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

180 Protonproblems was the slow rate of technology acquisition and failure to achieveeconomies of scale (production capacity). As a result, the company remaineduncompetitive, relying on domestic sales, with protection levels unchanged.Proton’s overall poor performance can be explained by the government’s exante and ex post failures.Ex ante failureEx ante failure occurred at Proton’s conception and privatization. Asan infant industry, Proton’s viability crucially depended on technologyacquisition and learning rents. However, the haste in which the national carproject was originally created led to several ex ante failures on the government’spart. It failed to secure a favourable technology transfer agreementwith Mitsubishi, ensure that learning rents (protection) was temporary andconditional upon meeting performance targets, and plan for exports. These exante failures affected Proton’s learning and technology acquisition. Underthese circumstances, privatization in itself was unlikely to solve Proton’s mainproblems, at most only providing a second-best outcome, and the decision toprivatize represented another ex ante failure. The government continuedto underestimate the problems inherent in the auto industry (and especiallyan infant industry), and the ability of the private sector to undertake such aproject, particularly where other economic and social objectives wereinvolved, namely Proton’s role in spearheading industrialization by supportinglocal (Malay) component manufacture.Proton’s technology acquisition was affected by political considerations,namely the need to promote Malay (and bypass domestic Chinese) capital,and the legacy of the NEP which compromised learning. This affectednegotiations for technology transfer and the learning process, creating additionalproblems for Proton as a late comer, and subsequently also affectingits performance after privatization. Negotiations with Mitsubishi, Proton’stechnical partner, were compromised by inexperienced (HICOM) officialsand the highly centralized and secretive nature of negotiations, led byMahathir, which excluded Malaysian Industrial Development Authority(MIDA) officials and (Chinese) Malaysian firms with experience in CKDpricing, technology transfer and local content (Doner 1991). As a result, thecontract left several areas vague (including future local content levels, CKDunit prices, royalty payments, local content, technology transfer, andexports), providing gains ‘far more secure for Japan and Mitsubishi than forMalaysia’ (Far Eastern Economic Review, 20 April 1989; Doner 1991). 25Moreover, Proton did not have the right management or engineeringexpertise to meet learning requirements, and opted to use existing componentsand make modifications to the existing body instead of graduallydeveloping its own technology (Malaysian Business, 16 October 2002; also seeBusiness Times, 10 January 1992). According to Proton’s managing directorMohd Nadzmi, technology transfer was slow because ‘no one knew how