Malaysia’s Flailing GLCs

Designed to bootstrap the Malay community, they are enriching the elite and widening the income gap

Jun 21

Malaysia’s Khazanah Nasional Bhd, one of the world’s largest sovereign wealth funds, with interests in energy, banking and finance, healthcare, industrials, information technology, media, real estate, telecommunications and utilities, earlier this month dumped a Singaporean asset, KidZania, a children’s theme park, launched back in 2016. Kazanah bought KidZania at a cost of RM165.53 million (US35.59 million), selling it off for the equivalent of US$83,500.

But although the Covid-19 pandemic had led to the closing, KidZania was already losing massive amounts of money, according to reports, partly due to poor management. These losses accumulated to RM 286.3 million, with the creditors demanding RM184.17 million in repayment.

That is one example of the incompetent management of Malaysia’s government-linked companies, most of them established during the 22-year first reign of former Prime Minister Mohamad Mahathir to give Bumiputera managers a leg up in Malysia’s Chinese-dominated business world. The Pakatan Harapan government, both times it has come to power, has vowed to sack its incompetent managers and dissolve the white elephants. That has never happened, and it appears unlikely to. They have become too important to the new government politically and economically.

Most mishaps, losses, incompetence, and corrupt practices never reach public attention. They go hidden. Ironically, many of them have been buried in Khazanah Nasional, which has been forced to do its national duty by taking them over including, for instance, UEM Builders Bhd, an offshoot of United Engineers Malaysia (UEM), along with UEM World Bhd. Khazanah Nasional now also owns PLUS, which held the tollway contract for the national north-south highway, as well as Pharmaniaga, a former UEM subsidiary dealing in hospital supply and other services, and many more companies too numerous to mention. It was forced to take on MAS, the national flag carrier, after billions in losses.

But on their way to economic disaster, government-linked investment companies (GLICs) and government-linked companies (GLCs) have delivered up a rentier class of executives who earn bloated salaries while driving their companies – and to a significant extent, the Malaysian economy – into the ground. According to the Household Income and Basic Amenities Survey, income inequality in Malaysia, measured by the GINI Index (100=total income inequality, 0=total income equality), has fallen from 0.399 in 2016, to 0.407 in 2019. GLCs make up around RM445.6 billion, or 25 percent capitalization on the Malaysian Bursa, or stock exchange. Other studies indicate that GLCs control assets amounting to 51 percent of Malaysia’s GDP.

Only a small circle of politicians and professionals can be appointed to their boards, a great privilege which opens the door to financial and other benefits. The financial website, Simply Wall St, for interest, reports Tenaga Nasional Bhd’s CEO Baharin Din’s annual compensation package at RM4.28 million, much higher than most non-GLC corporations. A seat on a GLC board may secure a five-figure allowance on a monthly basis for the lucky ones. These coveted jobs are obtained through contacts, and rewards for political service and loyalty and not managerial skill. They allow board members to obtain inside knowledge and access to financially beneficial contracts.

The government created the GLCs in an attempt to narrow the income gap of Malays with the rest of society, back in the 1970s. They stayed around as instruments to intervene in the economy. New ones are being created today. They operate from artificially created monopolies, where the means of production, distribution, and/or service are state-owned. These are usually rent-seeking activities, not based upon innovation, or creative destruction. They don’t encourage any creativity in the marketplace, or processing methods, as they rely upon artificially created captive markets.

Adversely influencing the economy

The basis of GLC existence is the creation of artificial monopolies, or oligopolies, and restrictive licensing regimes or franchises, that limit trade. This gives GLCs the sole right to operate a particular business, or a massive competitive advantage over other companies wishing to enter the particular industry.

Many were seen as instruments to enhance public welfare, or as a method to protect strategic industries and products within them. However, in reality, the activities they undertake have traditionally been rent-seeking activities, with protection that creates complacency on matters to do with innovation. Protected operations don’t need to be efficient, and thus costs are much higher than in a competitive market.

Artificial market landscapes have purposely created barriers to entry incorporated into them, that has stifled innovation over the last few decades. As a result, Malaysian industry has lost its relative productivity position within the region. Consequently, Malaysia is still very much a low-cost labor economy today.

GLCs have restricted competition, especially in the case of land development, with state government and special purpose vehicles (SPVs) formed with the approval of government, controlling most of the nation’s prime land. These cozy agreements benefit specific companies, which obtain the right to these opportunities over other firms.

The effects of these business practices, most often mean higher prices for consumers as exemplified in the price of rice and telecommunications charges, compared to the rest of the region, demonstrating how monopolization and inefficiency have driven up prices.

Many, if not most GLCs have weak audit trails and loose procedures, with some managers using the system for personal financial benefit. This is particularly the case with land deals and the awarding of contracts. Most of these ‘under table’ activities are usually never exposed.

Widening the income gap

The GLCs thus have failed in their bid to enhance incomes and well-being, and have actually contributed to growing income inequality. This alone is a good argument for initiating a review of their costs and benefits. They have crowded-out many markets, distorting the quality of opportunity within the Malaysian economy. If the objectives were to increase the well-being of Malaysians, World Bank data indicates otherwise. They appear to be enhancing the wealth of elites at the cost of the rest of the Malaysian community.