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.