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

192 Summary and conclusionagain demonstrates the fact that tariffs or fares usually have to be negotiated,as has been the case in Singapore, Bangkok and Manila.Similarly, MAS was privatized despite well-known industry problemsrelated to high capital costs and the cyclical nature of the airline industry.Furthermore, the privatization was poorly structured, based entirely on loanswhich created an unpayable debt burden and affected the owner’s abilityto finance the airline. Proton was poorly conceived as a project and failed totake into account industry characteristics, global trends (towards industryrationalization) and the substantial technological and financial challenges.As Proton’s success depended crucially on the technology acquisition processand hence, on the state’s management of learning rents, privatization was aninappropriate policy response.The fact that privatization proceeded despite these problems stronglysuggests that it was motivated by political considerations. This could thenexplain some of the choices made in terms of candidates and privatizationmethod. With the exception of LRT System 1 (which was owned by stateagencies), all the other privatizations were awarded to individuals closelyassociated with a few political leaders, in particular, the Prime MinisterMahathir Mohamad and former Finance Minister Daim Zainuddin (seeChapter 3, Table 3.07). As discussed in Chapter 3, this was related to thegrowing political contest within UMNO which saw the increasingly personalizedallocation of resources as a means of securing political support.At the same time, the political leadership also sought to continue to developentrepreneurial capacity through the privatization process. The success ofthis depended on the government’s disciplinary capacity to ensure that anyefficiency trade-off was only temporary. However, the government’s disciplinarycapacity has historically been constrained by the legacy of the NEP’spreferential treatment policies, which undermined the process of learning-bydoing,and led to a preference for easy rents. This affected the nature ofprivatized projects that were concentrated in non-competitive sectors, largelycentred on infrastructure construction, with each of the privatization caseshere providing opportunities for economic rents.Despite the lack of information, the privatized national sewerage systemwas widely regarded as profitable based on the original and even revisedtariffs. This is why each subsequent new owner was prepared to pay a premiumfor control of IWK even after the government revised tariffs downwards,and indeed, each sale netted the previous owner substantial profits.Moreover, control of IWK increased the parent company’s share price andfacilitated ‘signalling’ on the stock market to secure more bank credit onbetter terms. In the case of the LRT, the government chose to privatize boththe construction and operation of the LRT system to the same concessionairebecause profits were at least guaranteed in the former. This would have providedstrong incentives for the operator of System 2 to meet the constructiondeadline, and may explain why the foreign (technical) partner for System 1sold its stake back to the state upon completion of the project. The higher