Global Trends by Martin Khor
Monday 18 June 2018
Addressing the issues of GLCs in light of the 1MDB scandal will be a tough job. We should start by identifying the good, bad and rogue ones, then take actions accordingly.
Government-linked companies (GLCs) have become a hot topic, because of the scandals linked to 1MDB, the Felda group and other enterprises which politicians of the old order have abused, causing the public to lose many billions of ringgit.
The public outrage over the frauds and thefts has grown with each new revelation. Some GLCs were used as the private domain of high-level political leaders as opportunities to make huge private profit at public expense. There is thus widespread scepticism about GLCs in general.
The pendulum may however have swung too far. While there are rogue GLCs, some other GLCs that have done well. They play an important role in the economy and society, and should not be lumped together and condemned with the bad apples and condemned.
GLCs can and should play valuable economic and social roles. This is especially so in a complex society like Malaysia’s where there is need for balance with regard to social classes, regions and ethnic communities, and between local and foreign participation in the economy.
The GLCs can play their part in this complex balancing role. They also earn dividends for the government, pay taxes, make investments that are too large or risky for private companies, and carry out social functions, besides creating jobs and contributing to growth. They can fill in gaps which private firms by themselves cannot. They should also be efficient and make a surplus.
Those are positive objectives. A valid critique is that only some GLCs fulfil them, and many do not, or even have practices that counter these goals.
When something goes wrong with some GLCs, some critics blame the GLCs as a system and as a whole and call for their closure en bloc, and for private companies to take over their space.
But just as there may be “GLC or state failure”, there can also be “market failure” as companies are not perfect and have been guilty of big fraud and unethical practice that can bring the whole economic system down.
The 1998-99 Asian financial crisis was triggered by speculative funds out to make a fast buck; the 2008-09 global crisis was caused by big financial institutions manipulating the public to invest in “sub-prime” financial products; private data of individuals collected by an internet giant were sold to firms wanting to exploit or influence a national election; the tobacco industry profited from decades of sales when it knew its cigarettes caused cancer; a German car company (Volkswagen) was last week fined one billion euros for falsifying emissions data, in addition to the US$4.3 billion paid to US authorities.
There are also many examples of corporate fraud and inefficiencies in Malaysia, but it would be absurd to ask for the closure of all companies.
To address the GLC issue, there should be a comprehensive study and review of the GLCs, their functions and performance, strengths and weaknesses, with proposals for action. Perhaps the Auditor General’s office could lead the review.
For a start, it would be good to differentiate among the GLCs, who may number over a thousand.
An important category is the GLCs involved in commercial activities. Top of this list is Petronas. It has huge assets, is a major contributor to government revenue, generates many jobs directly and indirectly.
There are the five government-linked investment companies (GLICs), Khazanah Nasional, Permodalan Nasional Bhd (PNB), Tabung Haji, EPF and LTAT (Lembaga Tabung Angkatan Tentera).
Khazanah also has a reputation of being well run. Its realisable asset value (RAV) rose from RM 51bil to RM158bil from 2004 to 2017, with a credit-worthy growth rate of 8.6% per annum.
Net worth adjusted (RAV minus liabilities) rose from RM33bil to RM116bil (9.6% growth per annum), which is in line with the performance of the FBM KLCI, the stock market index composed of the 30 largest companies in Bursa Malaysia.
In the same period, cumulative profit was RM28bil, declared dividends were RM10bil, tax paid RM1.6bil and shareholders funds grew from RM13bil to RM40bil.
Some of its core companies have done well with per annum rate of total shareholders’ return in 2004-2017 being 15% for Telecom Malaysia, 11% for CIMB, 17% for Malaysia Airports, 10% of UEM and 15% for IHH Healthcare.
Another category comprises the 20 GLCs (known as the G20) which are under the GLICs umbrella. Most are publicly listed. They include, besides the ones above, Maybank, Sime Darby, UMW, CCM, MRCB, Affin Holdings.
Between May 2004 and July 2015, the G20 as a group performed as follows: 11.5% total shareholder return per annum, 11% return on equity per annum, three-fold growth in market capitalisation (from RM134bil to RM386bil); and net profit growing from RM10bil to
RM26bil from 2004 to 2014.
The GLCIs and the G20 GLCs underwent a decade-long coordinated reform process in 2005-2015 which covered management practices (including compensation linked to performance), revamping procurement practices, and improving practices in capital management, regulatory management and social responsibility.
These big three – Petronas, the five GLCIs and the 20 GLCs – comprise the bulk of the total value of all GLCs in the country. They control or influence some of the heights of the economy.
Therefore reviewing their governance and performance, continuing the reform process with added elements, and ensuring even better performance are very important to the future of GLCs overall.
Another category are miscellaneous GLCs that include statutory bodies such as Felda and Mara, foundations like Yayasan Palaburan Bumiputra, state-level GLCs such as state development corporations and “Menteri Besar Incorporated”. And of course the bad GLCs like 1MDB, which deserve a special category like “rogue” all by themselves.
There are many hundreds of these GLCs and government institutions. Even identifying and listing them, their governance, activities and performance would be a complex task.
This is where the rogue GLCs can be found, and many others that are doing badly. But among these hundreds are also good-performing GLCS with potential for doing better.
Thus, we should not be thinking of GLCs in general, but place them in categories, such as “the good; the not-so-good-but-not-that-bad; the bad; and the ugly and rogue.”
During a review, different actions can be considered for the different GLCs. The good should undergo even more transformation to be excellent and world-class; the not-too-good can be grouped to undergo a reform process similar to what the GLICs and G20 went through; the bad ones could mainly be closed though some may be saved; and the ugly rogues should not only be closed but the wrong-doers brought to book.
State-owned enterprises, which is what GLCs are generally known in other countries, have done a lot of good worldwide, contributing to national development, economic growth and social equity. Some have also done a lot of harm. But we should not throw out the baby with the bathwater.
We need a new good system of governing the GLCs, regulating and monitoring them, and encouraging and supporting them so that they can do a great job.
The new system should also prevent the recurrence of the 1MDB experience; it must have early warning systems, checks and balances, and a wider national framework of democracy, rule of law and freedom of speech so that there will not again be a monopolistic control by a few politicians who can get away with anything.