Khazanah’s response to ‘Government-Linked Companies: Impacts on the Malaysian Economy’ by IDEAS

We refer to various news reports including that entitled, “Government-Linked Companies: Impact on the Malaysian Economy” by Jayant Menon. The article was published on the 18th of December 2017 as a research piece under the Institute for Democracy and Economic Affairs (“IDEAS”), as Policy IDEAS No. 45.

GLCs

The article explores the impacts of Government-Linked Companies (“GLCs”) on the Malaysian economy from four perspectives — Impact on Private Investment; Impact on Governance; Impact on Inequality; and Impact on Government Revenues. As a whole, the article paints a negative picture of GLCs, arguing that GLCs negatively impact the Malaysian economy along all four perspectives.

However, the evidence put forth by this policy paper is weak and, often, missing altogether thereby lending itself to misleading conclusions. Moreover, the paper fails to provide adequate contextualisation to its arguments, leading to unbalanced perspectives.

For instance, consider one of the study’s statements which has made the media headlines. I refer to “GLC bailouts cost Putrajaya RM85.51b over a period of 36 years” by the Malay Mail on December 19, 2017. The statement was actually taken from an article by the Malaysian Insight entitled, “How Malaysia Inc racked up RM85.5 billion losses” published on April 1, 2017. The Malaysian Insight article is incorrect on several fronts.

For one, it lists the “bail-out” of Renong Group (“Renong”) for RM25 billion. In actuality, Renong was taken over by Danasaham Berhad for RM4.1billion, even though Renong was reportedly saddled with approximately RM26 billion of debt at the time. This cannot be considered a bailout of a State-Owned Enterprise (“SOE”) or GLC simply because Renong was a listed company, controlled by private shareholders.

Secondly, even if Renong was a SOE or GLC, that RM4.1 billion outlay is now a subsidiary of Khazanah, where the value to Khazanah, incorporating both the valuation of the company and total dividends to date, stand at approximately RM19.5 billion against a cost of approximately RM7.0 billion for Khazanah (RM4.1 billion from the Danasaham acquisition and other assets from the Renong Group that was acquired). As it turns out, this is therefore a profitable investment and not a bail-out. It also saved some major strategic national assets, preventing key national assets from falling into foreign hands as in the case of South Korea, Thailand and Indonesia.

On a broader scale, the timeline given for the bailouts begins in 1980. As such, any meaningful discussion of bailouts needs to include the context of changing political economy policy and the mix between state and market instruments. The early-1980s, for example, was a time of stronger state instruments including, for instance, the National Industrialisation Policy, the National Heavy Industry Policy, Malaysia Incorporated Policy and the Privatisation Policy. In the late-1980s, following the Plaza Accord deliberations, Malaysia shifted to a development model that focused more on Foreign Direct Investments (“FDI”). By the early to mid-1990s, privatisation was heavily underway and many government departments and agencies had been taken private.

In the late 1990s, the government used state instruments such as Danaharta and Danamodal, for instance, to stabilise the economy post the 1997/1998 Asian Financial Crisis. Once the economy had stabilised, YAB Tun Abdullah Badawi, the Prime Minister at the time, launched the GLC Transformation Programme (“GLCT”) — where Khazanah was the Secretariat from 2004 to 2015 when the programme was graduated – which was carried on by YAB Dato’ Sri Najib Razak. This was meant to develop a more balanced economy with both private sector companies and high-performing GLCs. The New Economic Model which was launched in 2010 addressed the issue of the role of Government in Business and indeed one outcome of this was to rebalance the presence of both non-GLCs and GLCs that resulted in an acceleration of divestment of non-core, non-competitive assets of GLCs, increasing the collaboration of GLCs and non-GLCs in business combinations and improving the capacity and quality of economic regulation. The policies that were adopted in the different eras of Malaysia Inc. need to be understood in all their complexities, contexts and richness before conclusions can be drawn, something the policy paper fails to address.

Turning to the IDEAS policy paper, we now address the four ostensible conclusions of the report. As a whole, the primary issue with this policy paper is that the evidence put forth is weak and, often, missing altogether leading to misguided conclusions. Indeed, the arguments seemed to be based on conjecture and an intent to push forward an ideological neo-liberal perspective which has been widely discredited – see for instance arguments by Nobel Laureates Joseph Stiglitz, Amartya Sen, Robert Shiller, and Paul Krugman, among others – since the 2008 Global Financial Crisis.

On the first perspective, the impact of GLCs on private investment. The paper makes the case that, as a result of being “…seen to have preferential access to government contracts and…favourable government regulations” GLCs ‘crowd out’ private investment. It would have been more useful if the author had provided proof of these claims of preferential access and favourable government regulations on a specific basis. Furthermore, the author presents empirical evidence from a paper he co-authored which found that investments among private companies tended to decrease in sectors with higher presence of GLCs.

This, the author claims, is evidence of crowding out. This claim is incomplete; more details are required. After all, one alternative explanation for the results is that GLCs tend to be involved in sectors in which new investments are difficult to do, in general. The fixed effects model used by the author controls for individual firm characteristics that are invariant across time, but they do not control for sector as the unit of observation was individual firms. As such, the coefficient on GLC presence may just be a proxy for (more difficult) sectors.

Furthermore, to prove that crowding out is occurring, the evidence needs to show that absent the presence of big GLCs in a given sector, private investment in that sector must be increasing. If there was no significant increase in private investment in so-called less GLC-dominant sectors (as was the case in the paper), it could be the case that private companies may not be able to identify suitable investment opportunities and have instead chosen to return cash via dividends and buybacks to shareholders. Therefore, what I would recommend the author to do is to consider industry structure; perhaps the problem is not GLCs per se but on monopolies or oligopolies, which need not be government-owned. A study comparing sectors in which there were dominant private players versus sectors in which there were dominant GLCs would be helpful; if the data shows that private investment of smaller challengers increased in the private-dominant sector versus the GLC-dominant sector, then a case for crowding out by GLCs can be made. Otherwise, the evidence is inconclusive, and more is needed.

In addition, the article makes no mention of the “crowding out” of GLCs such as in the case of the first generation Independent Power Producers (“IPPs”) on Tenaga Nasional which has been well-documented, among others. To be sure, our position throughout the whole transformation program and beyond is that we strongly believe that fair and proper competition is good for the economy and good for companies. To say, without presenting credible evidence, that GLCs have crowded out others due to favourable regulatory capture (when in some cases it was to the contrary) is not consistent with reality.

Another case in point is where GLCs have played a positive role in catalysing investments into sectors or ventures that the non-GLCs were either not willing or not able to invest for various reasons including high risk, long gestation periods or large financing and a requirement for difficult coordination capacity. Your readers may recall that in the aftermath of the Global Financial Crisis of 2008, the Government under Prime Minister Dato Seri Najib Razak had called for an increase in private investments under a stimulus package launched in 2009. In line with trends around the region and the world then, take up by the private sector was generally slow. In Malaysia, the presence of strengthened GLCs, who were about five years into the GLCT, allowed them to play a commercial and developmental role, in line with their mandates. Examples of these catalytic investments include the development of economic corridors such as Iskandar Malaysia and the Eastern Corridor (by Petronas), investments in a movie studio (Pinewood Iskandar Malaysia Studios), theme parks, education services clusters, and the Desaru destination resort among others. These catalytic investments have been, by and large, beneficial to the overall Malaysian economy, through which the non-GLC firms have also benefitted.

On the second perspective, with regards to the impact of GLCs on governance. While it is true that there are cases of SOEs domestically and around the world can be susceptible to cases of poor governance or even corruption, the many failures of corporate governance among private companies indicate it is by no means a failure of GLCs/SOES per se.  The article fails to highlight that, for the GLCs which had undergone the GLCT (the G20 consisting of 17 GLCs and 5 GLICs – of which Khazanah was the secretariat), these companies have actually enjoyed a period of stability, recovery, growth, and success (of course there is a variance) with good governance practices. Indeed, integrity, transparency and accountability — symbolised best by the Headline KPIs — was the bedrock of that success, with support by the government under YAB Tun Abdullah Badawi and YAB Dato’ Sri Najib Razak.

Indeed, in the recent Minority Shareholder Watchdog Group and ASEAN Corporate Governance Awards (see the Edge, December 11 to December 17 edition), seven out of the top ten companies in the “Overall Corporate Governance and Performance” rankings were SOEs — Bursa Malaysia (1), Petronas Dagangan (2), TM (4), Maybank (5), TNB (8), Axiata (9) and Petronas Gas (10).

On the third perspective, the impact of GLCs on Inequality, the paper argues that, “The link between GLCs and inequality operates through the central role that GLCs have been assigned to play in pursuing the affirmative action program.” It would be useful to note that the neo-liberal perspective of Economics tends to reject affirmative action as a policy tool. Indeed, if the author had meant to argue against a particular affirmative action point of view, it would have been helpful had he been more specific.

Yet, this perspective that GLCs contribute to wider inequality is based on conjecture. In the article, the author argues, “More than 13 percent of GDP in 2016 is classified as billionaire wealth, and more than 95 percent of this is said to consist of wealth emanating from the crony sectors. Since GLCs dominate this sector, this suggests a potential link with the increase in asset and wealth inequality in the country.” It fails to say “who” said that 95% of wealth emanates from crony sectors. It also simply suggests a potential link without providing any evidence. It also assumes that GLCs are equivalent to crony capitalism without any proof.

Even so, it fails to be balanced by neglecting to mention that GLCs have a wider mandate than private companies, undertaking not just commercial activities but also developmental ones. Many of these are not profitable and would never be done by private companies. Yet, it is the role of GLCs to ensure that services are made available to all Malaysians. This includes the provision of unprofitable operations in rural areas by Telekom Malaysia, MASwings, Tenaga Nasional, carrying strategically important extra electricity reserve margin by Tenaga Nasional, building affordable housing by UEM Group, as well as undertaking a lot of Corporate Responsibility Initiatives.

On the fourth perspective, the impact of GLCs on Government Revenues. The primary avenue of critique is on ‘special treatment’ from the government, such as direct subsidies, concessionary financing, state-backed guarantees, and so on. The article also discusses bailouts, for instance of MAB (although it failed to say that this was via KNB and not the federal government and that MAB/MAS in itself was a failed privatisation that resulted in the Government having to purchase MAS from private shareholders in 2001) and of Proton in 2016 (although it failed to say that Proton is now a private company). It would also have been useful for the article to give real detailed examples of ‘special treatment’ but it did not provide any.

Moreover, the G20, as reported at its graduation in July 2015, had shown an increase in market cap of 2.9x from RM134 billion in May 2004 to RM386 billion in July 2015, an increase of RM252 billion. During that period, the G20 also paid RM108.6 billion of dividends (much of it to the rakyat through trust agencies such as EPF, PNB, LTH, etc.) and RM62.7 billion of taxes to the government. This does not yet include Petronas which contributes even more to government revenue. These facts obviously do not paint the picture of a fiscal drain, quite the contrary, and indeed, the article neglects to mention these facts.

In conclusion, our initial response to what appears to be the four main assertions of the report are that the conclusions are unfounded and certainly at best selective and misleading, with little to no detailed evidence or proof. Our view has been consistent all along that we should not judge corporate performance by its parentage (state or private sector held) but rather by its behaviour and to therefore anchor on facts rather than ideology. Both state vehicles and private sector vehicles can fail, and both can succeed. A modern economy (including the likes of France, Singapore, Israel, China and even the United States – see for instance work by Ha-Joon Chang, Ricardo Hausmann, Dani Rodrik and Mariana Mazzucato, among others) has a combination and mix of both state and private sector players. Indeed, neoliberal economics post the 2008 Global Financial Crisis has much to answer for and much of the literature in Economics today focuses on soul searching towards a more humane form of capitalism.

Malaysia has always anchored policies on growth with equity and has used a pragmatic mix of market and state instruments. It’s of course by no means perfect but it has by and large delivered commendable results over the best part of our 60 years as an independent nation. Of course, we must continue to improve our corporate performance and corporate governance, both GLCs and private sector firms alike, and, for posterity, there is still much room to grow. Indeed, well-reasoned studies would certainly support this improvement and are certainly welcomed. Khazanah looks forward to engaging with individuals or entities that provide constructive criticism based on well-found evidence. However, for the reasons outlined above and more, this study leaves a lot to be desired. It would have been better to have more of the ‘logical’ in this ideological piece.

Nicholas Khaw
Senior Vice President, Economic Development Section,
Khazanah Research and Investment Strategy Division

For Khazanah Nasional Berhad
Secretariat to the Putrajaya Committee for GLC High Performance (2004-2015)