Written by Nur Zulaikha Azmi, Research Executive at IDEAS
First published in The Edge Malaysia on 19 October 2020
For one reason or another government-linked companies (GLCs) continue to make headlines. Whether it is questionable new appointments or controversial merger proposals, debate on GLCs is a permanent feature of Malaysia’s political economy. When other countries look at Malaysia, it is not just the number of GLCs that is surprising, but the fact that we have no single agency overseeing them all.
In Malaysia, we are more familiar with the term GLC than state-owned enterprises (SOE). Unlike other countries which use the term SOE, we use GLCs to refer to enterprises with commercial objectives and government as the majority shareholder, either directly or indirectly via government linked investment companies (GLICs) such as Khazanah Nasional and the Employee Provident Fund (EPF).
The term SOE is broader and in Malaysia’s case includes GLCs, GLICs, statutory bodies and government agencies. GLCs are distinct from other SOEs as they are incorporated as companies under the Companies Act 1965 and considered as “commercial” because they engage in markets where competition occurs or could occur.
As GLCs have a huge presence in the economy, accounting for 42% of the total market capitalisation of the stock exchange, a clear policy on GLCs is essential.
GLCs also play an important role in achieving social objectives as demonstrated during this pandemic when GLCs were mobilised as part of the government “ecosystem” to support vulnerable groups.
In an OECD survey of 31 countries, half of the countries surveyed have a central entity that exercises ownership in SOEs. This includes China’s State-owned Assets Supervision and Administration Commission of the State Council (SASAC), India’s Department of Public Enterprises (DPE) and Korea Institute of Public Finance (KIPF). These agencies set policy guidelines for SOE ownership and monitor their performance.
There are multiple benefits of having a central agency for GLCs. Periodic review of continued government ownership in the companies can be carried out systematically. In addition, setting up a coordinating agency will institutionalise the role of the state in managing GLCs. The agency will also clearly spell out the policy objectives of GLCs and once this is set, the focus can progress towards monitoring the performances of GLCs.
A central agency for GLCs would exercise ownership rights over all GLCs and, on top of that, would have the capacity and competency to effectively scrutinise and direct the appointment of the board of directors, set and monitor the objectives of each GLC, and to vote in the Board meetings or annual general meetings (AGM) on behalf of the government.
This central agency for GLCs will also be held accountable to the relevant representative bodies and have clearly defined relationships with applicable public bodies, including the Auditor General’s Department.
The situation in Malaysia
Malaysia does not have a centralised entity that owns GLCs. The Ministry of Finance Inc. owns 70 companies, while other GLICs and statutory bodies also own GLCs such as MARA’s ownership of 57 companies which are considered as GLCs.
The companies owned by MOF Inc. are managed and supervised by a division under MOF called Government Investment Companies (GIC), but other GLCs such as the 57 companies owned by MARA or GLCs owned by other GLICs and statutory bodies are not supervised by a coordination agency or ministry.
In 2004, the government set up the GLC Transformation Program to turn selected GLCs into high performance companies. Despite some 20 GLCs graduating from the program, the guidelines produced under the program did not extend to all GLCs.
This includes the manuals for procurement and governance best practices which were published as recommendations but are not binding. The lack of institutionalisation of reform may result in sliding back on some of the reforms over time. A centralised agency can help to ensure reforms stick.
However, there are some risks with creating one agency with so much power. First, GLCs come in many forms and structures and there is a long list of GLCs with different performance levels. Some of the higher performing GLCs that ranks in the top 30 of the stock market are popular household names such as Tenaga Nasional Berhad, Petronas and Telekom Malaysia. There are also the unlisted GLCs such as TH Hotels and Resorts and MARA Corporation.
The different levels of GLC performance and presence across sectors means the task of setting up the goals and performance monitoring of GLC is not easy. For example, the justification for GLCs’ presence in the public transportation sector is different from those in the property sector. There is less justification for government presence in competitive sectors with high numbers of private providers like hospitality, but this may not be as straightforward for the telecommunications sector.
Second, a blanket solution cannot be applied to all GLCs based on one-size-fits-all objectives and performance indicators. These must be defined on a case-by-case basis. Hence, it will be difficult to have a central agency exercising ownership for all GLCs.
Third, it is also risky to create a central agency as it might become a “central protection agency” of all GLCs. Instead of improving the monitoring of GLCs, the agency might end up saving GLCs in distress. Creating another level of bureaucracy will also cost more taxpayers money and in the future will become another layer to tackle.
Hence, beyond having a centralised entity that owns all GLCs, what Malaysia needs is a clear and central direction in the government’s objectives for GLCs.
It is vital to have clarity in the role of GLCs in the economy. The government should recognise the key role of GLCs and communicate it clearly so that it can be achieved and monitored effectively.
The role of GLCs should be to support structural reform in strategic sectors, and then to gradually exit from those sectors when that presence is no longer warranted. GLCs should be put on four different paths.
These paths can be consolidation, privatisation, liquidation or corporatization. The government’s focus behind setting a policy for the direction of GLC must be to create an environment that is more conducive to entrepreneurship and growth of the market.
Periodic review of the government’s ownership in GLCs must be undertaken and progress of this policy has to be monitored. Government’s GLC ownerships can be classified into two: strategic and commercial ownership, where the former means government exercising control in the companies they invest in while the latter type gives the company complete independence in decision-making.