NEM: Some Initial Thoughts from SakAK47

March 31, 2010

NEM: Some Initial Thoughts

by SakmongkolAK47

The PM has outlined the main aspects of the NEM. I was waiting to read strategies to unleash the entrepreneurial energies of economic agents besides the same old players. Private sector means what? Does it mean the same old companies, friendly parties or the faceless multitude of ordinary business people?

Since 2004 ,for example, Khazanah has been divesting its holdings in many companies- may we know who and on what criteria? People can say all sorts of things on paper- using highly technical financial jargon which actually means they were hiding something.

What I take as entrepreneurial agents to turn this country into a nation of high-incomers are the large number of businessmen- the SME people, research of which has shown are more productive and generate more income that the big guns. These are the people who have been excluded from participation simply because they only have technical skills but no patronage and no intimate relationship with powerful decision makers. So why do we pander to the wishes of the superleaguers?

I was reading some comments given by ex-banker Amirsham who is the Head of the NEAC. He was telling that maybe some contracts should be given to a certain group of contractors not including the big leaguers. I would support the idea by pushing it a bit further. Why don’t for the next 5 years, we declare that all listed companies engaged in construction are not to participate in government mega contracts?Or the big suppliers are excluded in the next 5 years to participate in big government supply contracts. You have made large profits previously and you can hold on for the next 5 years. This would allow the middle and even top bottom leaguers enough room to prove themselves to become big leaguers. Such an interim policy of 5 years would also re-distribute contract opportunities from the current big leaguers to others.

Amirsham shouldn’t say- we leave it to the government to do that. As Head of the NEAC-  you must say it and say it loud  and clearly what needs to be done lah, tauke! Then we wouldn’t hear the stomach turning spectacle-  YTL Corp this and that, GAMUDA this and that, Syed Moktar this and that, Berjaya this and that.

Let’s see whether the big leaguers, without the traditional patronage, can be creative and venture elsewhere? Can they do that? They must- after all smaller contractors have been excluded from participating in big contracts. Remove all the classes in contractors. In 5 years’ time allow every contractor, on a Classless basis to compete on equal footing. I am sure the up and coming and qualified contractors can also do strategic partnership. Many of the smaller bumi contractors, for example, are highly trained people- engineers and technicians.

I have written a number of articles on what I wanted the NEM to be. At that time, we had no inkling what the NEM will be. I start from some key phrases the PM used. These included competitiveness and creativity. I had to re-read what Porter said about competition and competitive advantage. The key word of creativity pushes me to re read Joseph Schumpeter- creative destruction.

As I look into the NEM, I will have to say it is not actually a new construct at all. It is just a grandiloquent way of saying, we will do it differently. The PM said it himself-

“I pledge this: we will work tirelessly to develop and implement the economic reforms that our nation needs to grow, our businesses need to succeed and, above all, for our people to prosper,” he said. “Some people are questioning the need for urgency to break the habits of the past. Do not be fooled. We need a new way of doing things. We must act now to position Malaysia for the future. We need to have a sustained and consistent big push if the reforms set out today are to gain momentum and help us achieve our goals.

I do not doubt the sincerity of this PM to carry out what he has said- a new way of doing things. This would certainly demolish the hopes of those hankering for a return of the inglorious past- where patronage and who you know rule the day. Since 1981, the driving force behind almost all businesses has been the dubious factor- hey do you know this Pengarah, this Ketua Pengarah, this Minister and the PM?

It is precisely that weakness that has created and sustained a select group of rent seekers and patronage hunters. Their success depended less on meritorious skills and expertise and more on harnessing the right political networking relationships. Success depends on sharing privileged information which excluded the real entrepreneurs out there.

The new model must strive to be closer to a market driven economy in the sense that it must introduce system that many free marketers believe- placing wealth creating assets closest to actual economic agents. Hence I welcome an assurance that our GLCs right from Khazanah to state owned companies will be divesting their holdings. Allow private sector entrepreneurs to develop the assets and apply better work ethics and different motivations.

Khazanah, for instance, will sell 32 percent of its stake in Pos Malaysia but let us do it on open tender basis, not “direct ngo”. But not before Pos Malaysia account for its humongous loss of over RM 500 million. Then not only must it be privatized, we must also make those responsible for the losses accountable. Do not allow those responsible for the losses to come back with a MBO plan or any business plans for that matter.

If it is not tenable to have one Pos Malaysia let us do a Mama Bell and Papa Bell — break it down to regional Pos Lajus. Let them compete among themselves and see who can offer better services. Why don’t we allow online tendering so that people in Khazanah or decision makers don’t come face to face with bidders until they are called in the final round? Hands off and on line tendering will allow the government avoid being accused of cronyism or patronage.

I have long advocated the freeing of the market from the clutches of state owned companies. In the absence of competition for example how do we know whether the State Owned Enterprises (SOE’s)  function on operating efficiencies or are just passive beneficiaries of the nature of the product? For example, in Pahang there are a few SOEs which are given monopolies in developing land for palm oil. I suspect, they enjoy good earnings simply because of the natural price of the product. Palm oil has a good price. All you need to do is to ensure you produce a certain quantity and sell at the good prices.

We really do not know whether this is due to productivity, efficiency, best practices or what? Because as soon as you compare productivity with private companies, then you will realize that SOEs have not been efficiently run. Their comparative productivity is lower than many private owned companies.

As long as you allow SOEs monopolies, you impose the crowding out effect. Genuine investors are sidelined from participating in certain economic segments. SOES get priority in many areas- land allocation and application, financing, guaranteed credit etc.

On these points, I have advocated when I was a state assemblyman  the closure of several GLCs and their subsidiaries. If they are not able to compete with even some upstart companies, while they have been receiving a variety of privileges, they might as well close down. Naturally, those suggestions were not well received by the CEOs of the various SOEs.