October 10, 2013
Getting real and moving on with Bumiputera Industrial Development
by Dr.Lee Hwok Aun
Prime Minister Najib’s Pemerkasaan Ekonomi Bumiputera (PEB) and his installation as the agenda’s Council chief were announced with scripted infatuation in English and Malay newsprints, and denounced with fierce indignation in much of the online world. (I use PEB instead of Bumiputera Economic Empowerment [BEE] due to the 17 times variations of “perkasa” resound in Najib’s September 14 speech at UiTM, plus the absence of an English equivalent of that word.
The backlash is expressing the expected sentiments, but one crucial question has been missing in reaction: should Malaysia pursue Bumiputera participation in industry as a policy?
The loudest contention against the policy is that it does not benefit the vast majority of the Bumiputera or the poor in general, and that the money should be allocated to social spending instead. Yes, this point is to some extent valid. But is this the most important question? No, I think not.
The time is ripe for Malaysia to ask whether we should in the first place promote Bumiputera industry, and to think seriously about the consequences of our answer. The question must be sufficiently focused: should we endeavour to raise Bumiputera participation in ownership and management of dynamic enterprises, especially in industrial sectors, and should we implement effective programmes that directly try to achieve that national objective?
We need to face this question head-on, because for the most part, we largely split into opposing flanks, neither of which offers constructive and feasible prospects for reform. There is the Perkasa-UMNO-BN stance of explicitly supporting the agenda and perpetuating failed policies, epitomized in the PEB launch. In rebuttal, there is a popular counterpoint of implicitly supporting Bumiputera industrial development but advocating need-based, pro-poor policies as solutions. This argument is usually paired with the claim that race should not factor into selection for empowerment opportunities, especially government contracting and licensing.
Najib’s 13 September speech had the works: blatantly political motives, a shipload of ethnically exclusive plans, total ignorance of past failures or even any acknowledgment of lessons learned, and no delivery details. He made it easy – perhaps too easy – to repudiate the PEB agenda.
Rhetoric and popular momentum behind need-based policies and meritocracy are high, and much negative reaction to the PEB spring from these worthy principles. This is good, but it is better to keep things in proper perspective.It is interesting that we often apply a different logic when it comes to matters of ethnicity, in that we acknowledge problems directly marked by ethnic lines – then insist on solving them through indirect measures. This is understandable but not very helpful.
I doubt we would reject sports programmes to promote outstanding success because they are predominantly going to benefit top athletes, not the masses. We accept that there is a place for such measures, while health, teamwork, discipline and the other innumerable benefits of sports to society can be fostered through common provisions, like sports fields and physical education.
One cannot project to win world championships by just increasing the number of playgrounds. I’m sure most will agree that we can and should do both special programs for the few and general programs for the many, especially those who depend on public facilities.
But on matters involving ethnicity, we have become quite accustomed to rejecting direct actions and insisting on the indirect route, whether or not that offers credible alternatives. We tend to support Bumiputera industrial development (I do not hear loud opposition to this objective) but reject programs that directly benefit Bumiputera companies.
Of course, this particular Bumiputera agenda follows a long line of failures, shortfalls and mishits. However, these past experiences do not in any way make social spending a viable alternative for the purpose of Bumiputera industrial development.
Policies assisting the poor or Bumiputera masses, I must emphasize, demand much higher priority and greater public funds. The amounts we spend on public education and health, infrastructure, social protection, microcredit and such, must for obvious moral and development reasons exceed allocations for Bumiputera industrial development. But such need-based policies are pursuing distinct objectives. They will help level the field in basic needs and attainments, but can scarcely be depended on to produce dynamic Bumiputera enterprises.
Again, the question pertinent is, should we engage in interventions and expenditures toward Bumiputera industrial development? It’s plainly untenable to answer “Yes, we need Bumiputera industrial development policies” and then leave it to social spending to achieve this.
I think we can benefit a great deal by simply stating the obvious: Bumiputera industrial development policies primarily benefit Bumiputera businesses, and operate predominantly by targeting Bumiputera beneficiaries. Whether we reject such programmes is of course up to individual conviction and opinion, but rejecting such policies on the grounds that they “do not help the masses” is not really getting anywhere. They are not meant to help the masses. If rejecting it, do so on the grounds that the objective itself is illegitimate, or the measures taken toward objective are pointless, or arguments along these lines.
On the inter-related matter of meritocracy, undoubtedly there is a case to be made for abolishing racial representation in selection criteria for contracts and licenses, and making the process transparent, stringent, and competitive. But again, such policies have no direct role in facilitating Bumiputera participation in industry.
Thus if we maintain, “No, Malaysia should not implement Bumiputera industrial development policies”, we must acknowledge the consequences. This entails purposefully omitting Bumiputera enterprise development as an objective and Bumiputera representation as a target, and leaving these outcomes open ended. Again, the reform holds out the possibility that Bumiputera participation might not increase or be sustained – and may well decline.
It is reckless to advocate dismantling current forms of affirmative action and reducing quotas or preferences to zero, as I often hear, and merely presume that Bumiputera participation will be preserved. A strict adherence to merit-based criteria will select more qualified – but possibly fewer – Bumiputera firms. It is reasonable at least to expect slower growth.
We talk about resetting politics and resetting policies, but never about resetting expectations. Can we implement meaningful and difficult reforms, and continue to target accelerated change and widespread improvement?
Here’s my position on the matter. I think we should pursue more restrained but effective Bumiputera industrial development – and set suitably modest expectations and targets. Select policies are needed to continue long term Bumiputera industrial development and to avert severe declines in Bumiputera participation in the short term.
Surely this is better than what we have witnessed in recent history, where government announces “need-based” and “merit-based” affirmative action, provokes the ire of Malay contractors and the Malay Chamber of Commerce (and probably their UMNO patrons) who claim to be “marginalized”, then makes concessions and yields the plot.
Courage and conviction are needed to seize the plot and admit that there will be some transition pains. The tough part is that these pains will be borne by some powerful people who have influence in state-controlled media.
Hence, a clear message should be sent to the Bumiputera majority that Malaysia is reemphasizing socio-economic development that more directly benefits them, while making tough reforms to Bumiputera industrial development policies. Bumiputera participation will likely progress at a slower rate, but that is part of the necessary change. There are also benefits that can be broadly shared, such as cost savings from more competitive bidding and reduced corruption that can be channeled elsewhere.
Many alternatives and challenges will need to be negotiated; a follow up article will present some ideas. To return to the central issue, we need to deliberate whether to have Bumiputera industrial development policies at all. If yes, think of effective measures and leave aside social spending for other conversations. If no, think of the possible consequences, especially the politically unpalatable ones.
Keeping Bumiputera industrial development and social development as distinct policy objectives and instruments can help us critically examine the Pemerkasaan Ekonomi Bumiputera (PEB) agenda in at least four ways.
First, we should take note that programmes pursuing different objectives utilize different instruments, and draw on different resources.
Much attention has fixed on the RM30 billion or so that can be tallied from Najib’s PEB speech. The biggest ticket is RM20 billion per year of Petronas contracts for upstream and downstream projects, followed by RM9 billion of MRT contracts that have already been allocated.
Actually, there’s not much new here. Petronas has consistently promoted Bumiputera vendors; The MRT packages have already been sealed. Najib seems to be baiting his audience for applause. And in terms of cost to society, the problem is not so clearcut. The contracts and the funds cannot easily be rechanneled to poor communities and social spending, so these do not present alternatives. You cannot carve up a Petronas contract to one firm and offer it instead to masses of people – they cannot deliver. Likewise, these funds are tied up in particular projects and cannot simply be appropriated for other purposes. Inflated prices and substandard quality do incur social cost, but this raises challenges to the amounts spent and selection process, not the entire policy.
So let’s not get too wrapped up with the RM29 billion in Petronas and MRT contracts as a cost to society. There are other plans that potentially come at expense of society’s greater interest and that take away public funds from better alternatives. These warrant scrutiny and objection.
The PEB promises to create an Amanah Saham Bumiputera 2 fund with 10 billion units to be offered. Ownership of ASB is exceedingly skewed. At end 2011, 20% of ASB unit holders held 94% of ASB units, and just 7% of the largest ASB unit holders owned 70%. This is clearly not going to benefit most people, and deserves reproach for masquerading as community empowerment programme when it is mostly elite enrichment.
The RM700 million allocated to Tekun, shoots this small and micro enterprise support agency to prominence. This programme has enjoyed a meteoric rise in Putrajayan generosity, with its federal budget allocation growing from RM120 million in 2011 to RM300 million in 2012 and RM350 million in 2013. Notably, RM50 million was designated for the Indian community in the 2013 budget speech. Immediately one must question why another drastic increase is proceeding before any impact study of its efficacy has been presented. And why was there an allocation for the Indian community a year ago but not this time? If another small allocation is announced in the upcoming budget, that will smack of crass tokenism.
The PEB proposals pertaining to housing have not been allocated funds, but are arguably the most objectionable. The unaffordability of housing is a peoples’ burden, not one unique to low- or middle-income Bumiputera. Affordable housing, something that by definition is hinged to income levels, should have no grounds at all as an ethnically defined policy. And not only is this omitting a basic provision to other groups, but also potentially engineering social segregation by building and selling properties only for the privileged group.
Second, we should put preferential treatment and meritocracy in proper context, and pose critical questions on the efficacy of Bumiputera industrial development policies. I believe that many Malaysians, including non-Bumiputeras, do support the cause of Bumiputera industrial development. As I argued in the previous article, it is more sensible and constructive to think of effective ways to target and monitor Bumiputera beneficiaries of such preferential policies, than to dwell on social spending which is really not offering an alternative for this specific purpose.
At the same time, Malaysians, especially in the Bumiputera community, ought to come clean that these are indisputably discriminatory measures. Therefore, they should not be implemented in a casual, cavalier and unbridled manner.
Deputy Prime Minister Muhyiddin Yassin on 30 September remarked that folks should not complain about the PEB because it is not discriminatory, since non-Bumiputeras are doing ok. This is nonsense. When opportunities are reserved for one group, or preference is given to some over others, it is discrimination in clear daylight. Such policies need to be scrutinized and rationalized in terms of whether the discrimination, in principle and as much as possible in practice, plays a socially positive, empowering role.
Another common view these days, it seems, is that the government contracting system is merit-based. Well yes to an extent, but as a matter of fact, only partially. Najib noted in his PEB launch speech that MRT contracts were allocated to Bumiputera firms through meritocratic selection. What this actually means is that more deserving Bumiputera firms were chosen over less deserving Bumiputera firms.
I raise this issue more to set the record straight than to fault the policy. Meritocracy can play a role in reinforcing the Bumiputera industrial development programme, by striving to find the most capable ones that can excel. Importantly, though, this is not full-fledged open competition between all firms, but only among Bumiputera firms. So the policy, by excluding others from participating, remains discriminatory – hence we should do it effectively but with a view to transition away from its current practice, which is not desirable in perpetuity.
How might the public procurement system be made more effective? Some procedural enhancements took effect this January, including a scoring system for registered contractors, which can help regulate standards. Criteria for this merit-based selection among Bumiputera contractors, though, have not been publicly disclosed.
There is much also scope for improvement. For instance, companies that upgrade technology and skills, or that graduate especially from G1 (formerly F) to G2 or higher, could also be awarded bonus points. Perhaps some rounds of contract allocation can be reserved for contractors that graduate within the previous two years. Analysis by Research for Social Advancement (REFSA) shows that about three quarters of Malay contractors remain in class G1 [http://www.refsa.org/focus-papers/open-tender-policy-in-penang-nurturing-capable-malay-contractors/].
One current practice raises a clearer case for modification, concerning Bumiputera preference when bidding against non-Bumiputera contractors. The current system of granting price handicaps to Bumiputera bids for contracts valued between under RM15 million, in place for about 20 years if not longer, is doing a disservice to both contractors and society but presenting perverse incentive of being less efficient.
We could do better, say by according Bumiputera preference to competing bids only if they are of comparable price and quality. In larger and specialized projects, perhaps we can, in cases where a Bumiputera bid is judged second best but is within a certain range of first place, allow the top two firms to bid again in a two-way contest.
Third, some policy instruments may still be useful, even if Malaysia has failed in previous executions. In particular, grants can be effective means for starting new ventures that involve risk and uncertainty but offer potential breakthrough. Much technological progress, including recent green innovations around the world, have spun off from research or start-up grants. Recipients of a grant, unlike a loan (even a discounted one), can get straight to work instead of scrambling for finances.
The PEB’s project (Skim Permulaan Enterpreneur Baru Bumiputera, or new Bumiputera entrepreneurs start-up scheme), with a RM100 million endowment, appears to be adversely received. Of course, many Malaysians including myself have misgivings over the selection and monitoring processes, and whether it will be corrupted by political interest. However, as an instrument for Bumiputera industrial development – and there aren’t many tools out there – it holds out more promise than other methods.
We ought to draw more attention to true success stories, especially of those who have received public assistance then graduated out of it, as well as independent Bumiputera businesses that never received help from the government.
Fourth, corruption and political patronage can bring ruin, underscoring the case for the restraint to be exercised on Bumiputera industrial development programme. Najib’s speech showcased a plethora of huge projects, especially the upcoming big four of Menara Warisan Merdeka, Bukit Bintang City Centre, MATRADE Exhibition Centre and the RRI-Sungai Buloh project, with no assurance of the integrity of conduct or caution against political interest lunging for the spoils. This gives little confidence that the necessary change will happen to make Bumiputera industrial development effective, particularly when a lot of money is at stake, and with UMNO-BN in charge.
Oh yes, how things turn out depends on not just on clearer thinking and better policies, but even more critically on political will, integrity and audacity to make clean breaks from the past.
Lee Hwok Aun is Senior Lecturer in Development Studies at the University of Malaya. But the views expressed here are his own.