PRIVATIZATION Privatization in Malaysia, Regulation, rent-seeking and policy failure

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Kuala Lumpur Light Rail Transit 123Table 5.09 KL Monorail: Profit and loss (RM ’000)1997 1998 1999 2000 2001 2004 2005** 2006**Projected*revenueTurnover/revenueProjected*profit/(loss)Profit/(loss)before tax— — — — — 36,000.0 70,000.0 105,000.0— — — — 734.9 15,080.0 32,535.0 38,618.0(42,000.0) (37,000.0) (8,000.0)(43.2) (227.6) 13.9 121.1 409.9 (46,240.0) (75,936.0) (80,646.0)Source: Adapted from Companies Commission of Malaysia; * The Edge, 21 April 2003; ** KLInfrastructure Group (2006).Traffic volumeThe daily traffic volume in Kuala Lumpur was expected to be reduced by aminimum of 25 per cent by the end of 1999 when all the traffic mitigationfactors were in place. These included the LRT system, high-occupancyvehicle lanes, a review of parking charges, KTMB commuter trains and theamalgamation of eight bus companies into two. However, unlike Singaporewhich has the capacity to monitor and track traffic growth, assessing anyreduction in traffic volume in Kuala Lumpur, especially attributable to theLRT system, is difficult. Nonetheless, the number of registered vehicles in thecity clearly indicates increasing car ownership, while declining average speedsover the past 10 years suggests increasing traffic congestion, even four yearsafter the commencement of LRT operations (JICA 1998). This is supportedby ongoing media reports and regular government-commissioned studieson traffic congestion, with traffic conditions expected to remain susceptibleto chronic congestion in the foreseeable future without drastic measures(Business Times, 5 October 1998). The LRT system thus did not facilitate amodal shift in transport use, although this also depended on an integratedpublic transport network and the implementation of complementary policies.It is the failure of the government to implement these measures which we nowturn to.ProblemsThe Malaysian government was aware of the need for an integrated andcoordinated public transport system. Its failure to implement this (and thetraffic demand management methods discussed above), unlike Singapore,reveals the lack of institutional and political capacity. However, it is thegovernment’s political failure that is most striking, and the main reason whyprivatization failed. The failure of the LRT occurred on two levels. First, the
124 Kuala Lumpur Light Rail Transitgovernment failed to ensure that the project and privatization were commerciallyviable (i.e. ex ante failure). This was partly related to informationproblems, although the evidence on construction costs indicates that theprivatization was very likely driven by short-term interests in search ofconstruction rents rather than operational profit. Underlying this werepatron–client networks that shaped the choice of project (i.e. infrastructureconstruction) and how this was allocated.Second, having committed to the project, the government failed to thenimplement the necessary policies to maximize the LRT’s commercial viability,despite awareness of the problems and solutions. There is clear evidence ofthis ex post failure to correct mistakes. The government could not plan theroute optimally because it was unable to override commercial interests whorefused access to space for stations to be built. It was unable to force theoperators of Systems 1 and 2 to integrate their routes and provide commonstations and ticketing systems. It failed to merge bus companies and preventbus operators from plying LRT routes. It could not regulate parking faresor introduce a ‘congestion’ charge necessary to encourage a modal shiftfrom private to public transport. And it was unable to pass the necessarylegislation to centralize transport planning and authority.Ex ante failureThe privatization of the LRT system could have proceeded for severalreasons. The government could have believed that the project was viable giventhe international consensus in favour of privatization, and lobbying byforeign and local commercial interests. Failure here could have then been dueto the government lacking the necessary information to make the correctdecision. Conversely, privatization also potentially offered opportunities formonopoly rents from construction to parties close to the political leadershipand would have been partly politically motivated. In this case, ex ante failurewould have been related to political considerations which constrained thegovernment’s decision. The concessions for Systems 2 and 3 were awarded,without open tender, to individuals closely linked to segments of the politicalleadership, and the nature of the project was consistent with Malaysia’spattern of privatization, focusing on infrastructure construction. (System 1remained state-owned.)By awarding the concessions for construction and operations to the samecompany in each case, the government may have also sought to ensure theproject was self-financing. However, this led to a moral hazard problem,where profits could be made either up front (from construction) or spreadthrough the concession period (in the form of operating surpluses). From ourprevious discussion, we have seen that the project was flawed, based onunrealistic passenger projections which were arguably used to secure projectapproval (and financing). This created a large and potentially unpayable debtburden and led to a moral hazard problem where short-term profits from
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Privatization in MalaysiaRegulation
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Privatization in MalaysiaRegulation
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Dedicated to my parents, Tan Siew S
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viiiContentsProblems 123Conclusion
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xTables6.02 Asia Pacific airlines:
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AbbreviationsAFTAAFTKAPTKARPASEANAS
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LoSLPPJLRTLTALTATLTDLTLMARAMASMBOMC
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1 IntroductionWhy privatize?The deb
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Introduction: why privatize? 3neces
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Introduction: why privatize? 5count
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2 Privatization, rents andrent-seek
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Privatization, rents and rent-seeki
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What is needed to make privatizatio
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3 Institutional and politicalfailur
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Institutional and political failure
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Page 90 and 91: Institutional and political failure
Page 96 and 97: Malaysia’s national sewerage syst
Page 102 and 103: Table 4.01 IWK: Performance summary
Page 118 and 119: Table 4.09 IWK: Tariff revisions, 1
Page 124 and 125: Kuala Lumpur Light Rail Transit 107
Page 132 and 133: Table 5.01 Kuala Lumpur LRT: Financ
Page 136 and 137: Table 5.03 Regional urban rail syst
Page 150 and 151: 6 Perverse incentivesMalaysia Airli
Page 152 and 153: Malaysia Airlines 135Both types of
Page 154 and 155: Malaysia Airlines 137The industry i
Page 156 and 157: BackgroundMalaysia Airlines 139The
Page 158 and 159: Malaysia Airlines 141improvements i
Page 160 and 161: Malaysia Airlines 143Table 6.03 Reg
Page 162 and 163: Table 6.04 MAS: Leverage ratios and
Page 164 and 165: Malaysia Airlines 147debt as early
Page 166 and 167: Malaysia Airlines 149with the Maldi
Page 168 and 169: Malaysia Airlines 151its fleet to a
Page 170 and 171: Malaysia Airlines 15312 November 20
Page 172 and 173: Malaysia Airlines 155state not inte
Page 174 and 175: Malaysia Airlines 157overall indust
Page 176 and 177: Proton 159was technology acquisitio
Page 178 and 179: Proton 161(when Proton’s domestic
Page 180 and 181: Proton 163Late-comer and specific c
Page 182 and 183: Proton 165Motor Company (MMC), in M
Page 184 and 185: PerformanceProton 167Although Proto
Page 186 and 187: Table 7.03 Proton: Profitability, 1
Page 188 and 189: Proton 171be able to develop its ow
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Proton 173Table 7.08 Proton: Export
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Table 7.09 Proton: Impact of reduct
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Proton 1778 May 2004). Overall, Pro
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Proton 179DRB-HICOM for RM297 milli
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Proton 181to go about it’ and Pro
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Proton 183competitiveness needed to
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Proton 185Although Proton was finan
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Proton 187Proton’s poor performan
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Summary and conclusion 189necessita
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Summary and conclusion 191appropria
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Summary and conclusion 193cost per
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Summary and conclusion 195that it i
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Notes 197directed primarily at the
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Notes 1996 IWK was incorporated as
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Notes 20111 This comprised EPF (20
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Notes 203million new ordinary share
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Notes 20515 Proton’s market share
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References 207Aziz Zariza Ahmad (19
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References 209Chee P.L. and Fong C.
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References 211Felker, G. (1993) ‘
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References 213—— (2002) World A
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References 215Mustapa Mohamed on Ec
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References 217Lum W.K. (1994) ‘Pr
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References 219Payson, W. and Steckl
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References 221—— (2002) (SMRT)
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Newspapers, magazines, websites and
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226 IndexBumiputra National Economi
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228 IndexEmployees Provident Fund s
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230 Index99-100, 104; industrial ta
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232 Index41, 50, 65, 71-2, 77, 191;
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234 Indextechnology: acquisition an
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PRIVATIZATION Privatization in Malaysia, Regulation, rent-seeking and policy failure

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