National flag carrier Malaysian Airlines and carmaker Proton have both been filling column inches in the local business press recently, as their respective recovery plans get underway. Despite calls for the government to divest these loss-making liabilities, planning continues into transforming these companies into globally competitive players.
Guided by the overseas success of the state oil company, Petronas, the government has committed itself to upgrading what are known locally as government-linked companies (GLCs).
Major divestments of government holdings took place during the 1990s. This partial privatisation left varying amounts of government holdings in around 50 firms, which have been brought together under the state investment arm, Khazanah. This is almost entirely owned by the Ministry of Finance, with a single share owned by the Federal Land Commissioner.
Khazanah and its contemporaries are dubbed government-linked investment companies (GLICs) and other significant equity is held by organisations like the Employees Provident Fund (EPF), the national pension provider, and Permodalan Nasional Berhad (PNB), an institution set up in 1978 under the National Economic Policy to address the differences in shareholding between ethnic Malays, known as Bumiputras, and other races. Petronas is owned directly by the Ministry of Finance.
This system is not just about recovering from headline losses though. Prime Minister Abdullah Ahmed Badawi has committed himself to improving GLCs as part of Malaysia’s continuing economic development plans.
As deputy prime minister he established the key performance indicator (KPI) project for two GLCs, and in 2004 launched a transformation programme rolling out the KPI to all the other GLCs. He subsequently made waves at Khazanah, giving the body a fresh vision and some new senior staff.
In July 2005, he announced the launch of the GLC Transformation Manual, which gave various prescriptive guidelines aimed at re-vamping corporate governance, strengthening GLC directors’ capabilities, upgrading performance measures and ensuring closer scrutiny of procurement costs.
“The GLCs must reform and transform into high-performing organisations,” he explained at the launch of the manual. “This will boost overall performance of the GLCs, produce a powerful demonstration effect for the country’s larger private sectors and develop new growth prospects in the country.”
Abdullah’s commitment to upgrading GLCs has been a feature of his drive to focus the economy on private sector-led growth. The plan to improve the companies also aims to add some new life to the Malaysian stock market, where flaccid performances from GLCs have suppressed many of the market’s overall results.
Whilst GLCs make up only 5% of listed companies, they account for around 35% of market capitalisation. Investors on Bursa Malaysia are only too aware though that these firms have not performed. Studies have indicated that the GLCs tend to deploy capital less efficiently, yielding less profit per worker than non-GLCs. They also tend to be more heavily in debt.
Abdullah himself has been the first to admit that the challenges to reform are considerable. With many firms historically rooted in state bureaucracy, the corporate culture is rarely orientated towards market incentives, with frequent allegations of a lack of transparency being made, and of political criteria being followed.
Yet with the transformation gathering momentum, things have been changing. A crop of young, foreign-educated directors and managers with private sector backgrounds have taken the helm of leading companies, including Telecom Malaysia and Proton.
Bumiputra-owned small businesses were also starkly warned recently by Nor Mohamad Yackop, second minister of finance, that they would not be able to rely on GLC favouritism. Meanwhile, the government has launched initiatives involving GLCs to help small contractors get ready to face open competition when tendering.
Meanwhile, it is not just the GLCs that are changing their act – the GLICs are breaking former taboos as well. Leading the way, Khazanah has set aside previously held qualms about national ownership by selling stakes in some of its companies to foreign interests, including a 5% stake in Telecom Malaysia which was sold to Khazanah’s Singaporean counterpart, Temasek, in 2004.
Meanwhile Khazanah has started to emulate the apparent success of Temasek by going abroad. As well as stakes in Indian and Indonesian companies, the company is thought to be looking at opportunities in China.
Reportedly, the plan is to sell further equity in the company’s domestic GLC portfolio and re-invest it more profitably abroad. This has excited many stock watchers with the prospect of bigger floats on Bursa Malaysia, a market that lacks liquidity and sees very low trading volumes.
However, it might be too soon for some. Whilst Khazanah wants to get better returns on its capital, they say, it still has national obligations in its mission statement. Their worry is that Khazanah could divest before making sure companies in its portfolio are ready for competition.
Their concerns may yet be allayed. Khazanah management has reiterated its commitment to national goals, particularly those enshrined in the all-important Vision 2020. Actions speak louder than words and the fact that necessary changes bearing political consequences are not taken shows that Khazanah’s lot is still in with the greater good.
Mass lay-offs are to be avoided via a voluntary redundancy policy, while national power provider, Tenaga Nasional, still has to sell electricity at artificially low prices, squeezing it between costly purchasing agreements with independent power producers.
All in all, the government is fully aware that transforming GLCs will do more than stop headlines about the plight of the national airline and Proton. They are also aware it is a balance between spending taxpayers’ money and realising profitable improvements in GLCs.
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