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

Malaysia Airlines 147debt as early as March 1997 (at least six months before the Asian financialcrisis).MAS was thus severely affected by the 1997 crisis, with the ringgit’sdepreciation requiring more capital injection to meet its loan obligations andworking capital. But while the industry and its competitors began recoveringafter 1998, MAS’s performance deteriorated badly until its renationalizationin 2000. The recovery of Thai Airways, despite the baht’s depreciation,suggests that there were other problems which affected MAS’s performance.In July 1997, MAS was reported to have finalized plans to raise RM3.1billion to reduce its RM6.1 billion in company loans (at US$1 = RM2.50).This was abandoned following the currency depreciation and then pegging ofthe ringgit (at US$1 = RM3.80) (New Straits Times, 22 February 2000).However, with insufficient cash flow, MAS would have been unable to surviveits over-borrowing even without the impact of the 1997–98 crisis. 22ProblemsThe data on MAS shows that its operational performance did not improvesignificantly after privatization while its financial position deteriorated considerably.This can be explained by two types of government failure. Ex antefailure was evident in the choice of owner, purchase structure (which createdan unsustainable debt burden), and an essentially unchanged state–businessrelationship, all of which undermined incentives. MAS also inherited conditionsand problems which had existed before privatization, including theneed to service unprofitable domestic routes and previous managementinvestment decisions. However, this does not explain why the governmentfailed to correct these problems when they became known. Despite a continuingrepresentation on the board, and significant powers through its ‘goldenshare’, the government failed to monitor performance or intervene eventhough it was aware of problems, including mismanagement, early on. Thisex post failure to correct earlier mistakes was arguably a more importantfactor in MAS’s poor performance as more timely intervention could havelimited financial losses. This suggests that the government’s ability to intervenewas very likely constrained by political factors, in part due to the natureof patron–client relationships, in particular, the owner’s close associationwith the Finance Minister, 23 as well as the national importance of the airline.Both these factors created a moral hazard, where the government wasunlikely to allow the airline to fail, but was also unable to intervene earlier toenforce discipline or replace the owner.Ex ante failureThere were three aspects of ex ante failure: poor selection, poor purchasestructure and the failure to account for the airline’s inherited problems. Thechoice of owner necessitated the privatization be financed entirely by loans,