June 24, 2018
“…recent revelations show 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, as 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.”–Jayant Menon
About a month before Malaysia’s parliamentary election in May, then-opposition leader 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 Kuala Lumpur Composite Index, 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 confirm that the former government had been using Malaysia’s central bank and Khazanah (a sovereign wealth fund) to service the debt obligations of the scandal-laden 1 Malaysia Development Berhad government fund. The central bank governor has since resigned.
The GLCs have not been immune from scandals either. The most recent relates to a massive land scandal involving Felda Global Ventures, which is the world’s largest plantation operator. 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 (US$21 billion). All of this led one 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.
For GLCs, the answer is less straightforward. 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 program to improve the absolute and relative position of ethnic Malays and other indigenous people (Bumiputera). 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 Bumiputera were unjustifiably small and unequally distributed. The approach of using GLCs as instruments of affirmative action failed because it led to a rise in crony capitalism, state dependence, regulatory capture and grand corruption. 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.
Malaysia’s National Debt is said to be around 65 percent of current GDP
Additionally, recent revelations show 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, as 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. And like in most other countries, there are good and bad GLCs in Malaysia. If a GLC is not crowding out private enterprise, operates efficiently and performs a social function effectively, then there is no reason to consider divestment. But a GLC that crowds out private enterprise in a sector with no public or social function or one that is inefficiently run should be a candidate for divestment.
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 that the divestment process does not concentrate market power or wealth in the hands of a few. This has apparently happened before.
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. If done correctly, this should rejuvenate the private sector while enabling good GLCs to thrive, and it should fortify Malaysia’s fiscal position in the process. This is what Malaysians should expect — and indeed demand — of the ‘new Malaysia’.
Jayant Menon is Lead Economist in the Economic Research and Regional Cooperation Department at the Asian Development Bank and Adjunct Fellow of the Arndt–Corden Department of Economics, The Australian National University.