GLCs Crowding Out Investment
(A version of this was first published in theSun on 21st September 2012).
Deep structural changes are urgently needed to improve the country’s competitiveness, chief of which is dealing with government-linked companies (GLCs) that are presently crowding out private investment. The World Economic Forum (WEF) in its Global Competitiveness Index 2012 ranked Malaysia in 25th place, falling four spots from its 21st position last year.
Based on its report, Malaysia performed well in its “efficient and competitive market for goods and services” and “supportive financial sector”, but these were not enough to climb up the index ladder. Despite efforts made by the government to boost economic competitiveness over the last year, countries like the UAE, New Zealand, Korea and Luxembourg worked harder, successfully overtaking us. Amongst the indicators Malaysia performed worse in were “wastefulness of government spending”, “government’s budget balance position” and “intensity of local competition”.
This is a disturbing result, since Prime Minister Najib Razak, together with his Pemandu team, have waxed lyrical about the ability of the Government Transformation Programme (GTP) and the Economic Transformation Programme (ETP) to improve the country’s competitiveness standings, even attributing Malaysia’s sudden jump in 2011’s ranking to their good work.
This comes in the wake of an indicting economics paper published earlier this year by the Asian Development Bank, titled “Malaysia’s Investment Malaise: What Happened and Can It Be Fixed?” (Menon, Asian Development Bank, April 2012), from which this article quotes heavily.
This very excellently researched paper concludes that the twin problems causing our economy to be increasingly unattractive as an investment destination are: the ethnic-based affirmative action policies remnant of the New Economic Policy (NEP) and the dominance of GLCs and government-linked investment companies (GLIs), both of which combined create great market distortions.
Private investment is needed in any local economy – it also acts as a good indicator of an economy’s attractiveness, not falsely propped up by government. In Malaysia, private investment used to flourish, accounting for more than 70% of total investment in the boom years (1993-1997). But since 1998, “private investment has been equal to or less than public investment” for 10 out of the 14 years. This means that government’s role is dominant, with more public investment being injected into the economy.
But this comes as no surprise, really. In fact, the government’s own New Economic Model (NEM) admits that “GLC presence has discouraged private investment” (NEM, 2010). Its policy recommendation for government to divest its shares even had a clear timeline, with 33 GLICs identified for divestment.
In the report, Najib Razak himself stated that the reduced direct participation of government in the economy would minimise crowding out the private sector. But in reality, the reverse is happening. Menon (ADB, 2012) cites numerous GLC acquisitions of private sector property developers that have taken place recently, which seemingly defies any government divestment strategy. One such example is Sime Darby’s 30% acquisition of Penang-based Eastern & Oriental Bhd in late 2011.
Of course, a rebuttal one might make is that yes, government is indeed selling off its stake in selected entities: take the reported proposal to sell off state-owned Keretapi Tanah Melayu Berhad (KTMB) operations to Malaysian Mining Corporation (MMC), for instance.
A closer look, however, would reveal the ownership of MMC under the wealthy Tan Sri Syed Mokhtar al-Bukhary, who already owns a significant portion of public goods and services including major ports, rice, sugar, transport and logistics, finance, energy and utilities, amongst others.
Is the Malaysian economy therefore dominated by government and a very small select group of individuals? The figures seem to speak for themselves. GLCs account for “approximately 36% and 54% respectively of the market capitalisation of Bursa Malaysia and the Kuala Lumpur Composite Index”. GLCs and GLICs are the major players in the economy.
‘The private sector is the engine of growth’ seems to be a mantra oft-repeated in many government plans. The dominance of government in numerous sectors seems to reflect otherwise. The NEM has given sound recommendations on steps necessary to open up key areas to create a more fair, transparent, healthy and competitive business environment, but these unfortunately have taken a backseat.
One must caution that in the process of privatising government-owned entities, this does not create a top-heavy income society either, by benefiting a handful of individuals. Real growth ought to take place with the development of small and medium enterprises (SMEs), which the Competition Act 2010 and corresponding Competition Commission try to encourage (but is constrained by the limits of the Act itself).
Given the amount of media space and public attention to the GTP, ETP, and the alphabet soup of corrective measures to Malaysia’s competitiveness, one would hope for things to change. In fact, there’s no denying that we have to. Unless we address the structure under which we – and our economy – operate, we may continue to see such lacklustre performance in the coming years.
