October 5, 2015
Beyond Economics: First Fix The Politics
by Dato’Seri Nazir Razak
The theme of Khazanah Megatrends this year is around “innovation” and “creative disruption.”
In the next 30 minutes I would like to share with you some personal stories and anecdotes, and perspectives about why Malaysia remains frustrated in its quest for greater creativity and innovation, risk and adventure taking, ethics and integrity in our economy, and how thinking about this problem leads me to the same conclusion as when I think of many other pressing national issues – we must address the “elephant in the room”.
As a 25-year banking veteran, I would be the first to admit that banks have been poor at supporting not just innovation, but many creative ideas.
Some who survived to tell the tale include two young Malaysians who some years ago came to see me about buying an airline for RM1 to build a regional low-cost carrier. I showed them the door very quickly and quite rudely, and was only nice to them when AirAsia was successful and going for its IPO.
Similarly, our experiments at banking start-ups and technology companies did not go well. Banks are by definition conservative, highly regulated and staffed with bankers.
In the mid-1990s, in response to the perceived lack of access to capital for technology start-ups, I was asked to chair the “Industry Action Committee” to set up Mesdaq, the Malaysian Nasdaq.
Even before we had venture capital and proven technology companies, we decided to set up a stock exchange. And lots of money was spent on the new exchange when really it should have just been another board at Bursa; it would have been a far cheaper failed experiment. Till today, I regret not saying no to this project, but it was a good early lesson for me and probably why I do find it hard to keep my mouth shut.
As banks and the capital markets fell short, the government availed lots of money for technology and start-ups in general. Funds like MTDC and several venture companies were seeded by the government. Money itself has never been the problem. The problem was that we never had the institutional capabilities to allocate the money effectively, bias as we were to local intermediaries who lacked experience and networks, and prone as we were to proliferating agencies rather than building large institutions with economies of scale and partnerships with international experience and networks.
Today however, I do think that from a capital standpoint, there is much less frustration on the part of budding entrepreneurs and creative disrupters. Equinas, for instance, has scale and leverages professional fund managers well.
GLICs have evolved to apply best international standards in investing and now hire – and pay – a much better cadre of professionals for themselves and at investee companies. There has also been a proliferation of private equity and venture capitalists to supplant banks and offer more effective risk and reward structures.
There is room for improvement, of course. I would like to see more funds made available to smaller companies and more focus on how to encourage large GLICs to better support small companies or small deals.
I would also urge that we look at how to make it less punitive for banks to become investors in PE funds given the difference in the needs of our emerging economy versus the more developed markets where these new rules are being written.
Mentoring and international perspectives
Innovation is about three things – insight, idea and implementation. Beyond capital, entrepreneurs need guidance to help them build their ventures. Malaysia has had Technology Park Malaysia and others, and lately MaGIC, with varying degrees of success.
I feel that one thing lacking has been the international element to mentoring. It is unrealistic to think of building sustainable businesses based purely on domestic dynamics in this era of Asean economic integration and an increasingly borderless world.
This is why a few other individuals and I set up the not-for-profit organisation Endeavour Malaysia in 2013. In partnership with Endeavour Worldwide we search for entrepreneurs via a rigorous selection and interview process by first the local management, then the local board and finally the international Endeavour board.
Successful entrepreneurs are badged “Endeavour”, allocated local and international mentors, and are given access an international network of businesses – about 1,100 Endeavour companies worldwide.
Endeavour Worldwide is all about successful business people eager to give back by supporting new entrepreneurs. It does take an entrepreneur to know one and it takes knowledge from all over the world to assess the prospects of the best ideas.
Local mentors for Malaysian Endeavour companies include my co-founders Afzal Rahim, Mark Chang, Brahmal Vasudevan and Tony Fernandes.
Endeavour’s “mentor capitalist” model has worked extremely well in Latin America, where its biggest success story is MercadoLibre, the eBay equivalent. Marcos Galperin started the company in 1999 and was selected by Endeavour that year itself.
He expanded the business across the continent and the company is now listed on the Nasdaq with a market cap of about US$4 billion. Marcos is the perfect example of how a high-impact entrepreneur can have an outsized impact on the ecosystem around him or her. He subsequently became a founder and board member of Endeavour as well role model, mentor or direct investor in a whole string of emerging companies.
I hope that we can rapidly add to the six Endeavour companies that we have so far, but overall Malaysian entrepreneurs now have reasonable choice of ecosystems to help them.
If we define access to capital and ecosystems as economics, then I would say we have over the years largely addressed the economic issues, but there is still no real breakthrough.
Recent data shows national productivity growth slowing down from 2.7% between 2006 and 2010 to 2.1% between 2011 and 2014. And other worrying data points include the story of two recent big Malaysian innovation success stories – GrabTaxi and HappyFresh – they started in KL but have effectively moved to Singapore and Indonesia for various reasons.
When I asked several entrepreneurs whether if given the choice they would choose to be based in Malaysia, most said no, and those who said yes tended to strongly espouse their nationalistic sentiment. Even though it is just my crude dipstick survey, it is worrying because we are at risk of losing the best companies that we nurture.
So I asked those who said they would move away what their concerns are, without fail, they go beyond economics to the big picture, and relate not just their own concerns but perception of their potential international financiers and partners.
Role of the government
The heavy presence of government in the economy is one issue they highlight. We have spoken and agreed ad nauseam in various other platforms about reducing government involvement in business, yet the data from the past few years show quite the opposite.
Even more important is the role of government in overseeing business competition – the rules of the game in each sector. Much of this has been covered in the New Economic Model, and we are making progress with the Government Transformation Programme (GTP) and Aviation Commission, for instance. But much, much more needs to be done.
The more sensitive area of concern is the perception that people or businesses are not equal before the government and even when one can accept preferential treatment based on our affirmative action policy, the rules are often not clear. Added to that is a culture of top down decision-making, even in the sphere of innovation.
Let me share with you one personal anecdote. In 2004, I was appointed to the board of the infamous InventQjaya, set up by a self-described genius innovator, generously funded by the government with cash and a super smart building in Cyberjaya.
I joined two other independent directors, Tan Sri Shahril Shamsuddin and Datuk Sidek Ahmad. From early on, we sensed things were not right and when we conducted our own technical due diligence there were a lot of question marks around the intellectual property the company had expensively acquired from the genius innovator’s own company back in the US.
The turning point for me was when he showed us his “killer invention” – a glass window which would turn opaque at the touch of a button. Well, massage parlours in Korea had had them for years – so I was told!
Shahril and Sidek, who were both more literate in science than me, also found other dubious inventions. So finally, together with MoF official Datuk Rahim Mokti, we decided that enough was enough, we had to do the right thing.
Truth be told, if we knew how painful blowing the whistle was going to be, I’m not sure if we would have done it!
Etched in my memory is the day Shahril and I went to report the case at the A-G’s chamber. After spending a couple of hours showing all the evidence, the officer calmly asked “Did you bring your toothbrush?”
He said, based on his experience, people who make accusations are often the real crooks so perhaps he should detain us! So then we spent another couple of hours explaining that it wasn’t us –thankfully, we were convincing enough.
After triggering the institutional processes, we were advised that we had to see and explain ourselves to Tun (Dr) Mahathir who had firmly backed the project. After the A-G Chamber experience, we were too afraid so we ran to the master salesman Tan Sri Nor Yakcop and begged him to carry the news for us. I was told Tan Sri Nor did a splendid job, Tun agreed that we were doing the right thing and we were safe.
The authorities never managed to build the legal case against the inventor. A lot of money was wasted, but a great deal more would have been lost had we, the directors appointed by the government, not done our fiduciary duty and been willing to tell truth to power.
I have never fully traced the history of how and why InventQjaya started, but I was told it was by navigating the corridors of power and convincing the PM. Tun’s idea of a government-backed R&D centre was good, the problem was how it was implemented.
There could have been a tender open to scientists across the globe, for instance, as opposed to one man’s full trust in another who went on to liberally use the threat of his access to power to get his way.
I am sure there are other similar stories. So we need to recalibrate how the corridors of power work, re-establish processes and reaffirm institutional checks and balances. Over the years, power has become too concentrated and system checks and balances are not functioning as they should.
Human capital and education
Another issue that the entrepreneurs highlighted was human capital.I will not delve into education reform as many of our finest, Tan Sri Azman, Tan Sri Zarinah Anwar, Tan Sri Jeffrey Cheah and Tony were part of the National Education System Evaluation Panel set up in 2011, and from what I gather, the issues are well-understood.
There is of course plenty of research that show correlation between national propensity to innovate and the right educational policies. It’s the political realities of education reform that seem to have held us back. On the wider issue of talent retention or drain itself, again much has been discussed via TalentCorp, etc, but then when I speak to the brightest overseas Malaysians, the most often cited reasons for not coming home are socio-political.
Politics–The Elephant in the Room
The elephant in the room is politics and the socio-economic structures that have evolved in tandem over the years. As we have seen over the last two general elections, the dominant political party system that we have had since independence is at risk.
While we can point to many other countries where the transition to a multi-party system happens peacefully, Malaysia has a unique and complex with a potentially toxic mix of race and religion deeply embedded in the political system, so we can’t take that for granted.
Meanwhile, crucial reform proposals by many of our cleverest people like the NEAC which presented the NEM that proposed major structural reforms, have been frozen by politics.
I won’t try to predict the consequences of continuing with the current trajectory of Malaysian politics. But I will predict that if we don’t undertake major structural reform of our socio-economy soon, we may well lose the international economics game.
I propose that we go back in history. Not to the early, joyous, optimistic days of the initial post-Merdeka years.
Instead, let’s travel back to the devastating blow we suffered on May 13, 1969 – a day of infamy in our short history as a nation. A day that punctured our innocent idealism and introduced us to the Hobbesian nature of reality.
In the wake of that tragic and horrific blood-letting, the government declared emergency rule and set up a National Operations Council led by Tun Razak to run the country after Parliament was suspended indefinitely.
Eight months later in January 1970, Tun Razak chaired the first National Consultative Council, or NCC, meeting to examine the ethnic, political, economic and cultural sparks that provoked the May 13 episode and undermined national unity.
The NCC’s members consisted of just three ministers – Tun Dr Ismail, Tun Tan Siew Sin and Tun Sambanthan – as well as representatives from state governments, members of religious establishments, professional bodies, unions, teachers associations and political parties – a balanced representation of the population.
The NCC’s deliberations over a few months produced two extremely significant documents that guided our nation in the post-May 13 years: the New Economic Policy or NEP, and the Rukunegara.
Parliament was subsequently reinstated while the NEP spurred the growth of the government’s involvement in business with the establishment of many agencies to facilitate the rebalancing of wealth among ethnic groups and poverty eradication initiatives, with considerable success. The NEP epitomised what this conference is all about – innovation, creative disruption and inclusivity.
So, here we are today. The NEP that was set to be a 20-year programme remains 44 years on, albeit in a much mutated form. In the meantime, the world and our place in it have changed, not least with the advent of the knowledge economy and the shift in economic power from large corporates and institutions to individual talent and entrepreneurship. The near future looks even scarier as articulated this morning by Charles Leadbeater.
Supply chains have shifted dramatically and creative disruptors flourish in economies where vested interests are not protected by governments and politics. Is our economic system substantially designed in the 1970s able to cope with the demands of today?
We all seem to know major reforms are needed – there is already much good literature on reforms from the government itself – but implementation has been trapped by realpolitik. Recent events are surely symptoms of systemic strain.
I believe that just as in the post-May 13 era, we are now facing a national challenge. Back then, the fundamental issue was national unity. Today, in the 21st century, the parameters have widened. National unity and the forging of a Malaysian identity are still very much works in progress. But added to them are a plethora of problems ranging from the ethical to the practical, and even our quest to spur innovation and creative destruction leads us to this fundamental national challenge.
We urgently need a new social and economic re-engineering programme to suit today’s challenges and for today’s Malaysians. My humble suggestion is this: the time is ripe for the setting up of a council similar to the NCC. Let’s call it the National Consultative Council 2 or NCC2.
To borrow a leaf from history, let us once again bring together the best and brightest among us Malaysians to huddle and deliberate our options. Let the NCC2 be no different from the first NCC in terms of participation from all members of our Malaysian society.
Its membership should be inclusive, its deliberations wide-ranging, and its reports succinct and practical to implement. And it should be led by someone or some people with the moral authority to bring the good and the great to the table for the sake of the nation’s new future.
My own ideas on how the NCC2 would function are still evolving. Offhand, I would suggest the setting up of six panels to deliberate on the following critical issues, namely:
1) Constitutional reforms;
2) Electoral reforms;
3) Economic reforms-affirmative action, role of government;
4) National unity and the social contract;
5) Preserving and strengthening the integrity of the federation; and
6) Institutional integrity – checks and balances between various branches of government and within government itself.
I make no apologies for adopting NCC from my late father. As I have written earlier, he was a Malaysian to the core, a public servant to the extreme definition of that. I believe his legacy of an inclusive, deliberative, and Malaysian vision and identity, is even more relevant today than it was in the dark days after May 13.
As I said at the start of my speech, there are adults who consider my views on current affairs as unsuitable. And they will look for 1,001 motives behind my suggestion of NCC2 instead of what I have just articulated. That is their prerogative.
Just as it is my prerogative to say we can and must opt for national – politics, economics and social – recalibration. We have to address the elephant in the room. Malaysia needs innovative and creative disruption of a national scale to spur innovation and creative disruption in our economy. Malaysia also needs innovative and creative disruption of a national scale to secure our future and realise the true potential of our great nation. We have done it before, we must do it again.
* Datuk Seri Nazir Razak is chairman of CIMB Group. This is his speech at the Khazanah Megatrends Forum in Kuala Lumpur today.