Kuala Lumpur, 24 October 2016 – The Institute for Democracy and Economic Affairs (IDEAS) as part of its ongoing work in promoting better governance of Government Linked Companies (GLCs) recently released a study that draws on lessons learned from the 1Malaysia Development Berhad (1MDB) crisis to make recommendations for improving regulations on GLCs nationwide.
Authored by Rama Ramanathan of PROHAM (Society for the Promotion of Human Rights), the study highlights how 1MDB came into the public eye due to its excessive borrowings at high interest rates, its risk of loan default and its adverse impact on sovereign credit ratings. These were quickly addressed by the Malaysian government which saw the resignation of the 1MDB Board and the transference of 1MDB’s subsidiaries to the Minister of Finance Incorporated. Actions and investigations were also initiated by the Royal Malaysian Police and other regulatory bodies including Bank Negara and the Public Accounts Committee.
The weaknesses in the governance framework of GLCs are currently not addressed. The study stressed the need for oversight bodies such as the Public Accounts Committee and other regulatory bodies to play a stronger role in overseeing GLCs to avoid similar problems in the future. It is recommended that parliamentary approval must be sought prior to the issuance of letters of guarantees to support loans. In the case of 1MDB, RM13.6 billion in letters of support were issued for its borrowings in 2015. Laws must also be put in place to prohibit GLCs’ funding of political parties or individual politicians. This comes in light over allegations that 1MDB funds had been misappropriated to fund elections.
In addition, the study makes the following recommendations:
- Creation of a registry of all GLCs currently in operation and tracking their performance according to established measures of business success. The total number of GLCs is also publically unknown.
- Setting clear debt gearing goals or a debt-to-equity ratio which measures a firm’s total debt by its total assets for GLCs, and enforcing limits on how much a GLC can borrow. Non-compliance should be treated as a criminal offence.
- Ending the practice of appointing public officials to GLC Boards to prevent conflict of interest. Regulators of companies must not be permitted to also be Board Members in a company.
- Establishing rules to curb profiteering through sales of state-owned assets. Land sold by 1MDB to Tabung Haji was at 42 times its initial price.
The study also recommends that greater measures be taken to empower regulating authorities. For example, though regular audits were conducted on 1MDB, they did not reveal mismanagement in the company until it was too late. The study further recommends that the Auditor General be given the mandate to conduct regular in-depth audits of GLCs. The audits should look into matters such as adherence to the stated aims of the business, due diligence prior to making investment decisions and missing financial reporting dates.
Malaysia’s economy has a high dependence on GLCs – the 15 GLCs included in the GLC Transformation Programme alone contributes to 5% of the national workforce and accounts for approximately 36% and 54% respectively of the market capitalisation of Bursa Malaysia and the benchmark Kuala Lumpur Composite Index. 1MDB which amassed unsustainable debts of up to RM 42 billion in 2014 or 2.5% of Malaysia’s GDP according to Moody’s is a stark example on the adverse impacts that GLCs may have on the economy when not regulated correctly.
For the full paper, please go to the IDEAS website: www.ideas.org.my
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IDEAS is Malaysia’s first think-tank dedicated to promoting market-based solutions to public policy challenges. We are an independent not-for-profit organisation. As a cross-partisan think tank, we work across the political spectrum. Our purpose is to advance market-based principles, and we are not bound by party politics, race or religion. Our mission is to improve the level of understanding and acceptance of public policies based on the principles of rule of law, limited government, free markets and free individuals. For more information, please visit http://ideas.org.my/