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

Summary and conclusion 191appropriate policy, or enforcing discipline or conditionality, represents thegovernment’s ex post failure and provides a more important explanationfor the failure of privatization. Evidence shows that the Malaysian governmenthas historically lacked disciplinary capacity, failing to withdraw subsidiesor protection, for example. Here, privatization did not improve thegovernment’s disciplinary capacity, which continued to be constrained byexisting patron–client relationships, the scarcity of capital and social costs ofbankruptcy.The discussion of Malaysia’s political economy in Chapter 3 allows us tolocate the four case studies that follow. The evidence from each of the casestudies supports the two claims made in this book. In each case, privatizationnecessitated some form of state financial support due to high capital costs.State support was also required either because cost-covering tariffs or farescould not be implemented (IWK, LRT) or learning rents were needed(Proton). IWK needed state loans in order to keep sewerage charges low andpublicly acceptable. The three LRT operators all relied on generous stateloans which accounted for between 32 and 78 per cent of project financing atfavourable interest rates and lengthy loan periods. MAS was entirely financedby commercial loans based on implicit state guarantees, but despite this, theprivate owner was unable to finance the airline’s fleet expansion. Protonrelied heavily on state support in the form of import duty exemptions, subsidiesand tax breaks to finance its capital investment.Poor performance in each case was partly due to the government’s exante failure to determine project or privatization viability and the degree ofnecessary state support that would be required either over the short term orover the longer term in each case. Such an ex ante analysis may have enabledthe identification of the institutional mechanisms that would be necessary ineach case to ensure that the subsidies were not wasted, and owners had thebest mix of incentives and compulsions to maximize their managementeffort. Thus, in the case of IWK, privatization proceeded without sufficientinformation on the economic viability requirements of sewerage treatmentplants given the constraints on pricing. This prevented the operator fromcovering operating and capital costs, and the government from determiningappropriate tariff levels. Poor data on asset condition and performance raisedoperating costs and affected the concessionaire’s ability to meet service andenvironmental targets. Inappropriate tariff levels led to bill collectionproblems that ultimately undermined the operator’s ability to meet capitalinvestment targets. IWK’s experience here also illustrates the difficulties insetting tariffs, which often have to be negotiated rather than set according tostrict economic criteria. The privatization of the LRT system was based onthe assumption that urban rail systems can be privately financed and arecommercially viable whereas this has rarely been the case. To make mattersworse, this was based on grossly overoptimistic ridership projections(arguably to secure project approval). This led to operational losses whichcould not be sustained by the operators of Systems 1 and 2. The LRT case