Topic 6 Privatization 2a

8/10/2019 Topic 6 Privatization 2a

1/27

All Rights ReservedCh. 1: #

Malaysian Economy Oxford Fajar Sdn. Bhd. (008974-T) 2011

Chapter 6

Privatization in Malaysia


2/27



Learning outcomes

Define the term Privatization.

Explain reasons for privatization

Explain methods of privatization in Malaysia.

Explain scope of privatization

Site some examples of privatization in Malaysia

Explain some regulatory reform in Malaysia.

Explain reasons why privatization in Malaysia isdeemed to have failed


3/27


4/27



Defining Privatization

Transfer of ownership rights from the public to theprivate

Sale of state-owned enterprises (SOEs) or assets tofirms in the private sector

De-nationalization'

Greater use of markets to allocate resources in an

economy

Privatization


5/27

All Rights ReservedCh. 1: # Malaysian Economy Oxford Fajar Sdn. Bhd. (008974-T) 2011

PrivatizationDefining Privatization (cont.)

Corporatization entails the conversion of the legalstatus of a service provider from a state ownedenterprise to a private company

This involves the transfer of assets from a governmentdepartment to a newly set-up private company.

Transfer of activities & functions that rested ongovernment to private sector.

GOVERNMENTPRIVATE

COMPANY(owned by Govt.)

SALE OF SHARESTO THE PUBLIC


6/27


Reasons for Privatization1. To relieve the Governments financial

burden allowing the redeployment ofresources to essential areas such as

basic health, education, family welfare.Substantial revenues are raised fromprivatization leading to savings in public

operating and capital costs. There isreduction in national debt.


7/27


Reasons for Privatization2. Savings- Reduce government

expenditure to avoid budget deficit.When government runs a budget deficit

then expenditure is greater thanrevenues.

Proceeds from sale of government

assets.Reduction of government employees


8/27


Reasons for Privatization3. To improve work efficiency and productivity .

Leads to increased efficiency in the delivery ofpublic services.

This was due to the upgrading of facilities bythese companies which were also able to acquirenew and modern technology, expanded capacityand service network.

Promote changes in management and organization,as well as inculcates positive attitude amongemployees.


9/27


Reasons for Privatization4. Economic growth as government resources are

efficiently allocated

The government provides essential services such aslegislation, national policies, security andinfrastructure.Government is inefficient in productivityenterprise and so privatization allowsgovernment to concentrate in public sector .

Private sector is expected to produce goods andservices more efficiently through the market system.


10/27


Reasons for Privatization

5. To meet the New Economy Policy(NEP) in thecase of Malaysia as economic growth

i. Eradicates poverty.

ii. Facilitates the restructuring of the economy, giving job opportunities to all Malaysian. Eliminating theidentification of race by occupation and region.


11/27


Methods of privatization1. Sale by Equity

Sale by Equity - selling shares on the stock market.

Used when capital markets are more developed andthere is lower income inequality .

Share issues can broaden and deepen domesticcapital markets, boosting liquidity and (potentially)economic growth .

If the capital markets are insufficiently developed itmay be difficult to find enough buyers , andtransaction costs may be higher .


12/27


Methods of privatization2. Sale of assets

Selling an entire organization (or part of it ) to astrategic investor , usually by auction.

A public tender is suitable for the sale of larger ormore complex businesses where there is not likelyto be wide public participation.

The availability of the enterprise for sale will be

advertised and interested parties may be pre-qualified.

E.g. in telecommunications


13/27


Methods of privatization3.Lease of Assets

Investments or fixed capital are undertaken by thegovernment but facility is leased out to a privatecompany to operate in return for annual lease

payments for the concession period .The private company is responsible for the operatingexpenditures .

This is an agreement where a private company (or

consortium of companies) receives the right to collectrevenues associated with an existing asset in exchangefor an upfront fee to the governmental entity.

Ports in Malaysia e.g. Klang, Penang


14/27

All Rights Reserved

Ch. 1: # Malaysian Economy Oxford Fajar Sdn. Bhd. (008974-T) 2011

Methods of privatization

4. Management contracts A management contract is an arrangement under whichoperational control of an enterprise is vested by contract ina separate enterprise which performs the necessary

managerial functions in return for a fee.It is outsourcing of the management function within the stateowned enterprise to the private sector.

The Langkawi Water Project covering the group of islands is

under a 25-year management contract signed in 1996The Kuala Jelai Phase I and Phase II Water TreatmentPlant s in Negeri Sembilan, a management contract signed in2003


15/27

All Rights Reserved


Methods of privatization

4. Management contractsThe government is the owner and istherefore responsible for undertakinginvestments.

A management contract can involve a widerange of functions , such as technical

operation of a production facility,management of personnel , accounting ,marketing service s and training .


16/27

All Rights Reserved


Methods of privatization5. Concessions

In concessions both fixed and operatingexpenditures are incurred by the privatesector.The most common types of concessionsare:

1. Build Operate Own (BOO)

2. Build Operate Transfer (BOT)


17/27

All Rights Reserved


Methods of privatizationBuild Operate (BOO)

In a BOO project the assets are owned by theprivate company.

The private company will Build, Operate and Ownthe project.

Therefore the private company gets the benefits ofany residual value of the project.

Used when the physical life of the project coincideswith the concession period.


18/27

All Rights Reserved


Methods of privatizationBuild Operate (BOO)

A BOO scheme involves large amounts of financeand long payback period.

For examples water treatment plants. This facilitiesrun by private companies processes raw water,provided by the public sector entity, into filteredwater, which is after returned to the public sectorutility to deliver to the customers.


19/27

All Rights Reserved


Methods of privatizationBuild Operate Transfer (BOT)is a form of project financing, wherein a private entityreceives a concession from the public sector tofinance, design, construct, and operate a facilitystated in the concession contract .However these assets are transferred back to thegovernment at the end of the concession period.

The private company incurs operating andmaintenance expenses in the project and recover itsinvestment from the revenues generated by theproject.


20/27

All Rights Reserved


Methods of privatizationBuild Operate Transfer (BOT)BOT finds extensive application in theinfrastructure projects and in public privatepartnership.

The host government is the initiator of theinfrastructure project. The government providesnormally support for the project in some form.

E.g. provision of the land / changes in the laws..


21/27

All Rights Reserved


Methods of privatizationBuild Operate Transfer (BOT) Lending banks: Most BOT project are funded to a bigextent by commercial debt. The bank will be expectedto finance the project on non -recourse basismeaning that it has recourse to the special purposeentity and all its assets for the repayment of the debt.


22/27

All Rights Reserved


Privatization Policy in Malaysia

Scope of PrivatizationPrivatization in Malaysia was primarily implementedin the infrastructure sector:

Telecommunications Power generation sector

Water

Expressways

Ports

Airports

Year

Project Compan Mode Val e (RM


23/27

All Rights Reserved


Major privatizationexercises, 1982 - 2004

Year Project Company Mode Value (RMmillion)

1982 -85 Pinang Bridge Pinang Bridge Sd. Bhd. BOT 25-yearconcession

1,250

1988 - 95 North SouthExpressway

PLUS Expressways Berhad BOT, 30 + 20 5,950

1985 KlangContainerTerminal

Klang Container Terminal- Owned by PKA (49%) &Konnas Terminal Klang

(51%)

Leased

1990 Telecommunications

Telekom Malaysia Berhad Partial Equity sale

1992 Electricitysupply anddistribution

Tenaga Nasional Berhad Partial Equity sale 29,850

1993 -97 Paka & PasirGudang PowerPlant

YTL Power Generation Sdn.Bhd.

BOO 3,500

Year

Project Company Mode Value (RM


24/27

All Rights Reserved


Major privatizationexercises, 1982 - 2004

Year Project Company Mode Value (RMmillion)

1993 - 97 Lumut PowerPlant

Segari Energy Ventures SdnBhd.

BOO 3,500

1993 - 95 LRT 1 - STAR Taken over by government(SPNB) in 2002 for RM 3.3billion

BOT, 30 + 30 yearconcession

3,420

1993 - 95 LRT 2 - Putra Putra-LRT (100% Owned byRenong Bhd.) Taken over bygovernment (SPNB) in 2002for RM 4.5 billion

BOT, 30 + 30 yearconcession 5,400

1994 NationalSewerageSystem

Indah Water Consortium.Taken over by governmentin 2000 for RM 1.625 billion

28 yearconcession

1997 - 04 KL Monorail KL Monorail Systems Sdn.Bhd. Taken over by

government (SPNB) 2007for RM 4.5 million

BOT, 40-yearconcession

1,180


25/27

All Rights Reserved


Major reasons for failure Privatization in

Malaysia:

1. There is no complete transfer of ownership ormanagement powe r to private entities. Governmentstill retain majority share holding or remain powerfulthrough golden share system.

2. There are quite a number of privatized companies(still existing) suffering continues losses . Thisindicates failure to improve efficiency andprofitability. Government took back alreadyprivatized companies . E.g LRT -1, Indah Water, KLMonorail. This proves that not all privatizedcompanies can survive. This is nationalization ofassets.


26/27

All Rights Reserved


Gains from privatization in Malaysia:

1. There has been improvement in infrastructuredevelopment through the government-private sectorpartnership in privatization.

2. Improvement in service delivery , where the government

is responsive to the consumer needs. E.g. imposition oftolls on road in KL prompted the government to renegotiatethe contract with private developer. Kelang ContainerTerminal contract renegotiated.

3.This has spurred economic growth (3

rd

most popularinvestment center in the world)

4. Economic growth has been a source of employment .


27/27

All Rights Reserved

Ch. 1: #Malaysian Economy Oxford Fajar Sdn Bhd (008974 T) 2011

Gains from privatization in Malaysia:

5. Malaysia has technical expertise in privatization that isuseful to other developing countries.

6. Improvement investor confidence: a boost for extendedforeign investments .

Topic 6 Privatization 2a

Documents