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

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Institutional and political failure 57Table 3.02 Malaysia: Number of privatized projects by mode, 1983–2000Method 1983–90 1991–95 1996–2000 1983–2000Sale of equity (SOE) 4 94 11 109Sale/lease of asset (SOA/LOA) 5 39 35 79Build-operate-transfer (BOT) 9 21 15 45Build-operate-own (BOO) 1 18 10 29Build-transfer (BT) 0 5 0 5Corporatization (COR) 0 13 9 22Management contract (MC) 5 9 11 25Management buyout (MBO) 2 5 7 14Total 26 204 98 328Source: Adapted from Gomez and Jomo (1997: 84) for 1983–90; Malaysia (1996: 202–204) for1991–95; and Malaysia (2001a: 185) for 1996–2000.widely as possible among Malays, these privatizations were usually restrictedto services and small divestitures and contracts. Instead, a large proportionof privatization, including some of the largest, was allocated through nontransparentprocedures to a relatively small group of capitalists, both Malayand non-Malay (many who received training in NEP institutions and wereconnected to the political leadership, in particular the Prime Minister andFinance Minister) (see Ho 1988; Jomo 1990; Gomez 1990, 2002c; Barraclough2000) and to politically favoured state institutional investors andnominee companies (see Goh and Jomo 1995: Table 7.9). Furthermore, theMoF retained majority ownership of key privatized companies includingthe two largest companies on the Kuala Lumpur Stock Exchange (KLSE),Telekom Malaysia and Tenaga Nasional Berhad (TNB, the national powercompany).Regulation was similarly personalized (rather than formalized), with someprivate owners reporting directly to Mahathir. 23 This can account for thegenerally weak, often absent, regulatory framework and ad hoc nature ofgovernment intervention, often by different ministries/ministers, but with thePrime Minister having overriding authority. The low emphasis on regulationmeant that regulatory authorities were hampered by insufficient autonomyand technical expertise, and limited to safety regulations with relatively littleeconomic regulation. Regulatory design was further complicated by multiple(often social) objectives and weaknesses in competition policy (see Lee, C.2004), as well as institutional fragmentation and competing agendas (e.g. inthe public transport sector). These problems were partly due to technicalweaknesses and inherited bureaucratic structures, but also the nature ofpolitical considerations related to centralized and personalized patronagesystems.In particular, these institutional characteristics were a reflection of theincreasing conflict in UMNO and subsequent authoritarianism discussedearlier. Following Mahathir’s narrow re-election as party president in 1987,
58 Institutional and political failurehe consolidated his authority both within UMNO, where he amended theconstitution to increase his power (Milne and Mauzy 1999), and in government,with the concentration of power in a few key regulatory agenciesdirectly under the Prime Minister’s Department (Searle 1999). UMNO’s controlof key economic and technocratic agencies of government, specificallythe MoF, Ministry of Trade and Industry, and Economic Planning Unit(EPU, located in the Prime Minister’s Department) meant that decisionmakingbecame increasingly centralized, allowing Mahathir to bypass keybureaucratic interests (Felker 1999) and impose his own views on economicpolicies, with even the EPU having to defer to the Prime Minister on hischoice of key projects (e.g. see Jesudason 1989; Milne and Mauzy 1999).Here, increasing competition did not lead to decentralized patron–clientnetworks but instead prompted Mahathir to strengthen his authority, in partby securing political support through the greater personal control of resourceallocation.Privatization performance (1983–2000)Assessment of Malaysia’s privatization performance is affected by methodologicaldifficulties (discussed in Chapter 2) as well as data problems discussedin the previous section. As a result, evidence is patchy at best andinconclusive. One solution is to measure performance in terms of the officialaims of privatization.Relieving the government’s administrative and financial burdenPrivatization saved the government RM122.0–RM132.2 billion in capitalexpenditure (Malaysia 1996, 2001b; The Edge, 18 December 2000) andaround RM7 billion in operating expenditure (The Edge, 18 December 2000;Far Eastern Economic Review, 25 January 2001). 24 While savings on operatingexpenditure represented less than 1 per cent of operating (current) expenditure,savings on capital expenditure was around 25 per cent of total developmentexpenditure of the public sector from 1981 to 2000 (Malaysia 1986,1996, 2001b). However, these were only savings in accounting and not economicterms since the money was still spent on capital expenditure throughgovernment-guaranteed or soft loans to the private sector (i.e. it was effectivelystill a loan to the government but through the private sector). Mostnon-financial public enterprises (NFPEs) and even government developmentexpenditure have been primarily financed by the private capital market, albeitwith government-guaranteed loans in the former and government borrowingsin the latter.Furthermore, the state provided RM5.1 billion in soft loans for privatizationprojects (1983–96) (The Edge, 6 November 2000) and RM4.8 billion ‘forprojects with a high social component’ (1991–95) (Malaysia 1996). Most ofthese soft loans were later transferred back to the state, while ‘contingent
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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
Page 24 and 25: 2 Privatization, rents andrent-seek
Page 26 and 27: Privatization, rents and rent-seeki
Page 50 and 51: What is needed to make privatizatio
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Page 58 and 59: 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
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Kuala Lumpur Light Rail Transit 107
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Table 5.01 Kuala Lumpur LRT: Financ
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Table 5.03 Regional urban rail syst
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6 Perverse incentivesMalaysia Airli
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Malaysia Airlines 135Both types of
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Malaysia Airlines 137The industry i
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BackgroundMalaysia Airlines 139The
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Malaysia Airlines 141improvements i
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Malaysia Airlines 143Table 6.03 Reg
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Table 6.04 MAS: Leverage ratios and
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Malaysia Airlines 147debt as early
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Malaysia Airlines 149with the Maldi
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Malaysia Airlines 151its fleet to a
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Malaysia Airlines 15312 November 20
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Malaysia Airlines 155state not inte
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Malaysia Airlines 157overall indust
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Proton 159was technology acquisitio
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Proton 161(when Proton’s domestic
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Proton 163Late-comer and specific c
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Proton 165Motor Company (MMC), in M
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PerformanceProton 167Although Proto
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Table 7.03 Proton: Profitability, 1
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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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