1 RE-ENERGISING THE PRIVATE SECTOR (SRI 1), CREATING A COMPETITIVE DOMESTIC ECONOMY (SRI 3), ENHANCING THE SOURCES OF GROWTH (SRI 7) & ENSURING SUSTAINABILITY OF GROWTH (SRI 8) RE-ENGINEERING THE GOVERNMENT’S ROLE IN BUSINESS 1 I. Introduction Re-engineering the Government’s role in business is one of the key policy measures to re- energise the private sector to drive economic growth under the NEM. Government-linked companies (GLCs) and their shareholders, the Government-linked Investment Companies (GLICs), constitute a significant part of the Malaysian economy. Listed GLCs account for more than 37% of total market capitalisation in Bursa Malaysia 2 and contribute to 17% of fixed capital formation and 10% of GDP. 3 If non-listed GLCs, such as Petronas, Felda, KTMB and State-level companies were included, their contribution to GDP would be substantially larger. The Government’s presence in the national economy dated back to the pre-Independence period and peaked in the 1980s, when State-owned enterprises numbered more than 1100, out of which many were found to be persistently loss making. 4 After the first oil shock, a major round of privatisation and corporatisation of these public enterprises was undertaken, but some of the privatised entities subsequently failed due to poor management and excess debt. In early 2004, under the leadership of the Putrajaya Committee on GLC High-Performance (PCG) and Khazanah Nasional Berhad, a major effort was initiated to improve the corporate governance of the listed GLCs in order to revive growth and performance in the domestic economy. 5 Even with privatisation and active divestment, GLCs remain the main service providers in key strategic utilities and services, including electricity, telecommunications, postal services, airlines, airports, public transport, water and sewerage, banking and financial services. In the real sector, GLCs play a role in the automotive and semi-conductor sectors. More recently, GLCs are actively pushing forward the objective of gradual regionalisation of the Malaysian economy to align with globalisation of markets. The verdict on heavy Government intervention in businesses has been mixed. With investments in selected and strategic companies, Malaysia has managed to engineer economic diversification and industrialisation in new sectors not ventured into by the private sector due to heavy capital outlays and perceived low immediate returns. On the socio-economic front, Government 1 This paper is one of many papers prepared by Group A of the National Economic Advisory Council (NEAC) under the guidance of Tan Sri Andrew Sheng. The paper was reviewed by the NEAC and its recommendations summarised into NEM Concluding Part Report. 2 Securities Commission (SC) data as at 29 January 2010 3 Khazanah Nasional Berhad (Khazanah) data 4 Central Information Collection Unit (CICU) data from 1987 5 An overview of the PCG http://www.pcg.gov.my/about_us_overview.asp last accessed 1 July 2010
This document is posted to help you gain knowledge. Please leave a comment to let me know what you think about it! Share it to your friends and learn new things together.
Transcript
1
RE-ENERGISING THE PRIVATE SECTOR (SRI 1), CREATING A COMPETITIVE
DOMESTIC ECONOMY (SRI 3), ENHANCING THE SOURCES OF GROWTH (SRI 7)
& ENSURING SUSTAINABILITY OF GROWTH (SRI 8)
RE-ENGINEERING THE GOVERNMENT’S ROLE IN BUSINESS1
I. Introduction
Re-engineering the Government’s role in business is one of the key policy measures to re-
energise the private sector to drive economic growth under the NEM. Government-linked
companies (GLCs) and their shareholders, the Government-linked Investment Companies
(GLICs), constitute a significant part of the Malaysian economy. Listed GLCs account for more
than 37% of total market capitalisation in Bursa Malaysia2 and contribute to 17% of fixed capital
formation and 10% of GDP.3 If non-listed GLCs, such as Petronas, Felda, KTMB and State-level
companies were included, their contribution to GDP would be substantially larger.
The Government’s presence in the national economy dated back to the pre-Independence period
and peaked in the 1980s, when State-owned enterprises numbered more than 1100, out of which
many were found to be persistently loss making.4 After the first oil shock, a major round of
privatisation and corporatisation of these public enterprises was undertaken, but some of the
privatised entities subsequently failed due to poor management and excess debt. In early 2004,
under the leadership of the Putrajaya Committee on GLC High-Performance (PCG) and
Khazanah Nasional Berhad, a major effort was initiated to improve the corporate governance of
the listed GLCs in order to revive growth and performance in the domestic economy.5
Even with privatisation and active divestment, GLCs remain the main service providers in key
strategic utilities and services, including electricity, telecommunications, postal services, airlines,
airports, public transport, water and sewerage, banking and financial services. In the real sector,
GLCs play a role in the automotive and semi-conductor sectors. More recently, GLCs are
actively pushing forward the objective of gradual regionalisation of the Malaysian economy to
align with globalisation of markets.
The verdict on heavy Government intervention in businesses has been mixed. With investments
in selected and strategic companies, Malaysia has managed to engineer economic diversification
and industrialisation in new sectors not ventured into by the private sector due to heavy capital
outlays and perceived low immediate returns. On the socio-economic front, Government
1 This paper is one of many papers prepared by Group A of the National Economic Advisory Council (NEAC) under
the guidance of Tan Sri Andrew Sheng. The paper was reviewed by the NEAC and its recommendations summarised into NEM Concluding Part Report. 2 Securities Commission (SC) data as at 29 January 2010
3 Khazanah Nasional Berhad (Khazanah) data
4 Central Information Collection Unit (CICU) data from 1987
5 An overview of the PCG http://www.pcg.gov.my/about_us_overview.asp last accessed 1 July 2010
entire spectrum of Government-controlled companies. NEAC-compiled data on 445 GLCs show
that 79 of these companies recorded losses in their most recent financial year, while 31 have
negative shareholders’ funds. These ailing firms are a cause for concern as the Government
underwrites some GLC debts through formal guarantees and letters of support. As at 31
December 2008, Federal Government contingent liabilities stemming from GLC debt guarantees
amounted to RM62.9 billion (or 11.9% of 2008 GDP).
Furthermore, the 2008 Auditor-General’s Report also highlighted that the accumulated surpluses
of the Government-owned companies reviewed would shrink dramatically should Petroliam
Nasional Bhd’s FY2007 profit be excluded from the tabulation of 48 MKD companies (Petronas:
RM76.9 billion vs. remaining 47 GLCs: RM0.23 billion). The contrast between the earnings
trajectory of the Transformation Programme participants (commonly referred to as the G20) and
the MKD companies could be partially explained by the fact that the G20 comprises of the
biggest GLCs listed on Bursa Malaysia, while MKD companies have a greater public policy
focus.
(b) Lack of a standardised and comprehensive definition of GLCs
There is general confusion on what constitutes a GLC. In the past, the common term has been
State-owned enterprises (SOEs). Later, the common term used was Non-financial Public
Enterprises (NFPEs), and in the more recent period, Government-linked companies (GLCs) and
Government-linked investment companies (GLICs). For policy design and analysis as well as
public accountability purposes, it is important that there is general agreement on the
nomenclature as well as the definition of a Government-owned company.
A GLC is broadly understood to be any commercially oriented company with Government
ownership. However, in practice, defining GLCs requires some qualitative judgement as many
firms, despite not being majority-owned by the State, are still under its de facto control or
influence.
Prevailing terminology on GLCs is sourced from two authorities, namely: the Putrajaya
Committee on GLC Transformation (PCG) and Bank Negara Malaysia (BNM) (see Appendix 2).
PCG dichotomises Government businesses into GLCs and Government-linked investment
companies (GLICs). GLCs are defined as companies in which the Malaysian Government has a
controlling stake, while GLICs are Federal Government-linked entities that invest in GLCs.
BNM, on the other hand, deploys a quantitative set of criteria in defining Non-Financial Public
Enterprises (NFPEs). NFPEs encompass Government-owned business entities involved in the
sale of goods and commercial services or manufacturing activities, and:
have at least 51% of their equity owned by the Government;
record at least RM100 million in sales turnover, and;
have a significant impact on the Malaysian economy.
However, the PCG coverage does not capture the entire universe of Government-linked
businesses, chiefly by not including companies owned by State Governments (see Figure 4). It is
11
also unclear whether PNB and EPF ownership would constitute either public or Government
ownership, as PNB ownership is classified as Bumiputera-held, whereas EPF ownership is not.
Figure 4: Universal set of Government-owned businesses
For the purposes of this paper, the term ‘GLC’ refers to a company which:
has a distinct legal entity
operates in commercial affairs (i.e. trade marketable goods and services)
can be controlled by the Federal or State Government (directly via shareholdings or
indirectly via interposing holding companies)
is directly funded by the Government or exposes it to contingent liabilities via capital,
debt or income guarantees
The term ‘GLIC’ refers to any agency that either receives funding or guarantees from the
Government and is directly designated to invest in GLCs on the Government’s behalf. This
includes the following entities covered under the PCG definition: Khazanah Nasional Berhad,
Kumpulan Wang Persaraan (KWAP), Kumpulan Wang Simpanan Pekerja (EPF), Lembaga
Tabung Angkatan Tentera (LTAT), Lembaga Tabung Haji (LTH), Minister of Finance
Incorporated (MKD) and Permodalan Nasional Berhad (PNB). For the purpose of discussion, it
is also expanded to include State Government-owned investment entities as well as new Federal-
level agencies such as Ekuiti Nasional Bhd (Ekuinas) and 1Malaysia Development Bhd (1MDB).
(c) Past Experiences in Privatisation of the GLCs
In 1985, the Malaysian Government reversed its stance on State interventionism and set out to
privatise public enterprises by releasing the Guidelines to Privatisation, followed by the
Privatisation Masterplan in 1991. The official objectives of privatisation, as outlined in the 1984
Mid-term Review of the Fourth Malaysia Plan, were:
To increase the role of the private sector in economic development;
To reduce the burden on the Government’s fiscal budget, and;
To improve the productivity and efficiency of State enterprises.
12
Since the inception of the policy, 474 projects and entities have been privatized, including Sistem
Telekom Malaysia (STM, now Telekom Malaysia Berhad), Lembaga Letrik Negara (LLN, now
Tenaga Nasional Berhad) and Klang Container Terminal (KCT). Capital expenditure savings
from privatization were estimated to be RM123.2 billion, which helped to turn a public sector
deficit of 21.8% of GNP in 1981 to a surplus of 6.5% of GDP by 1997, prior to the Asian
financial crisis.
However, efficiency gains from privatization have been limited due to several pitfalls in policy
execution, some of which are:
Many GLCs remained under de facto Government control, despite having part of their equity
divested to private investors;
The ‘first-come-first-served’ approach to private sector-initiated privatisation was perceived
as opaque and potentially biased towards well-connected promoters;
Privatisation was not accompanied by greater competition, thus effectively converting public
monopolists into private monopolists;
Sweeteners to encourage employees to migrate to the privatised entities (e.g.: job security,
minimum wage requirements) restricted the entities’ ability to right-size its workforce;
Initial public offerings were underpriced, resulting in forgone Government income and
encouraging ‘stagging’ (the practice of buying and selling shares to make quick profits);
Privatisation of successful companies reduced the potential to cross-subsidise unprofitable
but socially important business lines.
(d) Roles of Khazanah in GLC management
Khazanah Nasional Berhad, the Government’s strategic investment arm, was incorporated in
1993. Having received a significant number of equity stakes in companies via transfers from
other Government-linked institutional investors, Khazanah initially acted as a passive holding
company before the scope of its mandate was greatly expanded in 2004. It was repositioned as
an active investor and strategic value creator, with the objectives of nation building and
developing national competitiveness.
The key thrusts of Khazanah’s re-modeled mandate include four strategic ‘pillars’, namely:
1. Streamlining, repairing and restructuring its legacy investment portfolio;
2. Transforming GLCs to increase strategic and shareholder value;
3. Investing in new strategic sectors and geographies, and;
4. Engaging in active human capital development for the nation.
Khazanah’s foray into new strategic sectors are funded not only by the RM1 billion plus annual
income generated by its investments but also through gradual divestments of its equity stakes
which are recycled into new acquisitions.
The drive to transform GLCs into regional champions gained impetus with the launch of the
GLC Transformation Programme in 2004 under the auspices of the PCG. As the secretariat to the
Programme, the Transformation Management Office (TMO) housed in Khazanah coordinates the
various efficiency-driving initiatives and publishes regular progress updates on the participating
GLCs (G20) for public scrutiny. At the time of writing, there is no plan on the horizon to include
13
either more GLCs into the G20 or new Government-linked investors such as Ekuinas and
1Malaysia Development Bhd under the purview of the PCG.
(d) GLC recommendations in NEM Part 1 and the 10th
Malaysia Plan
The 10th
Malaysia Plan (10MP) has adopted the NEM Part 1 recommendations in principle
although few details were outlined. Of interest is the proposal to fund Ekuinas to acquire,
amongst others, non-core assets of GLCs. Further study is required to determine the congruence
of this proposal within the broader strategy of reducing Government participation in business.
Figure 5: Overlaps and divergences between NEM & 10th
Malaysia Plan recommendations
IV. Policy Review and Recommendations
As we progress towards the NEM, it is important to leverage on the role of GLCs to catalyse the
development of high value-added economic activities to achieve high income, while also
assisting in the growth of BCIC as the prime mover for Bumiputera to become more active
participants and contributors to the economy. In this regard, a comprehensive policy on the
governance of GLCs is required. PCG has made significant strides in its Transformation
Programme, but emphasis currently is placed only on listed GLCs. A comprehensive policy must
build upon the favourable PCG experience and expand its scope to cover all GLCs.
The policy governing GLCs would also require clear demarcation of GLCs’ roles in the NEM
and the role of Government. To become a high-income, inclusive and sustainable nation, it is
imperative for Government involvement in business activities to be clearly defined. The
Government’s overarching role must shift from being a direct participant in business towards
focussing primarily on its role as a regulator and facilitator. Achievement of socioeconomic
goals such as the development of SMEs and the Bumiputera Entrepreneurial Community (BEC)
14
must be done by nurturing a business ecosystem where optimal distribution of the economic cake
could be achieved endogenously without the Government micro-managing the allocation.
To move forward, in implementing a comprehensive and holistic policy on the role of the GLCs
in the NEM, recommendations are categorised into 4 components:
A. An oversight mechanism for GLCs
B. A model for the Government to divest non-strategic companies and re-engineer the roles
of remaining GLCs by improving governance and adopting the service competition
model
C. Creation of a Fund from divestment proceeds to finance GLCs’ catalytic role to grow
new private sector activities
D. A re-engineered role for GLC in the economy – one that supports and does not compete
with the private sector.
This holistic 4-pronged GLC policy framework comprises both defensive and offensive
strategies as well as an over-arching policy framework governing GLC activities, supported by a
monitoring mechanism to ensure GLCs remain focussed in order to achieve the new objectives
which are aligned to support the NEM goals.
Figure 6: Strategies to re-engineer the roles of the Government and GLCs
15
The 4-pronged approach aims to achieve the following policy objectives:
Increase efficiency in resource allocation and elevate competitive positions of both
Government and private sector companies;
Reduce the Government’s level of business ownership to enable it to focus on its
facilitative and regulatory roles;
Improve public sector governance by separating regulatory and participatory functions;
Improve private sector confidence and trust in the public sector to build new private
sector dynamism in the Malaysian economy;
Enhance the Government’s fiscal position by reducing contingent liabilities.
A. An oversight mechanism for GLCs
Following the decommissioning of the CICU in 2001, there has not been a single institution
charged with overall GLC oversight and coordination, with the task currently fragmented across
the various GLICs. The annual Auditor-General’s Report provides aggregate GLC performance
reviews but covers only MKD companies and a selection of State Government-owned entities,
while PCG and Bank Negara only report on companies that fall within their respective working
definitions (see Section II on universe of GLCs). MKD monitors 100 GLCs in which it holds equity (including golden shares). Khazanah has a stable of companies it manages under its own policies that are not applicable to GLCs held by other GLICs. Furthermore, GLCs also are held by PNB, EPF and other Government entities, each managing GLCs based on their own internal policy guidelines. In addition, listed GLCs must comply with governance rules set by the capital market regulators, while banking and insurance GLCs are regulated by BNM. The issue, however, is that there is no aggregated information on GLCs, and no macro-level analysis is possible as data on GLCs are not easily available. For many GLCs, data are not even compiled, and when compiled are not shared.
16
Lack of all-encompassing and reliable data on GLCs has constrained a wholesome approach to
the design of a comprehensive strategy for improving the management of GLCs and to determine
GLC role in supporting Government policies. Problems in GLCs are therefore resolved on a
case-by-case basis, and there is no consistency in public policy towards GLCs as a whole.
It should be noted that monitoring of GLC financial and operating performance would be subject
to overall public sector fiscal standards that will be monitored internationally according to IMF
Core standards.
Recommendations
(i) Set up a central oversight authority
Without a central authority, the GLC sector is under-monitored and uncoordinated, which allows
potentially problematic entities to remain under the radar and impedes any comprehensive
transformation initiatives. To overcome this, a GLC Oversight Authority (GOA) should be
established to regularly collect financial data on all GLCs and monitor their performance. As
many of the GLCs incur financial liabilities to the Government, the GOA should be subjected to
a governance framework similar to that adopted by BNM and the SC. However, the GOA will
not duplicate sector regulatory oversight that is the responsibility of sector regulatory authorities.
In fact, regulatory authorities should leverage on GOA to create pressures for better performance
of the GLC.
As the oversight authority, the GOA is responsible for policies on GLCs, monitoring their
performance and accountable for budgetary expenses incurred by GLCs. The GOA will
coordinate with GLICs that are already tasked with operations of selected GLCs, and design a
monitoring framework for GLCs as a whole. As the coordinating authority, GOA will aim to
avoid duplication of functions and inconsistency in policy implementation among GLCs.
Coordination is also required between Federal and State authorities, which have regulatory
oversight on activities of GLCs. The GOA will also be the authority to pursue the policies being
recommended by the NEAC to implement the GLC-related policy changes in the economic
transformation programme (ETP). Ideally, the GOA should report to the Prime Minister’s
Department. It is conceivable that the PCG and TMO be formally institutionalised into the GOA
to carry out this oversight function.
The GOA will adopt best international practices with respect to governance and preserving the
public sector financial investments in GLCs. When embarking on a privatisation exercise, GOA
will observe principles of transparency to build private sector confidence and also to constantly
engage with the private sector on the transformation of a given GLC and its eventual transfer to
the private sector.
In this respect, the GOA will publish an annual report, which would provide an analysis of the
performance of all GLCs, their contributions to the economy, fulfilment of the GLC mandate and
17
other necessary information.9 The report should include summaries
10 of the following
information:
Objectives (financial and social) and the extent of their fulfilment;
Key financial indicators and total Government portfolio value as at year end;
Any trade-off between commercial and public policy objectives and an imputation of
their impacts on GLC resources and performance;
Any material risk factors and steps taken to mitigate them;
Financial assistance from the Government, including direct funds and guarantees, and;
Transactions with related parties/entities
For greater accessibility, aggregate interim reports on GLCs also should be published on the
GOA website and be updated regularly.
The oversight functions performed by this authority will improve overall GLC transparency and
disclosure levels to its ultimate owners, i.e. the taxpaying public. Maintenance of comprehensive
data also will form a sound basis for further studies into GLCs and allow trouble spots (e.g.
perpetually loss-making firms) to be identified promptly.
(ii) GOA to design policies for the Government’s role in GLCs, taking into account the
following:
GLCs lack a clear mandate and are often required to undertake conflicting operations that
have dire consequences on their financial viability; they are expected to act as profit-
making entities and pursue the Government’s socio-economic objectives at the same
time. They are required to implement vendor development programmes, provide loss-
making services to rural areas and are restricted from downsizing their workforce. The
pursuit of these conflicting objectives not only compromises the GLC performance, but
could also provide an excuse to mask inefficiency and poor performance.
Government interference in terms of micro-managing GLCs through specific directives
pertaining to investment decisions and corporate social responsibilities (CSR) has often
undermined efficacy of GLC operations. These practices affect GLC bottom lines,
particularly when such directives make little economic sense.
The Government continues to support uncompetitive GLCs that would have been
dissolved if privately owned. While GLCs providing essential services such as
transportation should be supported, supporting non-essential GLCs have had a severe
burden on public sector expenditure.
The holding of significant blocks of equity by Government constrains private sector
participation in successful Malaysian companies, dampening enthusiasm in the Malaysian
equity market.
GLC staff remuneration is performance-linked on paper only. In practice, bonuses and
salary increments still depend on subjective decisions, and performance tends to take a
lower weight than seniority, if not overlooked altogether. Front-line employees also avoid
escalating problems to their superiors to create a perception of being in control, resulting
in delayed problem resolution, ultimately requiring some form of Government bailout.
9 Adapted from the OECD Guidelines on Corporate Governance of State-owned Enterprises
10 Aggregate reports for small GLCs and individual reports for larger GLCs
18
The Government’s presence as an investor in the private sector companies conflicts with
its mandate as a regulator and facilitator of business. Views held by the private sector that
GLCs receive preferential treatment, such as more favourable credit terms due to
perceived Government backing and opaque selection mechanisms in awarding contracts
influence their decisions to expand operations in Malaysia.
Implicit capital and income guarantee for GLICs induces moral hazard risks by
privatising benefits and nationalising risks. It also prevents certain financial products
from being certified shariah-compliant which hinders Malaysian efforts to become the
global Islamic financial hub.
B. A model for the Government to divest non-strategic companies and re-engineer the
roles of the remaining GLCs by adopting the service competition model and improving
their governance.
The omnipresence of GLCs in the Malaysian economy resulted in some of them encroaching into
sectors where they are in direct competition with the private sector. This phenomenon deters
private investment, particularly in industries where GLCs are perceived to receive special
treatment via monopoly licenses, preferential procurement policies and tariffs. Such concessions
often were granted to compensate for public policy obligations that GLCs are required to fulfil,
for example universal access requirements, usually to the detriment of their bottom lines.
However, the public has no access to information that would enable it to verify whether the
adverse impact of public policy obligations on GLC performance had been quantified objectively
and whether the compensating concessions are fair or excessive.
Long-term holding of significant blocks of shares in listed GLCs by Government-linked
institutional investors also reduces the proportion of freely tradable equity. Private investor
interest in Bursa Malaysia has remained lacklustre compared to that in other Southeast Asian
bourses due to the illiquidity of the capital market. The Government already has directed GLICs
to reduce their holdings in major listed companies. However, while gradual progress has been
recorded over recent months, as evidenced by the gradual divestment of Pos Malaysia Bhd and
Telekom Malaysia Bhd by Khazanah, divestment has been through private placements.
In line with its ambition to reach high-income status by 2020, Malaysia needs an investment
climate that is transparent, meritocratic and well regulated. It requires an incentive structure that
promotes competition and private sector involvement, as well as strong institutions and minimal
red tape. Malaysia currently ranks 23rd
on the 2010 World Bank’s ‘Cost of Doing Business’
index, which is lower than its regional neighbours Singapore (1st), Hong Kong (3
rd) and Thailand
(12th
).11
Improving investor perception would require significant economic liberalisation,
particularly better implementation of ethnic-based business participation targets and restrictions
on foreign ownerships, as well as the introduction of competition into previously monopolistic
markets.
11
World Bank, ‘Doing Business 2010’ last accessed 9 May 2010 http://www.doingbusiness.org/economyrankings/
19
In moving forward, the Government needs to divest all non-strategic holdings and concentrate
on being the economy’s regulator and facilitator, not a participant. It needs to assess its list of
strategic holdings and streamline it to contain only firms that are vital to Malaysia’s broader
development strategy and national security, rather than pander to the whims of rent-seekers.
Even so, strategic control need not be retained through majority ownership but rather the holding
of a ‘golden share’ which allows the Government to have a say in major decisions while freeing
up equity to private investors. To date, the Federal Government (via MKD) holds a golden share
in 30 corporations, including Malaysia Airport Holdings Bhd, MISC Bhd and Telekom Malaysia
Bhd.12
GLCs and GLICs need to be issued with a clear mandate and specific terms of engagement to
clarify their goals and minimise confusion over their roles in the economy. Each GLC mandate
should unequivocally outline the responsibilities and objectives of the given entity, which would
improve transparency in performance assessment and reduce the opportunity for the Government
to persuade GLCs to engage in ‘excessive’ CSR.
The Government also ideally must allow the investment strategy committees of Government-
linked trust agencies to be fully independent and make investment decisions in the best
interests of their beneficiaries (e.g.. trust unit-holders or savers), which may not necessarily
coincide with the Government’s wishes. Lifting restrictions on overseas investments by GLICs
also will enable them to diversify risks and reduce the level of inter-GLIC trading on Bursa
Malaysia.
Instituting a more arm’s-length relationship will make threats of sanctions for non-compliance
more credible, thus sending out a signal to private investors that the Government is taking the
issue seriously. The dominant presence of Government nominees on the boards of GLCs also is a
poor corporate governance practice, as regulatory bodies are expected to regulate what
essentially are related entities, hence creating a conflict of interest within the Government itself.
The GLCs will benefit from better economic performance and public accountability by having
more private sector practitioners with ample business experience and wider perspectives than
former civil servants. All that is required is a right balance of public and private sector
representatives to ensure that the boards of directors optimally reflect investor interests.
Recommendations
(i) Reduce excessive Government participation in business Government equity stakes must be reduced and GLCs that engage in purely private sector
activities should be privatised. A privatisation model is recommended in order that the
exercise will yield benefits to the economy. This model entails developing a comprehensive
programme that classifies all GLCs into various categories based on a set of criteria and
identifies an appropriate divestment strategy for each class, including – where possible – a
recommended timeframe. Furthermore, it is recommended that the Service Competition
model should be adopted for industries where Government ownership of natural monopolists is
socially efficient, such as telecommunication, utilities and aviation.
12
Minister of Finance Incorporated (MKD) data
20
Instead of being a direct market participant, the Government could attain its goals via legislative
reform and strengthening the regulatory environment. It should encourage private
investment by simplifying the process of doing business and introducing competition-friendly
policies, while empowering regulators to enforce the relevant legislations. The passage of the
Competition Bill 2010 and the Competition Commission Bill 2010 to legislate against anti-
competitive behaviour13
marks a promising start.
WHAT THE GOVERNMENT SHOULD DO
1) Focus on being the facilitator and regulator of businesses, not their competitor
2) Review and streamline list of strategic holdings; divest all non-core and non-
competitive investments
3) Issue GLICs and GLCs with a clear mandate and specific terms of engagement
4) Allow the investment committees of GLICs to be independent and make decisions
in the best interest of their beneficial owners
5) Institute an arm’s length relationship with GLCs and make them compete on a level
playing field
6) Reform the legislative framework and strengthen the regulatory environment
WHAT THE GOVERNMENT SHOULD NOT DO
1) Attempt to micro-manage GLCs
2) Use the GLCs as vehicles to indiscriminately achieve the Government’s
socioeconomic objectives while comparing their performance to solely profit-
orientated private sector entities
3) Support uncompetitive GLCs although it does not make economic sense
13
Includes cartels, predatory pricing, withholding of supply or information to the detriment of consumers, price-fixing and bid-rigging
21
The recommended approach to the privatisation exercise is sequenced as follows:
Figure 6: Recommended approach to formulation of divestment programme
a. Proposed objectives of the divestment programme
The divestment program aims to rationalise the large number of Government entities with a view
to transfer qualified GLCs to the private sector, nurture those which have potential and undertake
appropriate measures, as well as decide on non-viable or problematic GLCs. This privatisation
model will also encompass a process to build capacity in the Bumiputera Commercial Industry
Community (BCIC).
The objectives of the privatisation model should include, among others, the following:
To revive private sector participation in the economy;
To downsize Government role in business in order that the conflict with its regulatory
role is removed, and restore public sector governance;
Alleviate drain on fiscal resources;
Improve efficiency in resource allocation and elevate competitive position of companies,
and;
Give priority to privatisation methods that will stimulate capital market development.
b. Proposed principles for divestment
The NEM is envisaged to take Malaysia into a new paradigm of market-based and transparent
policy implementation. It is also desired that policies under the NEM will improve
competitiveness. Hence, it is important that we maintain the course and not succumb to
temptations to revert to past undesirable practices, even for a few cases. This is particularly
important in the privatisation model. This time around, there should not be any backtracking or
policy reversals. This can happen through the adoption of a set of principles to guide the
implementation of the privatisation model. This set of principles should be determined upfront
22
and made transparent. Any change in the principles requires explanation to the public and should
be proposed only after acceptance through a public-private sector consultative process.
The Principles proposed are as follows:
The Government should divest companies which are deemed non-strategic and in which the
private sector has greater scope for value-creation;
Divestments must be transparent, market-based and meritocratic, using transparent
procurement procedures and adequate safeguards to prevent exploitation or abuse;
Divestments should be made to the private sector (not other GLICs);
Divestment cannot be reversed;
Implementation of any divestment exercise must follow internationally-benchmarked
procedures and adopt proper governance principles;14
As a priority, divestments should be conducted via the capital market to enable greater
public participation and market development;
Divestment proceeds must be capitalised into a reserve and not treated as general revenue;
In addition to the above, the following practices must essentially be observed to build confidence
and public trust in the implementation of the privatisation model:
When privatising publicly owned assets, the Government must ensure that majority
ownership is indeed in private hands, so that privatisation does not happen in name only.
This applies to both listed and non-listed companies. In addition, if companies and assets are
transferred into private hands via the capital market, the Government cap the potion of
equity held by GLICs and other GLCs (See c. below on strategic holdings).
Divestment will also create opportunities for new Bumiputera entrepreneurs. Use of
divestments to enhance Bumiputera participation in business must ensure that privatised
GLCs are spread across a pool of new Bumiputera entrepreneurs. Eligibility could be
determined by excluding Bumiputera individuals or companies who already own stakes in
privatised GLCs or are already mature in the industrial community.
Companies in which GLICs hold significant equity interests will be accorded the same
treatment as private sector-controlled companies (no preferential nor discriminatory
treatment). This equal treatment will cover aspects related to legal compliance as well as
access to business opportunities and facilities, such as loans.
Companies in which GLICs hold equity interests must be given clear mandates and specific
terms of engagement. Their responsibilities must be spelled out to minimise confusion and
misinterpretation. A process must be in place to ensure that all parts of Government will not
be able to persuade such companies to engage in socio-political activities that may
contradict their commercial objectives (see recommendations on public sector governance in
the 1Malaysia supply chain chapter).
Professional managers must be allowed to manage GLCs with neither interference nor
micro-management by Government, whether in day-to-day issues or in decision-making.
14
Suggested standards include the OECD Guidelines on the Governance of State-owned Enterprises
23
They should be given clear terms of reference and be hired or fired based on their
performance against such KPIs.
Pursuit of withdrawal of State participation through the capital market is important for two
reasons: 1) GLCs were built using public money. It is only right that the public should be
given the an opportunity to invest in them and benefit from their future growth; and 2)
integration into the capital market will automatically allow greater transparency of
operations of the entities, while also making entities subject to international practices of
corporate governance. Other benefits of divestment through the capital market include: the
ability to fetch the highest value through a competitive market system; signals the
Government’s commitment to subject GLCs to market discipline; and creates well-
capitalised stocks to attract investors into the equity markets.
The mechanism for divestment must accommodate the different characteristics of the GLCs,
but conducted within the parameters of the proposed model for divestment.
However, in the privatisation model shown in Figure 7 below, GLICs and strategic companies
are not recommended for complete privatisation.
c. Addressing the issue of strategic GLCs
What constitutes a strategic company?
The standard definition would be an entity whose functions are of national importance, i.e.
critical for the day to day running of the country’s economy and civil society. Strategic
companies often include energy, utilities, finance, telecommunications and transportation.
Characteristics of a strategic company include:
Generation of significant positive externalities
Economies of scale through the provision of physical or intangible infrastructure/know-
how to other firms in the same or related industries
Important upstream and downstream linkages15
It is acknowledged that some form of Government control over strategic industries is vital to
ensure their sustained operations, particularly in times of crisis. However, ownership is not the
pre-requisite for strategic control. Some countries use ownership rules for companies that are
deemed strategic, but in most instances, they are not to protect Government ownership but to
differentiate between domestic and foreign interests. For example, France has a tradition of
‘blocking’ foreign ownership in 10 strategic industries, including defence, military-related
technologies, biotechnology, information security and the casino business. Canada and Australia
designated certain financial institutions as strategic to the domestic economy and limit foreign
participation in those institutions.
In the privatisation model, a clearer definition of strategic sectors is needed and it is not
necessary that all companies within the stipulated sector are also strategic. At the moment, there
is no authoritative list of sectors deemed strategic. Based on Government control of entities, it
appears that strategic sectors cover automotive, financial services, airline and airports, railways,
seaports, energy, utilities and telecommunications. Often, certain sectors are designated as
strategic because the regulatory capacity in the sector is weak. Instead of enhancing regulatory
15
‘Strategic Industries in A Global Economy: Policy Issues for the 1990s’ OECD International Futures Programme
24
and policy-making capacity, the Government chose to govern and guide the industry through the
relevant GLICs and GLCs.
More work is required to determine strategic sectors. This, however, must be clearly defined as
critical to national survival. Second, once the strategic sector is defined, ownership in companies
within the sector is not the only means to exercise control. Examples of controls are shown in
Table 4 below.
Table 4: Alternative methods for exercising control over strategic companies
Method Countries Description
Golden
share
Great Britain
& Poland
• A golden share allows the holder a say in major decisions
pertaining to a strategic company; it affords the Government
control while freeing up ordinary shares for private investors
• To reduce scope for political interference, the powers of a
golden share must be clearly defined and time-limited
Industry
policy Japan
• The Japanese Government holds only 0.05% of equity in
Japan Airlines (JAL) but maintains strategic control via an
aviation policy which requires all airlines to service regional
airports as a form of CSR initiative
Foreign
ownership
restrictions
Australia &
Russia
• The Australian Government does not use post-privatisation
ownership controls but imposes foreign ownership limits of
49% on strategic entities such as Qantas
• Russian strategic industries law requires foreign investors
seeking a majority stake in any strategic company to obtain
Government approval, while State-controlled foreign
investors would require permission to hold stakes > 25%
The NEAC recommends the following:
Only GLCs that perform a public sector function should be deemed as strategic and
should not be privatised;
Companies in sectors deemed strategic should continue to be divested, and Government
aggregate holdings in such companies should be capped at 20% in line with international
norms. Ownership restrictions in these companies at the private sector level should be
limited to foreign holdings. Government control can be exercised through its regulatory
oversight of the sector and companies in the sector.
In non-strategic companies, Government equity holdings should be capped at 10%
The above limits apply to equity held for long-term strategic purposes. It is not
recommended to cap the number of shares purchased for short-term trading purposes, but
25
GLICs should be required to trade the shares within a stipulated period after purchase to
create market liquidity.
d. Factors to be considered in designing a market-based and transparent divestment
exercise16
Below are factors or the pre-requisite considerations for the design of the modalities for the
divestment exercise:
Existing market structure (competitive vs. monopolistic; will regulatory amendments be
required prior to divestment);
Method of privatisation (e.g. IPO, private placement, management buyout, etc)
Transparency of privatisation method;
Valuation/pricing of assets to be divested;
Market saturation and absorptive capacity; an ill-timed investment into a weak market
may result in poor proceeds;
Pre-sale preparation in terms of due diligence and disposal terms;
Short-term revenue forgone vs. long-term gains in economic efficiency and taxes;
Selection of a financially and reputationally sound buyer (in the case of a private
placement/trade sale); and
Potential buyers’ development strategies for the divested entities.
e. Proposed classification method of GLCs
Government-linked ownership entities may classify GLCs based on characteristics such as
financial performance, strategic importance and turnaround potential. Figure 7 illustrates the
recommended GLC classification process. However, the formulation of specific thresholds
remains at the discretion of the respective holding entities.
Figure 7: Decision Tree for GLC Classification
16
Adapted from non-core asset management best practices in the ‘GLC Transformation Programme Yellow Book’
26
f. Recommended action plan for companies that should remain under Government control
In the initial stage of implementing the model, it is recommended that GLICs and State-level
holding companies should not be privatised. Privatisation should focus on their investee
companies.
However, it is necessary that these GLICs are better governed and there is disclosure on their
operations. Their corporate strategy and deliverables should also be made known. Appropriate
oversight by GOA is required. The Government (through the GOA) can undertake the following:
Issue an ownership policy that outlines, amongst others, the Government’s investment
objectives;
Macro-manage GLCs instead of being involved in day-to-day management and afford
them operational autonomy;
Issue each GLC clear terms of reference, including their commercial and public policy
goals;
Make investment decisions based on objective cost-benefit analyses, not political
expedience;
Build risk-management capacity as a lead-up for diversification into overseas
investments;
Collaborate with the GLC central monitoring authority to provide timely aggregate
reports on GLC performance;
GLCs must comply with best practices in corporate governance and there must be a
mechanism to assess their compliance and sanction non-compliance.
g. Recommended action plan for companies which should be divested by the Government:
Non-strategic companies, defined as GLCs that perform purely private-sector activities, should
be divested on a staggered timeline based on their characteristics.
It must also be noted that not all GLCs are wholly owned by the Government. In large, listed
conglomerates, a subsidiary that is classified as non-strategic from the Government’s point of
view may be deemed strategic for the conglomerate by minority shareholders. In these instances,
corporate governance best practices must be adopted to ensure that all shareholders are treated
equitably.
Non-strategic listed companies
Cap aggregate Government holdings to 10% of issued shares to increase liquidity
Non-strategic unlisted high performers
Strategies:
Companies with good track record that meet Bursa Malaysia listing requirements
should be privatised via the capital market where possible;
Upon privatisation, aggregate Government long-term shareholding should be capped
at 10% of issued shares;
27
However, in some instances, trade sales and management buyouts may secure a
higher valuation; hence, privatisation methods will be considered on a case-by-case basis
using a cost-benefit analysis
Rationale:
Initial public offerings (IPOs) allow greater scope for participation by the private
sector and retail investors;
Greater liquidity contributes to capital market development and improves foreign
investors’ perception; and
GLCs were forged out of tax revenue and listing enable taxpayers to obtain direct
share ownership and participate in their success
Non-strategic unlisted low performers with potential for turnaround
Strategies:
Appoint a team of professional managers and provide incentives to managers to want
to turnaround the company (e.g. management or employee buyout opportunities). Incentives
will entice them to revive the companies to graduate into the ‘high-performing’ category;
Selection of professional managers has to be meritocratic and transparent, not
politically-driven. Public sector officials with no business expertise and experience should
not be allowed to take over companies;
Management of these GLCs must follow private sector best practices and adhere to
each firm’s respective terms of reference (see Defensive Strategy iv.a. above);
Government support, especially financial, must be limited to development cost with
a view to sell out or withdrawal within specified period;
Select some companies for inclusion in the BCIC to be run by Bumiputera
entrepreneurs with potential. The Government will provide support, especially skills and
coaching to ensure companies can turn around.
Rationale:
Appointment of professional managers enables the companies to be run by experts;
Adherence to each GLC’s terms of reference and decision-making independence are
vital to minimise arbitrary political interference that could jeopardise company performance.
Non-strategic unlisted low performers with no turnaround potential
Strategies:
Offer these low performers to the private sector for sale in an open tender, failing which;
Liquidate these entities and establish an asset-management company to dispose of their
assets in a transparent and market-based manner.
Rationale:
The private sector may generate synergies by integrating these companies into their
existing corporate structure;
Should there be no takers, these GLCs should be liquidated to avoid further drain on
fiscal resources.
Table 5: Summary of strategies in applying the privatisation model
28
Category High-performing
unlisted companies
Unlisted low performers
with turnaround
potential
Unlisted low performers
without turnaround
potential
Strategy
• Companies with a
good track record that
meet Bursa Malaysia
listing criteria should be
divested via the capital
market where possible
• Aggregate
Government
shareholding is capped
at 10% of issued shares
• Appoint
professional managers
and provide incentives
for them (e.g.
management/employee
buyout opportunities) to
revive the companies in
order to graduate into
the ‘high performance’
category
• Offer to the private
sector for sale, failing
which;
• Liquidate entities and
establish an asset-
management company
to dispose of assets in a
transparent and market-
based manner
Rationale
• IPOs allow greater
scope for private sector
& retail investor
participation
• Contributes to
capital market
development
• GLCs were forged
out of tax revenue and
listing would enable
taxpayers to obtain
share ownership and
partake in their success
• Appointment of
professional managers
enable the companies to
be run by experts
• Decision-making
independence is crucial
to minimize political
interference that could
jeopardize company
performance
• The private sector
may generate synergies
by integrating these
companies into their
existing corporate
structure
• Should there be no
takers, these SOEs
should be liquidated to
avoid further drain on
fiscal resources
C. Creation of a Fund from divestment proceeds to finance GLC catalytic role to grow
new private sector activities.
In the past, the Government has failed to capitalise proceeds from previous privatisations. Since
1983, 474 projects and entities have been privatised, netting the Government capital expenditure
savings of approximately RM123.2 billion. However, direct receipts from previous privatisations
were not explicitly capitalised into a special reserve, but were used to fund Government
expenditure. It is vital for divestment proceeds NOT to be treated as operating revenue (i.e.
flow), for they arose from disposal of assets and hence should be recognised as capital (i.e.
stock) in Government accounts.
29
Recommendations:
Recent Citigroup calculations have estimated that the Government could gain approximately
RM40-50 billion from reducing its shareholding in key GLCs to 30%. This sum and any further
proceeds from GLC divestments should be capitalised into a special reserve. Suggestions for
their utilisation include the following:
To fund GLC Transformation initiatives under the auspices of the GOA, including ventures
into new strategic sectors (e.g. business development services). GOA could allocate funds to
PCG, given its track record in driving new growth initiatives among its holdings GLCs.
The Fund to be managed as a sovereign wealth fund (SWF) that invests in various asset
classes (e.g. securities, foreign exchanges and derivatives) to maintain a sustainable income
stream. It is recommended for governance of this SWF to follow the Sovereign Wealth
Funds Generally Accepted Principles and Practices (‘Santiago Principles’)17
which require,
amongst others: public disclosure of the fund’s investment policy; financial statements and
risk management approach; and for the fund not to take advantage of privileged information
or inappropriate influence by the broader Government in competing with private entities.
To finance ventures into technologies with a Technology Readiness Level18
rating that is
lower than nine. Malaysia’s tendency to import ‘complete’ technologies that have been fully
tested and proven to be operational (i.e. TRL 9) saw local engineers having limited exposure
to the process of incubating successfully commercialised applications. GLCs should partner
with private companies that develop applications with a TRL rating that is lower than nine
to catalyse a transfer of semi-complete technologies to Malaysia. This will expose the
workforce to the process of developing a mature application that involves, among others, the
formulation of technical manuals and procedures.
D. A re-engineered role for GLCs in the NEM in a manner that is supportive of, rather
than competing with, the private sector.
There is on-going work at Khazanah to constantly refresh its programme of supporting private
sector growth and attracting investments across all sectors. Examples include deepening the
advantages from the global presence of electronic firms, building liveable cities, adopting new
approaches to tourism ventures, reforming the commercialisation of agriculture into a sustainable
industry and bringing in new technologies from abroad.
While GLC transformation continues to remain on track, a consolidated and coordinated
approach to operations of GLICs and large GLCs is necessary for them to become agents of
change for economic transformation under the NEM. The roles of the GLCs that remain after the
privatisation model has been executed can be summarised in the 6 key roles proposed by the
PCG below:
Figure 8: Modalities for GLC support in the NEM
17
http://www.iwg-swf.org/pubs/gapplist.htm last accessed 8 July 2010 18
http://esto.nasa.gov/files/TRL_definitions.pdf last accessed 8 July 2010