GLCs crowding out private investment, says ADB economist

PETALING JAYA: The growing presence of government-linked corporations (GLCs) in recent years is crowding out real private investment, according to Asian Development Bank (ADB) lead economist Jayant Menon.

In his recent policy paper titled “Government-Linked Companies: Impacts on the Malaysian Economy”, he said private firms tend to invest less in industries where GLCs are dominant, as the latter are seen to have preferential access to government contracts and benefit from regulations.

Based on his study, Menon said he found that when GLCs are dominant in an industry, investment by private firms in the sector is significantly negatively impacted.

Conversely, when GLCs do not dominate an industry, the impact on private investment is not significant.

“This suggests a negative relationship between the share of GLCs in an industry and the rate of investment by private firms,” he said.

Using either the industry share of operating revenue or income as a proxy for market share, Menon said he found that GLCs are most dominant in utilities (93%) and transport and warehousing (80%).

Nevertheless, he said GLCs tend to play a dominant role in all sectors except for some food-related, mineral, and services industries.

Meanwhile, Jayant said despite the Economic Transformation Programme undertaken by the government previously to reduce its role in the country’s business, GLCs’ shares in the FTSE Bursa Malaysia Kuala Lumpur Composite Index of the stock market increased from 43.7% to 47.1% between 2011 and 2015.

Although the programme was declared a success when it was concluded in 2015, he said the net result left the authority playing an even greater role in business.

Jayant said this is given that the divestment programme was associated with an even more aggressive programme of diversification, where government entered new sectors as it appeared to be reducing its influence in existing ones.

Therefore, he recommends that the government implement a transparent, timebound and committed programme of divestment, seeing it as the only real solution.

“Commitment to divestment is admittedly complicated and requires a separate study focusing on much broader issues. But at a minimum, it would seem to require confronting vested interests and addressing the underlying political economy motivations that continue to provide a lifeline for GLCs and allowing them to flourish,” Jayant said.