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

2

intervention in businesses helped to decrease identification of ethnic groups along occupational

lines, enabled the creation of a large Malaysian middle class and trained a pool of Bumiputera

CEOs, as well as contributing to a higher Bumiputera share of capital ownership (21.9% in 2008

from 2.4% in 1970)6.

At the same time, increasing Government interests in business have created a growing conflict

with its traditional roles as a regulator and provider of public goods. Regulatory impact is

significant in determining economic efficiency and competitiveness. International surveys

frequently cite regulatory shortcomings as negatively affecting Malaysia’s competitiveness

ranking. Regulation has an overriding impact on the ability of Malaysian enterprises to innovate

and deliver quality products and services to consumers along the supply chain. The conflict

between GLCs’ roles as operator and regulator, as well as between social objectives and profit

maximisation have a significant influence on the viability of the GLC supply chain, and

ultimately on Malaysia’s ability to progress into becoming an advanced economy.

Given their large size and significant impact on the economy, Government intervention through

GLCs and the economic behaviour of GLCs can either be a major positive driver of economic

growth or a negative drag due to impediments or breakdowns in the 1Malaysia supply chain.

Examples of negative drag occur when listed GLCs make substantial losses that not only impact

upon the stock market but also investor confidence.

This Chapter provides a diagnosis of GLCs in the Malaysian economy and their impact on the

1Malaysia supply chain, and makes a series of recommendations for the transformation of the

GLCs to play a major supporting role in achieving the goals of the NEM. These

recommendations build on current initiatives by Khazanah to transform GLCs. These

recommendations include: a privatisation model for GLCs which draw up major lessons from

past experience; further measures to enhance performance of existing GLCs, and a more prudent

oversight of GLCs, both at the financial and institutional levels (not covering the regulatory

oversight at sector levels).

It is also recognised that GLCs can play a catalytic role to achieve the goals of the NEM, as well

as help build the Bumiputera Commercial Industrial Community (BCIC). However, this will

require a re-engineering of the Government’s role in business and a transformation of GLCs that

can support these roles. These aspects of the recommendations have built on the Putrajaya

Committee on GLC High Performance (PCG) GLC Transformation Programme and recent

proposals presented by Khazanah and other GLCs during NEAC discussions with the

Transformation Programme participants.

II. GLCs Within the 1Malaysia Supply Chain

Most GLCs were incorporated as companies limited by shares or are legal corporations by

legislation (public authority), thus imbuing them with separate legal identities from the

Government. Entrenched within the domain of the private sector but with direct ownership ties

to the Government (see Figure 1 below), GLCs were established to:

6 EPU data

3

provide key public services, especially utilities and infrastructure;

catalyse economic transformation by investing in industries with low private

sector participation with a view of lowering barriers to entry;

maintain Government interest in strategic sectors;

achieve redistributive socioeconomic goals, and;

safeguard national wealth, while securing reasonable returns for the

Government.

Figure 1: The GLC sub-sector within the 1Malaysia Supply Chain

However, direct Government participation in business is a blunt policy instrument. When not

well managed and operating in contravention of the principles of sound public sector and

corporate governance, GLCs can contribute to the breakdowns in the 1Malaysia supply chain. As

GLCs hold controlling stakes in utilities and other services, their effective functioning to ensure

competitive prices and efficiency of services is critical in influencing productivity and private

sector output. GLC performance is critical to Malaysia’s competitiveness and the ultimate risk-

bearers of GLC failures are usually the taxpayers.

The performance of listed GLCs is a critical determinant of foreign and domestic investor

confidence and private investment decisions, because they are the largest channels through

which the foreign sector invests in Malaysian equities. Foreign investors tend to shun stocks in

GLCs where there is perceived to be political interference in governance and operations. Thus

far, the Khazanah-led GLC Transformation Programme has shown progress in improving that

perception, but overall GLC performance is still impeded due to the legacy of either excess

capacity (e.g. motor industry), price controls on their services or the burdens of excess labour

and uneconomical activities as a result of social objectives.

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Moreover, as some GLCs also act as both operators and de facto industry regulators, there has

emerged conflict of interests, which result in uncompetitive and flawed pricing structures for

services, thus creating market distortions.

Figure 1 above illustrates linkages in the 1Malaysia supply chain and breakdowns in the GLC

supply chain at both the upstream and downstream levels. These breakdowns have affected

competitiveness, and interfered with both the Government’s and the private sector delivery

systems, with repercussions on capital market development and the growth of the Bumiputera

Business and Commercial Community (see Table 1 below).

In some sectors, GLCs already play a role in connecting small-to-medium enterprises (SMEs) to

the 1Malaysia supply chain through vendor development programmes. However, there are no

clear directions for GLCs, and many are seen as competing with SMEs, rather than catalysing

SME growth and supporting their integration into the global supply chain. An example where

GLCs have not emerged to create new economic space is the agri-food business. Even though

Malaysia is a major food and oilseeds producer, and GLCs and State and Federal agencies

dominate ownership of agricultural land, Malaysia has not produced a single regional or global

agri-food champion compared with the likes of CP Charoen and Union Foods in Thailand and

Indofood in Indonesia. Agri-food is an example where a leading company with a global

distribution channel can nurture a whole supply chain of SMEs and small farmers/producers that

are able to access global markets through branding and high quality standards.

Table 1: Impact of Breakdowns in the GLC Supply Chain

Areas Breakdowns Impacts

Efficiency

• GLCs face multiple and conflicting

objectives with no clear priority.

• Performance evaluation and chain of

accountability are complex; could

inculcate management ineptitude.

• Some GLC debt obligations are

underwritten by the Government.

• Induces moral hazard; privatises

economic benefits and nationalizes

risks.

• Perception of Government backing

could result in better credit terms.

• Government ownership of major

financial institutions could lead to non-

arm’s-length transactions.

• Distorts financing costs against private

sector players, particularly start-ups.

• Gives rise to excessive risk-taking in

credit provision.

• Performance-based awards are non-

existent/ weakly enforced; hiring and

• GLCs have difficulties retrenching

unproductive employees, hence

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firing rules are restrictive. dampening overall wages.

• Inefficient/uncompetitive industries are

supported via tariffs, monopoly

license, etc.

• Consumers are penalized through

higher prices and availability of a

limited range of output.

Corporate

governance

• GLCs are subject to political

interference, preventing decision-

making from being subjected to

objective cost-benefit analyses.

• Some decisions are opaque and are not

necessarily in the best interests of all

stakeholders (e.g. minority

shareholders, the greater public).

• Absence of central monitoring

understates size of GLC sector;

performance is not scrutinized.

• There is no accountability mechanism

to ensure that Government funds are

utilized efficiently.

• Previous privatization exercises lacked

transparency & were perceived to be

based on patronage rather than merit.

• Not all GLCs were transferred to the

most efficient operators; some failed

and had to be re-nationalized.

• The patronage system favours the well-

connected & worsens income inequity.

Capital

market

development

• Dominant shareholding in GLCs by

Government investment agencies.

• Share trading and ownership

concentrated among Government-

linked institutions.

• Results in an illiquid capital market

with limited scope for private sector

participation.

III. Background and Diagnosis of GLCs in Malaysia7

(a) A brief history of GLCs and analysis of the GLC universe

Government direct participation in the economy started as a means to:

Provide major utilities and infrastructure;

Address development goals: long-term development required investment in a range of

physical and human capabilities, hence, the Government intervened to set up institutions

to provide goods and services which the private sector, for various reasons, was not able

to do; and

Apply social justice in terms of wealth redistribution and social restructuring that

sustainable development requires.

The public enterprise sector boomed in the 1970s into early 1980s as new entities were formed to

act as conduits for the implementation of the New Economic Policy (NEP).

7 Details are available in Appendix 1

6

In 1985, the Central Information Collection Unit (CICU) was set up to track the performance of

public enterprises. Housed within Permodalan Nasional Bhd (PNB), the unit collected a

comprehensive set of performance data on more than 1000 State-owned enterprises under its

purview.

In 1986, the Government initiated a large-scale privatisation drive with the issuance of the

Guidelines to Privatisation, followed by the release of the Privatisation Masterplan in 1991.

While the policies aimed to increase private sector role in the economy, they invited much

criticism as most of these privatisations turned out to be exercises in partial divestiture with the

Government still holding significant equity stakes, leading to limited efficiency gains.

Hence, despite the implementation of the Privatisation Masterplan, the Government, both at

Federal and State levels, is still the dominant shareholder in many listed and unlisted companies.

The CICU database on Government-owned enterprises initially provided some means of tracking

the performance of these entities. However, CICU was decommissioned in the late 1990s,

resulting in the cessation of comprehensive public enterprise monitoring and the absence of a

comprehensive database on the whole universe of Government-owned enterprises.

An NEAC compilation of entities with Government equity ownership resulted in a list of 445

entities which have a distinct legal entity, operate in commercial affairs (i.e. trade marketable

goods and services), are controlled by the Federal or State Governments and are directly funded

by the Government or expose the Government to contingent liabilities via capital, debt or income

guarantees. The entities covered those managed by KWAP, EPF, LTAT, LTH, MKD, Kelantan,

Penang, Perak, Sabah, Sarawak, Selangor, and Terengganu. Information on GLCs under PNB

and Khazanah was retrieved from their websites.

Figure 2: The GLC Universe

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Figure 3: Distribution of GLC ownership

As shown in Table 2 below, eight of the biggest 20 companies listed on Bursa Malaysia are

GLCs. In total, there are 53 listed GLCs which account for more than one-third of aggregate

market capitalisation on Bursa. The profit performance of GLCs hence would have a huge

impact on overall investor confidence and the general perception of Malaysian listed company

performance.

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Moreover, GLCs account for more than 53% of both the listed Finance and Trading and Services

sectors as well as over 28% of the listed Industrial Products sector. Although listed GLCs

account for only 7.8% of the listed Plantation sector, the dominance of unlisted GLCs, including

FELDA, FELCRA, the plantation arms of conglomerates such as Sime Darby and Boustead, and

State-owned oil palm estates such as those owned by the Sabah Land Development Board, would

be very large relative to private sector estates.

Consequently, GLC presence in the infrastructure, manufacturing and agriculture sectors are pre-

eminent in these supply chains, whereas GLC presence in the technology area is limited. Since

services and technology, especially high-tech knowledge-based products and services are at the

forefront of the high-value new economy, it could be argued that GLCs are not optimally

positioned in the ‘right’ industries to play their catalytic economic development roles.

Table 2: Top 20 biggest companies on Bursa Malaysia as at 29 January 2010

Rank Company GLC Market capitalisation (RM bn)

1 Sime Darby Bhd √

51.26

2 Malayan Banking Bhd √

48.06

3 CIMB Group Holdings √

44.71

4 Public Bank Bhd 42.09

5 Maxis Bhd 40.35

6 MISC Bhd √

35.15

7 Tenaga Nasional Bhd √

34.65

8 IOI Corporation Bhd 34.36

9 Axiata Group Bhd √

27.62

10 Genting Bhd 26.12

11 Petronas Gas Bhd √

19.33

12 PPB Group Bhd 18.94

13 Kuala Lumpur Kepong Bhd 17.68

14 DiGi.com Bhd 17.00

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15 PLUS Expressways Bhd √

16.55

16 Genting Malaysia Bhd 16.42

17 YTL Power International Bhd 14.93

18 AmBank Holdings Bhd 14.65

19 YTL Corporation Bhd 14.02

20 Hong Leong Bank Bhd 12.88

(Source: Bursa Malaysia)

Table 3: Sectoral presence of selected GLCs as at 29 January 2010

Sector Listed GLCs Market capitalisation

(RM bn)

As a percentage

of sector size (%)

Banking &

finance

Malayan Banking Bhd 48.06 22.40%

CIMB Group Holdings Bhd 44.71 20.84%

RHB Capital Bhd 11.35 5.30%

Industrial

products Petronas Gas Bhd 19.33 21.45%

Titan Chemicals Corp Bhd 2.23 2.47%

DRB Hicom Bhd 2.01 2.23%

Trading &

services

Sime Darby Bhd 51.26 13.42%

MISC Bhd 35.15 9.20%

Tenaga Nasional Bhd 34.65 9.07%

Axiata Group Bhd 27.62 7.23%

PLUS Expressways Bhd 16.55 4.33%

Telekom Malaysia Bhd 11.16 2.92%

Petronas Dagangan Bhd 8.64 2.26%

(Source: Bursa Malaysia)

Although GLCs under the PCG Transformation Programme8 recorded strong aggregate earnings

of RM11.7 billion for FY2009, the picture loses its lustre once the analysis is expanded to the

8 An overview of the PCG http://www.pcg.gov.my/about_us_overview.asp last accessed 1 July 2010

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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

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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.

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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

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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)

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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

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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.

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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

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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

30

KKU 2 Oct 2007

ROLES

Stay the course in executing the 10 year GLCT Programme

Relentless execution to

become regional champions

Pursue new economy

investments in line with the

NEMCollaborate and co-invest with

non-GLC private sector

Other roles under NEM [e.g. market liquidity and

labour market issues ]

Continue focus on core operations on

a level playing field and exiting

non-core and non-competitive assets

1

2

3

4

5

6

(i) Confluence of infrastructure ownership and operating rights

In certain industries, particularly in telecommunication and utilities, a monopoly market at

passive infrastructure level is the most efficient structure as economies of scale only could be

optimally exploited over a very large range of output.

However, in Malaysia, GLCs dominate not only the infrastructure but also the content provision

markets and in some cases, they prevent private sector competition and innovation in these areas.

This affords their content provision arms lower costs to access both passive and active

infrastructure relative to private sector content providers. These areas are usually the most

dynamic sectors of value creation in the global markets and an area where private sector (or joint

ventures with GLCs) could transform the competitive landscape. Absence of industry regulators

also forces some GLCs to exercise some form of regulatory functions, which could give rise to

conflict of interests.

Recommendations

31

Industries where the natural monopoly market structure is socially efficient should adopt the

service competition model which will allow network ownership to be separated from regulatory

functions and operating rights (see Table 6).

Under this model, GLCs will retain ownership of passive infrastructure (e.g. optical fibre

networks, power generators) while the second tier of infrastructure, known as active

infrastructure (e.g. access node switches) will adopt an oligopoly structure.19

Private sector

players will populate the active infrastructure market; the existing arm of GLCs, which operate

on this tier, should be privatised.

Most importantly, the content and service provision market will be fully liberalised. This

requires existing content provision arms of GLCs (e.g. BlueHyppo) to be severed from

ownership of both passive and active infrastructure. Liberalisation of this market tier is expected

to induce competition and result in increased efficiency and consumer choice.

Table 6: The Service Competition Model

Level Market Structure Players

Upstream Passive

infrastructure Monopoly GLCs (e.g. TM, TNB and MAHB)

Mid-stream Active

infrastructure Oligopoly

Private operational companies (OpCos)

including privatised arms of GLCs which

operate on this tier; access is license-based

Downstream

Content &

service

provision

Fully

liberalised

Private content and service providers

(ServeCos) including privatised arms of

GLCs which operate on this tier; minimal

barriers to entry and exit

Implementing agencies:

GLC Oversight Authority, Competition Commission, industry regulators and all GLICs

(iii) Lack of a facilitative legal and regulatory framework

In some industries, GLCs were established to achieve public policy objectives due to weak

regulatory capacity or the absence of an industry policy (e.g. aviation).

However, in transitioning towards a more laissez-faire approach, it is important for the

Government to strengthen the legal and regulatory framework to level the playing field between

GLCs and private businesses and alleviate private investor uncertainty (see papers on regulatory

standards for NEM and recommendations on implementing the Competition Law.)

A robust, well-enforced governance framework, which defines what falls within GLCs’

mandates, will also reduce the opportunity for political interference in their day-to-day

operations, hence contributing towards more transparent and efficient companies.

19

Full liberalization of the active infrastructure market tends to lead to resource duplication, subscale operations and coordination issues

32

Recommendations:

Include GLCs under the provisions of the Competition Act to ensure that their trade

practices refrain from being anti-competitive – it is essential that GLCs are not exempted;

Mandate via laws and legislation any public policy obligations that have to be undertaken by

GLCs (e.g. universal access requirements). Information on these obligations, the resulting

costs and impacts upon GLC performance and resources should be disclosed to the public;

Refrain from providing automatic Government guarantees for GLC liabilities;

Grant credit to GLCs on the same terms and conditions as those for private sector firms;

Remove both written and unwritten barriers in the Government procurement supply chain

which affords GLCs special treatment;

Legislate against interference in the day-to-day management of GLCs by political entities

and other Government agencies to curb ministerial discretion;

Prohibit officers and directors in GLCs from being involved in formulating or enforcing

regulations that directly affect their companies. This precludes, amongst others, GLC Board

members from concurrently serving as members of regulatory bodies.

(iv) High barriers to entry into new strategic industries

Efforts to develop new strategic industries often are thwarted due to risk aversion by the private

sector or the lack of adequate infrastructure and venture capital availability.

3.7.1 Recommendations

GLICs such as Khazanah and Ekuinas already are investing in new industries at various stages of

development (e.g. start-up and growth). The Tenth Malaysia Plan (10MP) has highlighted that

GLCs will continue to play a catalytic facilitator role by venturing into new industries with a

view of lowering barriers to entry.

The NEAC concurs with this approach and also recommends that GLCs should be trailblazers in

adopting sustainable practices. The following are recommended:

A clear exit strategy is required to ensure that GLCs do not linger in mature industries;

GLCs should establish Corporate Venture Capital (CVC) arms. Through CVC, GLCs

will invest directly in start-up firms and SMEs to which they may provide funds,

management services and technical expertise. CVC investments are be motivated by the

potential competitive advantage afforded by the investees upon their maturity;

GLCs can partner with non-profit organisations to venture into social enterprises, which

are businesses where social and environmental goals, rather than profits, are central to

their mission. Operating surpluses are not distributed but re-invested to fund business

expansion. Examples of social enterprise objectives include employment of the

disadvantaged or people with disabilities and recycling by using industrial waste as

product inputs. A social enterprise GLC also could be established specifically to provide

labour training and up-skilling programmes for the 40% lowest-earning households in

line with the Government’s ambition of alleviating poverty;

Adopt the triple-bottom-line (TBL) reporting method, which highlights not only a

company’s financial, but also social and environmental performance. TBL reporting

currently is recommended but not mandated in Malaysia.

33

(v) Ongoing need to develop Bumiputera entrepreneurial participation

Socioeconomic restructuring efforts have yielded significant results, as evidenced by the growth

of a thriving Bumiputera professional class. However, there is a need to continue stimulating

Bumiputera participation in entrepreneurial ventures to achieve the development of a Bumiputera

Commercial Industrial Community (BCIC).

3.8.1 Recommendations

Expand upon existing vendor development programmes by partnering with Bumiputera-

controlled SMEs and providing them management and technical expertise in order to assist

them in making the leap into becoming mature companies;

Privatise a selection of GLCs to Bumiputera entrepreneur consortiums through a transparent

open tender process, and ensuring that privatisation is accorded to a broad range of new

Bumiputera entrepreneurs based on merit and capacity;

Require a minimum representation of Bumiputera officers in professional management

teams appointed to run GLCs. Selection of these officers from within the Bumiputera

candidate pool must be transparent and meritocratic. Performance incentives such as

opportunities for management buyout of successfully restructured GLCs also contribute to

the achievement of the 30% macro-level Bumiputera equity ownership target;

GLCs to develop an apprenticeship and internship system to build a bigger pool of

Bumiputera entrepreneurs and technical experts in various fields in both the services and the

real sector; the German model offers useful lessons;

GLCs to form a conglomerate to develop one-stop business development services (BDS)

to SMEs (See recommendations on developing the BCIC SMEs in the SME chapter).

Implementation Issues

Many agencies will be involved in the implementation of the recommendations above. However,

further detailed work is required in implementing these recommendations. Given that Khazanah

already has instituted a divestment policy, its input in developing the proposed privatisation

model into an implementation action plan will be useful. Managing stakeholders’ perceptions

and understanding of this policy is important for buy-in throughout the process. A review of past

privatisation exercises is required to better appreciate the sub-optimal actions and measures.

Such lessons also will be useful to manage similar risks, which could also occur in this

privatisation model. Equally important is to address the implementation impact on the

distribution of income objectives and general consumer welfare.

It should be noted that divestments and listing plans are subject to prevailing market conditions.

Expected Outcomes

In summary, expected outcomes from the recommendations would be as follows:

Favourable fiscal results from privatisation model;

Greater scope and opportunities for private sector investment;

A clear separation of regulation and operations; enhancement of regulatory capacity in

the various sectors will improve private sector confidence;

Improved efficiency from various measures reinforcing each other into a virtuous cycle

of transparency, market discipline, fair practices, leading to removal of monopolies,

market-based pricing structures, higher productivity and competitiveness;

34

Divestment through the capital market will improve liquidity, build greater confidence in

the equity market, resulting in higher investments by both domestic and foreign investors.

Setting up the GOA will ensure coordinated policies on GLCs and that GLCs perform according

to new mandates as agents of change in the NEM. Oversight functions will improve overall

transparency and disclosure levels to its ultimate owners, the tax-paying public. Maintenance of

data will also form a sound basis for further studies on GLCs and allow trouble spots to be

identified and corrective measures taken promptly, and avoid loss-making developments.

V. CONCLUSION

For Malaysia to transform into a high-income, inclusive and sustainable economy, it cannot

continue the status quo where the State dominates the market. If the private sector is to drive the

economy, the Government has to concentrate on becoming a regulator and facilitator by

nurturing an optimal environment for all businesses to grow. Public sector governance requires

Malaysia to strengthen its regulatory standards and oversight, and cease to directly participate in

the economy to achieve its goals. It is imperative for Malaysia to benchmark against

international best practices, particularly in pursuing a separation between its regulatory and

participatory functions to avoid skewing the playing field against the private sector.

GLC transformation efforts under the oversight of the PCG are already showing results through

the sustained improvement in the G20’s performance trajectory. Initiatives under the

Programme, such as pursuing new economy investments (e.g. green technology) and divestment

of non-core assets, are congruent with the recommendations of the NEAC. However, these

initiatives should be expanded to all GLCs, including State-owned companies, to ensure that the

best practices permeate throughout the entire sector.

Adoption of the recommendations of the NEAC to re-engineer the role of the Government in

business, in conjunction with other market optimisation initiatives such as deregulation and

improved enforcement, will allow Malaysia to re-energise the private sector, create a competitive

domestic economy, as well as enhance the sources and sustainability of growth to enable it to

become a developed nation by 2020.

Group A of the National Economic Advisory Council

September 2010

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Appendix 1: Overview of Previous Privatisation Drives in Malaysia

State enterprises were conceived as a means to achieve economic development and address

under-provision of public goods by the private sector. The introduction of the New Economic

Policy (NEP) also cast Government enterprises as the main vehicles for reaching wealth

redistribution targets. This sector expanded significantly since late 1960s with Government

enterprises numbering over 1,100 entities prior to the privatisation drive.20

However, most of the

entities were perpetual loss-makers, with an aggregate net loss of RM1.9bn in 1987.21

In the 1980s, as the developed world embraced free market ideals, the Malaysian Government

under the then-new Prime Minister, Tun Dr Mahathir Mohamad, reversed its stance on State

interventionism and ostentatiously set out to privatise public enterprises.

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

20

Jomo & Tan (2002) ‘Privatisation and Renationalisation in Malaysia: A Survey’ 21

562 companies recorded aggregate losses of RM7.5bn while another 446 made collective profits of RM5.6bn

36

To reduce the burden on the Government’s fiscal budget

To improve the productivity and efficiency of State enterprises

It also became an avenue for achieving increased Bumiputera corporate participation via the

requirement for at least 30% of the privatised entity’s equity to be held by Bumiputera investors.

Shareholdings by foreign investors were capped at 25% of equity.

Privatisation was initiated by either the Government or the private sector. In a private sector-

initiated privatisation, the first promoter to submit a detailed feasibility study earned the right to

negotiate the proposed privatisation of the studied entity with the Government and no other

privately commissioned feasibility study would be accepted. However, should the negotiations

fail, the Government may open a public tender or commence negotiations with a single, selected

party.

Some of the State enterprises that were privatised in this period were Sistem Telekom Malaysia

(STM, now Telekom Malaysia Berhad), Lembaga Letrik Negara (LLN, now Tenaga Nasional

Berhad) and Klang Container Terminal (KCT).

Implementation pitfalls

The execution of the privatisation policy, however, was not without its shortcomings, several of

which are listed below:

Privatisation occurred only in form and not in substance. Many GLCs remained under de

facto Government control, despite having part of their equity divested to private investors.

This exercise hence failed to resolve most of the governance issues that originally plagued

the entities and may have worsened the aggregate public sector balance sheet by the ‘natural

selection’ tendency to privatise only successful enterprises.

The ‘first-come-first-served’ approach to private sector-initiated privatisation was perceived

as opaque and potentially biased towards well-connected promoters who could have access to

inside information

Privatisation was not accompanied by greater competition, hence effectively converting

public monopolies into private monopolies

Sweeteners to encourage employees to migrate to the privatised entities (e.g.: job security,

requirements that emoluments must be at least as much as what the employees received in

the public sector) restricted the entities’ ability to right-size its workforce and trim costs

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

business lines or companies which were instituted to meet socioeconomic objectives

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Appendix 2: Existing definitions of GLCs in Malaysia

Term Government-linked

companies (GLCs)

Government-linked

investment companies

(GLICs)

Non-financial public

enterprises (NFPEs)

Issuing

authority

Putrajaya Committee on

GLC Transformation

(PCG)

Putrajaya Committee on

GLC Transformation

(PCG)

Bank Negara Malaysia

(BNM)

Definition

Companies that have a

primary commercial

objective and in which the

Malaysian Government

has a direct controlling

stake.

Federal Government

linked investment

companies that allocate

some or all of their funds

to GLC investments.

Business entities which

are owned by the

Government and involved

in the sale of goods and

commercial services or

manufacturing activities,

38

Controlling stake refers to

the Government's ability

(not just percentage

ownership) to appoint

Board members, senior

management, and/or make

major decisions (e.g.

contract awards, strategy,

restructuring and

financing, acquisitions

and divestments etc.) for

GLCs, either directly or

through GLICs.

Defined by the Federal

Government’s influence

in: appointing/approving

Board members and

senior management, and

having these individuals

report directly to the

Government, as well as in

providing funds for

operations and/or

guaranteeing capital (and

some income) placed by

unit holders.

Currently includes: EPF,

Khazanah, KWAP,

LTAT, LTH, MKD and

PNB.

with:

• 51% Government

equity

• >RM100 million sales

turnover

• Large impact on the

economy

Appendix 3: Summary statistics of GLCs compiled by NEAC*

Federal State Total Federal (%) State (%)

Number of entities 332 113 445 74.61% 25.39%

Listed 53 1 54 97.78% 2.22%

Unlisted 279 112 391 72.00% 28.00%

Public limited companies 91 9 100 91.00% 9.00%

Private limited companies 241 90 331 72.81% 27.19%

Statutory bodies 0 6 6

39

Unlisted public companies 38 0 38

Dormant entities 17 10 27

Public float > 50% 9 0 9

Public float 0% < x < 50% 25 1 26

Negative shareholders' funds 17 14 31 5.12% 12.39%

Loss-makers 41 38 79 12.35% 33.63%

Public (Bhd) loss-makers 19 2 21 20.88% 22.22%

Private (Sdn Bhd) loss-makers 22 34 56 9.13% 37.78%

Statutory body loss-makers 0 2 2

* GLICs and State Governments which submitted information are: KWAP, KWSP, LTAT, LTH,

MKD, Kelantan, Penang, Perak, Sabah, Sarawak, Selangor and Terengganu. Information on

GLCs under PNB and Khazanah were retrieved from their websites. Information submitted is

based on the latest set of published accounts.