Hafiz Noor Shams. Some rights reserved Mohd Hafiz Noor Shams. Some rights reserved

First published in The Malaysian Insider on May 4 2011.

Categories
Economics

[2135] Of GLCs are not quite part of the private sector

Second Finance Minister Ahmad Husni Hanadzlah recently made a speech that received a lot of attention. Early in it, he shared that the government is looking to increase the private sector’s contribution to the domestic economy. This particular point would have been exciting if it was not for three reasons. One, he is not the first person to say this. Two, the last time somebody important in the government expounded the idea, the size of government expanded considerably instead. Three, as the minister said, the government means to see this through via government-linked companies. The third point is noteworthy because government-linked companies hardly qualify as part of the private sector.

It is instructive how the definition of a word or a phrase changes over time. Invasion is termed as liberation. Loss of innocent human lives resulting from military action sanctioned by the state is called collateral damage. George Orwell probably drives home the point best with the statement ”war is peace, freedom is slavery and ignorance is strength.”

The term private sector is supposed to describe the sector within the economy that is not owned by the state, where private individuals make private choices with private resources for private gains or losses. Any enterprise owned by the government, and therefore largely utilizes public resources, is part of the public sector. While the break may not be clean because the link between the two sectors in some cases is inevitable, their difference in Malaysia now is far too blurry for it to be meaningful within the context of the speech. The cause of that is years of government intervention in the market.

These interventions come in many ways. Bailouts of failed enterprises by the government are one way where excessive presence of the state in the market can be introduced. Another is through the government’s expressed intention of participating in business that is mostly due to political and not business considerations.

During the Abdullah administration, multiple fully-owned government-linked companies were established as part of the government’s focus on the agricultural sector, as well as its love affair with centrally planned economic corridors. During the Mahathir administration, the focus on manufacturing brought upon the birth of — for example — the state-owned Proton. How the protection of Proton has prevented Malaysia from becoming a regional automotive hub driven by foreign but essentially private sector is well known and needs no further elaboration.

Even when import substitution policy was all the rage in the early history of Malaysia, the government helped create what eventually became favored oligopolies in multiple sectors. These oligopolies continue to exist until today. The creation of a monopoly is not exactly a healthy way to enhance the private sector’s contribution to the economy because most monopolies have the incentive to maintain the status quo. They do this by discouraging adoption of new technology that is crucial to improving productivity and ultimately challenging their dominance to the benefit of society at large. Without improved productivity, it is hard to see how the private sector could increase its contribution to the economy.

Due to those interventions, the understanding of the term private sector has gradually but surely shifted to assume its opposing definition. Observe how strongly linked the domestic economy, specifically the supposedly private sector, is to Khazanah Nasional Berhad, Perbadanan Nasional Berhad and even the Employees Provident Fund, among others. Entities linked to them are countless: UEM, CIMB, Maybank and Sime Darby. Many of supposedly privatized companies are not quite part of the private sector as well.

To label entities strongly linked to these organizations as part of the private sector is tenuous because, like it or not, the government has a strong say in the management of those entities. With that, the government essentially controls the direction of these companies. Given the vast resources available to the government despite its massive fiscal deficit, the government unfairly competes with the true private sector. This unfair competition itself discourages the creation of new entrepreneurs for the inculcation of competitive market, to limit space for the true private sector.

Considering all that, how exactly does the government plan to increase the true private sector’s contribution to the domestic economy through government-linked companies will be interesting.

Does the government intend to instruct its government-linked companies to increase activities in the market and then label such contributions to the economy as privately-driven?

Or does the government plan to increase activities of government-linked companies to increase opportunities for entities from the true private sector? This creates only a culture of dependency. In times when the government seems intent to reduce dependency on the state, this contradicts the effort.

The best way to increase the true private sector’s contribution is to embrace the original meaning of the term. To do that, the government or really, the state, needs to reduce its participation in the market. Bad regulations protecting monopolies and state-owned entities meanwhile require dismantling in order to give true private sector space to expand in a largely distortion-free environment.

The first step to take is for the government of the day to stop overestimating its capability in managing the economy. Humbleness is the key in getting the private sector to improve its contribution to the local economy, especially in a sustainable manner. Rather than trying to expand the role of government-linked companies, the government should focus on building credible institutions capable of accommodating expansion of private sector.

In other words, the government must refocus on its original purpose. That original purpose of a government, without being ideological about it, is governing, not doing business.

Let the true private sector do its work properly without excessive government interference either directly from the government itself, or via government-linked companies.

Mohd Hafiz Noor Shams. Some rights reserved Mohd Hafiz Noor Shams. Some rights reserved Mohd Hafiz Noor Shams. Some rights reserved

First published in The Malaysian Insider on December 17 2009.

Categories
Economics

[1169] Of market liberalization or government intervention?

There has been noticeable liberalization in the Malaysian economy. Statement by the Managing Director of Khazanah Nasional Berhad, Azman Mokhtar further affirms the trend of an increasingly liberal economy:

KUALA LUMPUR, March 28 (Bernama) — Khazanah Nasional Bhd is prepared to cut its stakes in government-linked companies (GLCs) in line with the government’s aspiration to reduce its stake in state-controlled companies.

Its managing director, Datuk Azman Mokhtar, said the government investment arm was committed to reducing its GLC stakes in a gradual and orderly manner. [Khazanah Ready To Cut Stakes In GLCs. Bernama. March 28 2007]

This is in line with sentiment expressed by the chairman of Khazanah, the Prime Minister himself:

Prime Minister Datuk Seri Abdullah Ahmad Badawi recently announced that the government would reduce its stakes in GLCs that had high concentration of government linked ownership. [Khazanah Ready To Cut Stakes In GLCs. Bernama. March 28 2007]

However, there might more than market liberalization going on at the moment. I suspect so after reading several sources that seem to suggest that the government might be intervening with the market under the guise of liberalization.

At Bernama today:

KUALA LUMPUR, April 10 (Bernama) — The government will increasingly float the shares of government-linked companies (GLCs) to make the stock market more attractive and competitive, generating interest among foreign equity investors.

“The foreign investors are looking for liquidity and big companies in the market,” Deputy Finance Minister Datuk Dr Awang Adek Hussin said, Tuesday. [Govt To Increasingly Float Shares Of GLCs On Local Bourse. Bernama. April 10 2007]

How could the government intervene in the market through the floating of GLCs’ shares?

A short visit to how a central bank operates might shed some light on the matter.

The central bank to some extent could influence the prevailing interest rate. It does that by buying or selling money. Keep in mind that money comes in many forms and does not necessarily comes in cash.

In order to raise the interest rate, the central bank buys, or perhaps more precisely, hoards money in the market. Once that is done, the quantity of money in the market is reduced and hence, the interest rate goes up. If the central bank would like to decrease rate, it just floods the market with money by selling it. This is a rough explanation but for our discussion, it suffices.

If that is clear, let us consider the equity market. If the government wishes to increase activity, it increases liquidity by releasing its shares to the market. If it would like to curb activity in the market for whatsoever reasons, it buys shares. Instead of a central bank, we have Khanazah, the investment arm of the government.

If that is clear too, it is time to put all that to perspective.

Not too long ago, the Prime Minister said confidently the Kuala Lumpur Composite Index might hit the now famous and magical 1,350 mark. A few days after he shared his opinion, through sheer luck perhaps, the market plunged spectacularly. While the fall was temporary, that was all it took to make the Prime Minister looked bad.

Now, consider the Prime Minister’s expectation and the recent statement on floating GLC’s shares.

If I were the Prime Minister, it would be tempting to act towards the 1,350 goal. One easy way to achieve that goal is by increasing the market liquidity by selling GLC’s shares. Or, more eloquently, in Liar’s Poker:

One trader remembers that “Lewie would say he thought the market was going up, and buy a hundred million [dollar-worth of] bonds. The market would start to go down. So Lewie would buy two billion more bonds, and of course the market would then go up. After he had driven the market up, Lewie would turn to me and say, ‘See I told you it was going up’…” [Liar’s Poker. Michael Lewis]

Hence, the possibility of government interference in the market. Of course, it is not intervention if the reduction of government influence in GLCs is done genuinely for the sake of liberalization.

But the question remains: are we seeing real liberalization or is it just a convenient cover to self-fulfill a Notradamus-style prophecy (oops, I mean expectation…)?