This article first appeared Issue 1120 of The Edge Malaysia (July 25-31):
Is the private sector in the driving seat of Corporate Malaysia? Apparently not, new research by a renowned academic shows, because the government controls a significant portion of it.
This may not be immediately obvious but if one considers the sheer weight of involvement by government- linked companies (GLCs) and government-linked investment companies (GLICs) in the Malaysian economy over the decades, it becomes plausible.
In his recent research, Universiti Malaya academic Professor Dr Edmund Terence Gomez found that control of the corporate sector is concentrated in the hands of the executive, specifically the prime minister, who is also the finance minister.
Gomez arrived at this conclusion in his research of the complex web of control and ownership of Malaysia’s economy after examining the shareholding structure of seven federal GLICs — Minister of Finance Inc (MoF Inc), Khazanah Nasional Bhd, Permodalan Nasional Bhd, the Employees Provident Fund, Lembaga Tabung Angkatan Tentera, Lembaga Tabung Haji and Kumpulan Wang Persaraan (KWAP) — and their investments.
According to Gomez, the finance minister holds a powerful position as he oversees MoF Inc, which controls a vast empire of companies in strategic sectors, including utility, oil and gas, infrastructure and development finance.
“As minister of finance, he controls MoF Inc. It is a super entity at the top of the core periphery structure,” he says.
What this means is that the government can exert a strong influence on GLICs and GLCs when it comes to major commercial decisions, including the award of contracts, key appointments, corporate strategy, financing, asset acquisitions and sales.
Gomez’s research outlines seven broad mechanisms via which the government controls the GLICs: legislation, business groups and interlocking stock ownership, control of the financial sector, policies, directorships, golden shares and proxies.
He says this is phenomenal because the GLICs hold sway over some RM1 trillion ($333 billion) worth of investments. According to his research, the seven GLICs control 35 of the top 100 listed companies in Malaysia whose combined market capitalisation accounts for 42% of the market cap of all the listed companies on Bursa Malaysia.
Many of these companies operate in key sectors of the economy, such as utilities, infrastructure, property and telecommunications. For example, some MoF Inc’s key assets and investments include Petroliam Nasional Bhd, Khazanah Nasional, UDA Holdings Bhd, Keretapi Tanah Melayu Bhd, MRT Corp Sdn Bhd, Syarikat Prasarana Negara Bhd, SRC International Sdn Bhd as well as several development financial institutions. Khazanah Nasional’s investments meanwhile include CIMB Group Bhd, UEM Group Bhd, PLUS Malaysia Bhd, Iskandar Investment Bhd, Tenaga Nasional Bhd, Axiata Group Bhd, Telekom Malaysia Bhd, TIME dotCom Bhd, IHH Healthcare Bhd, Astro Malaysia Holdings Bhd, Malaysia Airports Holdings and Malaysia Airlines Bhd.
The analysis also shows that the seven GLICs have interests in 427 high-value companies either via subsidiary, associate or minority stakes.
Ten levels down, the GLICs have exposure to 6,342 companies, and this is just taking into consideration the shareholding of the seven GLICs, their listed companies and their subsidiaries and associates. The analysis at this stage does not include state GLICs.
This marks a big departure from corporate control seen in past decades, under past prime ministers, that largely placed control of a huge asset base in the hands of Umno- linked proxies and Umno leaders.
“Who owns Corporate Malaysia today? We had a time when there was a fragmented Umno, when there were many Umno leaders who had a key presence in the corporate sector. They were a source of patronage. They were powerful people who had interests in the corporate sector.
“But this is not the case today. Now you see a well-integrated executive controlling the corporate sector,” says Gomez in a recent public lecture entitled “Who Owns Corporate Malaysia Now? Ownership and Control of GLICs”.
He argues that this new shift has put “extreme concentration of economic and political control” in the hands of the prime minister.
The story of Corporate Malaysia’s evolution from a post-independence nation to the present day is not purely one of private enterprise and capitalist endeavours. There are other important, interconnected dynamics at play as well, including economic and social policies and politics.
The professor recalls a time in the 1990s which saw the rise of a bumiputera capitalist class that was closely aligned with Umno leaders. This was during the era of Tun Dr Mahathir Mohamad, Tun Daim Zainuddin and Datuk Seri Anwar Ibrahim.
In tracing the broad history of control over the Malaysian economy, Gomez says the 1970s saw a transition from extensive ownership by foreign interests post-independence to the ascendancy of government-owned enterprises in the 1980s.
And when Dr Mahathir became prime minister in 1981, he took Malaysia in a completely different direction by going for privatisation and liberalisation with a view of creating a pool of “bumiputera corporate titans”, says Gomez. But the plan fell apart around 1997 at the time of the Asian financial crisis.
During Tun Abdullah Ahmad Badawi’s administration, the Malay capitalist influence on the economy declined and there was a resurgence of GLIC dominance, Gomez points out.
So, is government over-intervention a necessary evil or of strategic importance to the Malaysian economy?
This has been hotly debated and opinions span the spectrum, from those who favour a free market economy where the government is not directly involved in business to those who favour state intervention in “strategic” sectors.
Private-sector entrepreneurs have long bemoaned the presence of the GLCs, which some allege have an unfair advantage when it comes to accessing government contracts, financing and policies.
At this point of their research, Gomez and his team have yet to address the outcomes and impact of the GLCs and GLICs on the Malaysian economy.
This trend of the government’s overbearing influence runs contrary to Prime Minister Datuk Seri Najib Razak’s earlier pledge that the government will divest the GLCs so that the private sector can return to the driving seat of the economy. Indeed, the government has commenced a plan to divest its interest in some GLCs, either via paring down its stakes, public listing of companies or outright sales.
But the slow pace of the divestments calls into question the government’s sincerity in reducing its direct role in the economy.
As at February 2013, less than half of the 33 GLCs had been divested and 24 of them were supposed to have been divested between 2011 and 2012, according to the Asian Development Bank (ADB).
An April 2013 paper by ADB sought to answer the oft-asked question: Are government-linked corporations crowding out private investment in Malaysia?
ADB concluded that private investment in Malaysia is indeed negatively affected by the dominance of GLCs. “We find that when GLCs are dominant in an industry, investment by private firms is significantly negatively impacted. Conversely, when GLCs do not dominate an industry, the impact on private investment is not seen,” according to the ADB paper by Jayant Menon and Thiam Hee Ng.
Private investment in Malaysia — domestic or foreign — has never fully recovered from the impact of the Asian financial crisis, ADB notes. “One explanation put forward in accounting for the sluggish performance of domestic private investment relates to the crowding-out effect as a result of the growing dominance of GLCs in many sectors.
“The continued pervasiveness of GLCs and their ability to exercise not only significant market power but also to use their special access to government and regulatory agencies to their favour suggests that they may present a formidable barrier to both competition and the entry of new private firms,” ADB adds.