It’s time to tame the GLC ‘monster’
Now is the moment for much-needed reforms which must include shrinking the Government’s involvement in business.
DURING the GE14 campaign period, Tun Dr Mahathir Mohamad had famously referred to Malaysia’s complex ownership structure of government- linked companies (GLCs) as a “monster”.
There was irony in this statement because Dr Mahathir, after all, had a played a leading role in creating this structure that has enterprises in every sector of the economy.
However, he noted too that this structure was created to serve a “noble vision”, but the GLCs had evolved into tools exploited by politicians to serve their vested interests.
There is undoubtedly a deep sense of frustration among Malaysians, particularly business people, about the pervasiveness of GLCs in the economy.
The contention is that the GLCs crowd out private firms in key economic segments, except the industrial and manufacturing sectors.
Under Barisan Nasional, there had been numerous promises to reform the GLCs, particularly during economic crises.
Critics also note that the presence of influential politicians in the GLCs has weakened managerial practices, undermining the performance of these firms.
Through GLCs, corrupt politicians have channelled concessions to private companies in exchange for campaign contributions.
Something must be urgently done about the GLCs. However, what is brewing as Malaysia embarks on an arduous journey of instituting reforms is a serious divide in opinion about how to deal with these GLCs.
The most commonly articulated panacea is to privatise the GLCs. Unfortunately, it is not so simple. This debate assumes a homogenisation of GLCs when in fact there is a variety of such institutions that play different roles in the economy.
How we got here
The introduction of the New Economic Policy (NEP) in 1970 precipitated extensive government intervention in the economy. The NEP was a progressive 20-year affirmative action plan to eradicate poverty and equitably redistribute wealth between ethnic groups. Bumiputera corporate ownership then stood at a mere 1.5%.
Government intervention entailed establishing public enterprises to acquire primarily foreign-owned businesses. These public enterprises, later renamed GLCs, were also introduced at the federal and state levels to play a developmental role in the economy.
Among these GLCs were development financial institutions tasked with nurturing domestic SMEs, funding ventures in new sectors and promoting R&D.
Other GLCs included sectoral-based institutions to achieve core development goals and socioeconomic-type statutory bodies.
After Dr Mahathir was first appointed Prime Minister in 1981, he embarked on privatisation, partly to rid the government of the huge number of GLCs, but also to create a new breed of bumiputra entrepreneurs who owned business conglomerates of international repute.
He achieved this goal but the 1997 Asian currency crisis unravelled his plans.
The government had to renationalise many of these privatised companies, creating again a public sector that owned a large number of GLCs.
A plan was initiated to reform GLCs, mainly those listed on the stock exchange. Professionals from the private sector were hired to manage them, while politicians were removed from their boards of directors.
These professionals, most of whom had never served in government, were paid salaries benchmarked against private sector remuneration, an issue of much contention today.
Another criticism was that these executives were subservient to the dictates of the Prime Minister.
One outcome of this reform was that these GLCs emerged as leading firms. Since the turn of the century, GLCs have been among at least seven of Malaysia’s top 10 listed firms.
GLICs and listed GLCs
GLCs have, however, not evolved in a coherently linear direction. They are required to fulfil a range of business and social duties, implemented by different institutions.
At the federal level, the GLCs are primarily owned by five savingsand investment-based institutions (the Employees Provident Fund, Retirement Fund (Inc), Lembaga Tabung Haji, Lembaga Tabung Angkatan Tentera, and Permodalan Nasional Bhd), sovereign wealth fund Khazanah Nasional Bhd, and the government’s primary holding company, Minister of Finance Inc.
Collectively termed as government-linked investment companies (GLICs), these seven vary considerably in size and objectives, and are ultimately controlled by the Finance Minister through a complex pyramid-type organisational structure.
In early 2017, of the 900-odd companies listed on Bursa Malaysia, 70 were GLCs, that is, those with a GLIC as the largest shareholder. The 20 largest among these companies, known as the “G20”, accounted for about 42% of the exchange’s total market capitalisation.
What is of concern is that the government has substantial equity interests – ranging from 5% to 37% – in 140 listed firms. However, the government is not the largest shareholder in these companies; instead, the majority owners are individuals or foreign enterprises.
It is unclear why the government has sought to secure such huge shareholdings in these companies that it does not control. This sort of equity ownership could well be in order to earn dividends from the companies, but such shareholdings can lead to hostile takeovers.
Business owners have long complained of expropriation of their companies by the government, ostensibly as part of its equity redistribution exercise. Fear of expropriation has undermined investor confidence and hampered R&D endeavours to shape globally competitive enterprises.
Reforming the GLCs
Given the scale and scope of government involvement in the Malaysian economy, urgent reforms are necessary to ensure the GLCs function well and are taken out of the overwhelming control of politicians. There is no one remedy to deal with this colossal government-business complex. A thoughtful debate is imperative after a comprehensive study of these GLCs.
In the short term, institutional reforms can be formulated to ensure accountable and transparent governance of the companies, specifically to address concentration of economic power in the Finance Ministry.
Power has to be devolved to key oversight institutions such as Bank Negara, the Securities Commission and opposition-led parliamentary committees.
Within GLCs, autonomous technocratic professionals must be employed, based on merit and not ethnicity, so that inefficiencies and abuse of power can be curbed. These professionals can be appointed by the Finance Minister, who will have jurisdiction over these GLCs, though subject to parliamentary oversight.
In the long term, as part of the GLC reforms, there must be a review of how statutory bodies, holding companies and foundations function. The government should consider the implications of the restructuring on a sector-by-sector basis. The modes of reforms to be considered include divestment where government presence is not necessary, for example in construction, media and tourism.
On the other hand, the government would need to retain ownership of GLCs in utilities, banking, oil and gas, defence, plantations, airport services and ports.
The transfer of ownership of huge firms in these sectors to private investors may not serve the nation’s interest.
However, in these cases, partial privatisation through the listing of the GLCs has been proposed as a way to raise funds while extending equity ownership to private investors. The government will retain control of these companies.
While reforms are being debated, it must be considered that GLCs have played an important developmental role, creating a vibrant domestic privately-owned enterprise base, promoting mechanisms to encourage private firms to venture into new economic sectors, and enhancing the development of rural- and niche-based enterprises. GLCs must still play this role.
Evidently, a number of issues must be reviewed when reforming this interlocking nexus of government and business. It is therefore surprising that the reform-minded Pakatan Harapan government has yet to act on this matter, even as debates about the GLCs gain curency.
Collectively termed as governmentlinked investment companies (GLICs), these seven vary considerably in size and objectives, and are ultimately controlled by the Finance Minister through a complex pyramid-type organisational structure.
Edmund Terence Gomez is professor of political economy at the Faculty of Economics & Administration, Universiti Malaya. The views expressed here are entirely the writer’s own.