Rationale For Establishing Malaysian GLCs

Rationale for Establishing Malaysian GLCs

M. Bakri Musa

www.bakrimusa.com

Late in the Mahathir Administration the government embarked on an ambitious “transformation” (that overused word again!) exercise aimed at, well, transforming GLCs. It is noteworthy that in all official publications on the matter, including its “Silver Book” and “GLC Transformation Manual,” there is no mention of the original principles or rationales behind the setting up of these GLCs.

It is obvious that the government and those currently managing these GLCs have lost sight of the original mission. No surprise than that those objectives have remained unaccomplished; they have been forgotten.

When Tun Razak conceived the idea of GLCs back in the 1960s he had three major objectives. First was to spearhead Malay engagement in commerce generally and the corporate sector specifically. Second, he wanted to level the economic playing field by breaking the monopolies and monopsonies of the huge colonial firms (as well as the few Chinese ones) thus easing the entry of new players (meaning Malays). Third, he wanted to bypass the Byzantine ways and lumbering pace of the civil service.

While merdeka immediately changed Malaysia’s political atmosphere, there was no comparable accompanying changes in the economic. Its commanding heights, from plantations to finance, remained entrenched in colonial hands. The only local firms that could come close to challenge those colonial entities were the few large Chinese ones. With the withdrawal of political protection for colonial firms, the existing Chinese companies blossomed. Like capitalists everywhere, they too were prone to collusion, aided greatly by their clan organizations and cultural tradition of guanxi (personal connections).

Even if there were enterprising Malays, they would not be able to compete against the clan mentality of existing Chinese enterprises. Like others, those Chinese businessmen were not in the least tolerating or welcoming of new competitors, especially those not of their own kind.

There was an enterprising Malay entrepreneur, “Loya” (lawyer) Maarof, (after whom Bangsar’s Jalan Maarof was named), who started a Malay bank and a string of Malay enterprises in Negri Sembilan. He was a bright man whose talent was earlier spotted by the British; he was sent to Britain to read law. He was also well versed in economics and knew the importance of having a Malay bank to act as an intermediary as well as catalyst for Malay economic development. More to the point, he was able to mobilize the Malay masses or at least interest them in matters economic. All other Malay leaders at the time (and even today) were intoxicated with political power, specifically then the pursuit for independence. Maarof was the rare exception; he recognized early that unless Malays were also serious players in the Malaysian economy, merdeka would be a hollow victory. He was particularly prescient.

Somebody must have viewed him a serious threat on the economic front, for he was soon found hung in Gombak. The official verdict: suicide. Not many believed that.

Not much has been written about this bright enterprising young lawyer. He was of my father’s vintage. All I knew about him was what my father told me when I was growing up. Not many Malay leaders at that time impressed my father. To him they were all good only at giving rousing (berkobar-kobar) speeches. Maarof was again the rare exception; he was a man of action, especially in the field of mobilizing Malay savings and starting Malay enterprises.

Maarof’s cruel fate reflected the then prevailing animalistic “law of the jungle” economic climate. A decade later Tun Razak too recognized that it would be a formidable challenge for any Malay (or anyone for that matter) to take on these established Chinese and colonial players. They had effectively tilted the economic playing field in their favor. Only the government would have the might to take them on; thus was born the first GLC. Fifty years later China would use the same strategy to establish its GLCs to take on the giant Western transnational corporations.

The third reason for these GLCs was to overcome or bypass the sluggishness of the civil service. The rule-crippled civil servants would stymie every development initiative with their bureaucratic obsession with “rules.” They were simple administrators, not innovative policymakers, clerks rather than executives. They were preoccupied with routine stuff; strategic planning and bold new initiatives were alien concepts to them. To get a simple project going would involve a Byzantine process, meandering through the convoluted belly of a constipated bureaucracy. All these inadequacies are well documented in Esman’s book, Administration and Development in Malaysia: Institution Building and Reform in a Plural Society.

With GLCs Razak could bypass all of those bureaucratic hoops. He was also able to recruit fresh young talent to helm these companies. Under the strict civil service code with its undue deference to seniority, these promising officers would have been stuck in some junior positions. That was how Tengku Razaleigh was able to head Bank Bumiputra and later, Petronas, while still in his thirties.

Today, the only hint of deference to Tun Razak’s original mission was this oblique and very brief statement in the 49-page “The Summary of Transformation Manual”: “[T]he principles of growth with equity, ... development of human capital, and the development of the Bumiputra community.”

To be generous, Tun Razak’s original mission of spearheading Bumiputra participation in the private sector could be encompassed under “the development of the Bumiputra community” umbrella. That aside, the much-hyped “Transformation” document makes no direct or specific mention to the role of GLCs in today’s Malaysia. Instead the report focused on profits. Meaning, these GLCs are no different from any other corporation except for the fact that the government is their principal shareholder and provider of financial and other capitals, and also increasingly, their main customer.

The stated objective of NEP, reiterated ad nauseam, is that there be at least 30 percent Bumiputra participation in the equity market. GLCs were to be the primary instrument to achieving that. There is little disagreement that over two generations later, Bumiputra participation in the private sector, specifically the equity market, is still well below what is expected based on our share of the population. It is also well below NEP’s modest target.

That transformation report made no reference to this abysmal failure. If these GLCs have failed to achieve their modest goals during the past five decades, it is unlikely that they will be any more successful in the next five. The only conclusion, and a crucial one, is that these GLCs are not effective. It is time we abandon them though the original objectives as laid out in the mission statement remain valid and worthy of pursuit.

It is time to liberate our thinking and be bold in our imagination. I suggest that we sell all these GLCs and put the proceeds in a trust fund for the specific purpose of enhancing Bumiputra human and social capital. Before fleshing out my proposal, I will review the impact GLCs have had on Malays. Just in case my idea of disposing of the GLCs entirely is deemed too radical, I outline my ideas for newer models as well as offer my alternatives towards achieving the same goals.

Next:  Ratinale for GLCs:  Leveling the Economic Playing Field

Adapted from the author’s book, Liberating The Malay Mind, published by ZI Publications, Petaling Jaya, 2013. The second edition was released in January 2016.

The Fallacies of and Reassessing Government-Linked Companies

The Fallacies of and Reassessing GLCs
M. Bakri Musa

Commercial activity on the part of the ruler is harmful to his subjects and ruinous to the tax revenue.

Ibn Khaldun (1332-1406)

The government’s preferred route for spearheading Malay participation in commerce is through establishing Government-Linked Companies (GLCs). The fundamental question is whether this is the most efficient route or are there better alternatives that could supplement or even supplant these GLCs.

As discussed earlier, it takes more than just money to start an enterprise. Equally if not more important is the human, as well as social capital. Enhancing human capital requires improving our education as well as healthcare systems. As for social capital, the World Bank defines it best: “...[T]he institutions, relationships, and norms that shape the quality and quantity of a society’s social interactions. ...[S]ocial cohesion is critical for societies to prosper economically and for development to be sustainable. Social capital is not just the sum of the institutions which underpin a society – it is the glue that holds them together.”

GLCs consume inordinate amounts of our leaders’ attention, gobble up huge sums of public funds, and employ the bulk of our premium Malay talent. GLCs are also major players in the economy and marketplace. And as demonstrated by the 1MDB fiasco, also a major source of corruption.

There has been an accelerating proliferation of GLCs in recent years, together with a very noticeable “mission creep.” At the June 2011 “Open House” for GLCs, Prime Minister Najib bragged that some of them have become multinational corporations. This is the sort of “mission creep” typical of many government initiatives. Najib did not mention which of the GLCs that had attained multinational status. Nonetheless the 20 largest GLCs collectively had nearly a third of their revenues from foreign operations. However, there was no mention what portion of the profits came from their overseas units.

What Najib refers to as “multinational” is no more than GLCs with overseas presence, nothing fancy. It is a far cry from multinational corporations like Nestlé, General Electric (GE), or IBM. Those are more correctly called “transnational” corporations. They may be headquartered in one country but their operations are global and have senior executives from different nationalities. It would be hard to say that GE is an American company when substantial numbers of its shareholders and employees are non-Americans. Malaysian “multinational” GLCs are far from that.

Petronas, Sime Darby, and Malaysia Airlines are three large GLCs with significant revenues from abroad or denominated in other than ringgit. Except for Petronas, the other two have had their shares of near-catastrophic financial debacles. Sime Darby is currently involved in a messy lawsuit over an engineering fiasco in Abu Dhabi that saw its CEO being ousted. Then there was its domestic debacle with Sarawak’s Bakun Dam.

Malaysia Airlines too has also had its share of financial fiascos and bailouts, except that they labeled as otherwise. Instead the government concocted a “Special Purpose Vehicle” to take over the airline’s debts. Wouldn’t it be nice if we all could have our own SPVs and make our debts disappear just like that!

Petronas, at least until recently, is the praiseworthy exception. It is professionally run and exemplary not only for a Malaysian GLC but also any national oil company. Its track record in terms of both upstream and downstream activities easily exceeds that of Petro-Canada, another successful oil-related GLC. Petronas’ success is due to it being relatively free from government interference in its day-to-day operations, although there have been major “inputs” with important policy decisions, like the building of the Petronas Towers and the new national capital, Putrajaya. In the aftermath of the economic crisis of 1997, Petronas was “persuaded” to “buy” (bail out) a shipping company owned by one of the sons of then Prime Minister Mahathir.

Petronas is remarkable for a Malaysian entity, private or public, in being free of corruption. Although its management and employees are predominantly Malays, nonetheless it has sought out only the competent ones, and not those more known for their political pedigrees. The company is an antidote to the prevailing stereotype that anything run by Malays is doomed to failure or mediocrity. I do not blame those who harbor such prejudices; there are just too many ready examples.

The other remarkable feature of Petronas is that it seeks to exploit opportunities in areas ignored by the major oil companies, as in Africa and such pariah states as Myanmar. That reflects the genius of its management. That company used to be a major contributor to the government’s coffer. With the declining price of petroleum, and with the company blighted by the usual disease afflicting all GLCS–political interference with its management–its future is less rosy.

Next:  Rationale for GLCs

Adapted from the author’s book, Liberating The Malay Mind, published by ZI Publications, Petaling Jaya, 2013. The second edition was released in January 2016.

Soft Barriers To Malay Partiipation In Commece

Soft Barriers to Malay Participation In Commerce

M. Bakri Musa

Soft barriers to active participation in the money economy are especially pronounced in societies that still exist in or have just exited from the peasantry and subsistence living. That is Malay society at the time of colonization. It is still true for a vast segment even today. The concept of money and the “money economy” is alien to them. Money was equated with greed and unbridled materialism, not a suitable topic in polite conversations. To ask for the monetary value of anything or service was tantamount to insulting its owner or provider. Monetary value was only for showing off your social status as with how much was your dowry or car.

The traditional trading activities in such societies are primitive, restricted to bartering. The worth of such exchanges, as with trading a few coconuts for fixing a leaky roof, is not with the economic value of the coconuts or the repairing of the roof, rather the goodwill generated, one fellow villager helping another.

One can imagine the difficulty members of such a society would have in adjusting to a money economy. If this were to be imposed from the outside world, as with colonialism, free-flow immigration, or unrestrained globalization, the difficulties in adjusting would be compounded.

Typically that society would react in one of two ways. It either withdraws, effectively declaring that it does not want anything to do with this alien value system, or else it blindly embraces the new system enthusiastically and uncritically.

The first reaction is seen in many Muslim countries, and I will pursue this further in the section, “Imprisoned by Religion.” We also see this with North American Indians, India under Nehru, and today’s Myanmar.

With the second, what typically happens is the absorption of only the superficialities and excesses, as can be seen in the immediate post-Mao period of China. After spurning the outside world, China suddenly changed under Deng Xiaoping. In mature capitalistic societies such as America and Western Europe, there is an effective taxation system with redistributionist elements, and where philanthropy is an honored tradition which have evolved and been perfected over time.

In China (as in many Third World societies) you are considered stupid if you do not conceal your income from the government and cheat on your taxes. As for charity, when Warren Buffet and Bill Gates, two billionaires known for their charitable deeds as much as their capitalistic instincts, visited China to interest its newly rich in philanthropy, the pair were greeted with silence if not derision. America has its Dukes and Stanfords, elite universities that are testaments to the generosities of their capitalist titans. China has none as yet, and possibly never will.

It is the rare society that gets it right immediately. The hope is that it will learn and stabilize eventually. Otherwise those excesses would lead to instability. The Chinese leadership today is very much aware of the severe negative consequences to the excesses and flamboyance of its politburo members and their children, especially when displayed abroad. There is as yet no such abhorrence with the excesses, corrupton, and flamboyance of the Malay elite–our sultans and UMNOputras.

It was only a generation or two ago that Malay society was deep in its subsistence and agrarian mode, typical of the kampong lifestyle. Most Malays lived off the land, and gotong-royong (communal effort) was the norm; bartering or trading of goods and services were strange concepts. Instead you helped each other, with no financial considerations.

With the coming of colonial rule and with it, capitalism, Malays were thrown into the money economy precipitously without any transition. The later influx of immigrants further compounded the issue. The immigrants by default and out of necessity had to adapt to the money economy to survive; they had no social or physical support system as with Malays and our kampong lifestyle. This earlier entry into the money economy by the immigrant population conferred significant advantages vis a vis the native peasant population.

It was no surprise that Malays, specifically those in UMNO, at the dawn of our country’s independence were clearly anti-capitalistic, except for its top leader, Tunku Abdul Rahman, who remained unabashedly committed to capitalism. To those in UMNO during its infancy, the term kaum kapitalis was derogatory, comparable and perhaps synonymous with kaum kolonialist (colonialist class/hordes). That soon changed when they saw the tangible results of profits and wealth. This Malay embrace of capitalism was accelerated under Mahathir.

Like the Chinese in China today, Malays embrace only the primitive or animalistic form of capitalism, its raw and exploitative version, and the associated quick bucks and short-term mindset. Also akin to modern China, corruption, collusion, and influence peddling rapidly became the norm.

If those are not formidable enough obstacles, then there is yet another significant “soft” barrier to Malay entry into commerce–our religion, or more accurately our particular and myopic interpretation of the Koran and Hadith (sayings and practices of Prophet Muhammad, s.a.w.). I will defer this to Part Eight, “Imprisoned by Religion.” For now, let me quickly preempt the anticipated reflex criticisms.

As a Muslim, I believe that my faith is fully consistent with and supportive of the ideals and practices of capitalism. Nothing in my reading tells me otherwise. After all, our Prophet Muhammad, s.a.w. (May Allah bless his soul) was a successful trader before receiving his prophethood. That reflected the profession’s high standing with Allah as much as His appraisal of the man.

However, being not an Islamic scholar or an economist, I lack credibility. All I can do is share with readers what I have learned from others about my faith and its view on capitalism.

One thing is certain; Islam cannot be supportive of atheistic communism or its close cousin, socialism. It is true that the egalitarian ideals of socialism may appeal and indeed have to many Muslims and can be construed as being consistent with those of Islam. On closer reading however, equality is not the ideal of Islam; indeed that would be against human nature. Allah in his wisdom has created us in all our diversities, with different skin colors, speaking different languages, and having diverse cultures. He has also endowed us with different talents and abilities.

Equality in such a setting would be an elusive goal, as well as a cruel illusion. Those in power would determine what equality would mean. In America at the time of the declaration of independence, the “We, the people” phrase in the preamble of its constitution for whom “equality” would apply were restricted to only tax-paying white males. They alone were entitled to vote and have the protection of the constitution. Slaves, women, and those who did not own land were excluded. Only later was that “equality” extended to them.

Likewise with meritocracy; those already in power would determine what attributes are considered meritorious.  Meritocracy as a concept could easily be used to justify continued suppression and denial of opportunities to others not currently favored.

Islam emphasizes justice, not equality. We cannot treat an orphan in the same “equal” manner as the son of a privileged family. That would be the height of injustice. Indeed to be just, we should do more for the orphan, which would also be the right thing to do. The great American jurist Oliver Wendell Holmes said it best, “It is a wise man who said that there is no greater inequality than the equal treatment of people who are unequal.”

It is easy for today’s observers, Muslims included, to conclude that Islam is against capitalism, or at least wealth creation and accumulation. Muslim countries, even those blessed with abundant natural resources like oil and gas, are overrepresented in the poor and deprived category. In Malaysia, Malays, who by statutory definitions are Muslims, lag behind the other races in all socioeconomic indices. That there was a time when Muslims were ahead of the curve has been all but forgotten, and if recalled, only for syok sendiri (self-gratification) exercises and not as a learning opportunity.

Capitalism is not un-Islamic. On the contrary, many of the practices and consequences of capitalism are very much in tune with the aspirations of our faith. Both capitalism and Islam are very adaptive. If the communist Chinese could adopt capitalism and imbue it with Chinese characteristics and sensibilities, and in the process emancipate hundreds of millions of its people out of poverty, I fail to see why we cannot do the same. Meaning, imbue capitalism with Islamic characteristics.

Next:  The Fallacies of GLCs

Adapted from the author’s book, Liberating The Malay Mind, published by ZI Publications, Petaling Jaya, 2013. The second edition was released in January 2016.