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

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Institutional and political failure 75by potential short-term rents instead of longer-term profits arising fromimproved operational efficiency. This is most evident in the case of the LRT(where construction costs were higher than comparable regional networks)and Proton (where the company continued to rely on profits from a protecteddomestic market). Even in the case of IWK, privatization was very likelydriven by the prospect of monopoly rents from compulsory sewerage charges.Irregularities at MAS suggest that rents may have been earned from thepurchase of aircraft and the creation of subsidiaries. This preference forshort-term profits through rent capture was also arguably consistent with theabilities of the private operators, most of whom had no previous experiencein these or related sectors.Here, the government failed to address potential moral hazard problemswhich made these short-term rents more attractive than potential profitsarising from greater efficiency in operations and production. However, thisis not to say that failure was due to the poor choice of candidates. As mentioned,the selection of these candidates was politically and economicallycircumscribed, and also needs to be considered in terms of state effortsto create domestic capitalists. In this context, it was crucial the governmenthad the capacity to manage the subsidies necessary for ensuring that theprivatization was viable. It therefore needed credible sanctions to ensure thatthe privatizations addressed industry challenges (see Table 3.08). Instead,failure was ultimately due to the government being unable to implementthe necessary ex post measures to address industry challenges and promotelearning. There is evidence that the government attempted but failed toenforce the collection of tariffs (IWK), coordinate investment and publictransport policy (LRT), and enforce discipline (Proton, MAS).Each of these failures highlights the different political constraints to thestate’s political capacity. With the possible exception of IWK, these politicalfailures can be partly explained by changes in social relations which increasedcompetition for resources in UMNO and changed the nature of patron–clientnetworks, compromising privatization decisions, related institutions andregulation, and ultimately the government’s capacity to correct mistakes. Thegovernment’s disciplinary capacity had historically been weak, and attempts,through privatization, to improve (Malay) private sector inefficiency arisingfrom the NEP largely failed. This was partly because successful privatizationrequired the effective management of rents, yet privatization per se did notenhance the state’s political capacity to enforce the rules and conditionalityintegral for the success of any subsidy programme.This allows us to explain why the completion of LRT System 3 was considerablydelayed and the project scaled down without penalties (when theconcessionaire ran out of money) as the concessionaire was closely associatedwith the Prime Minister and Finance Minister. As for LRT System 2 andMAS, the owners were closely related to UMNO, and in particular, Daim,possibly even acting as proxies. This may explain why the government failedto intervene earlier in the case of MAS, and why its owner and LRT System 2
Table 3.08 Malaysian case studies: ChallengesIWK LRT MAS ProtonBackground Sewerage needs Traffic congestion Capital expansion Fragmented auto industryObjectives Expand coverage, improveservice and efficiencyIndustry challenges High capital costs, publicunwillingness to paySpecific challenges Information, regulation,cost covering tariffs, tariffenforcementPerformance indicators System coverage,refurbishment and capitalworks, service delivery,environmental standards,local technologyPerformance Exceeded takeover targetsbut failed to meet coverage,service, capital investmentand environment targetsEx ante failure Privatization design,institutional framework,tariffsEx post failure Failure to enforce paymentof tariffsCapital works, privateincentivesHigh capital costs, lowrevenue, price capsState coordination ofsystem integration andtransport policyFinancing, delivery,financial performance,traffic volumeFinancing relied on stateloans; STAR, PUTRA metdelivery targets; operatingrevenue too low (STAR,PUTRA); increasing trafficcongestionPrivatization design,system integration,transport policyFinance airline expansion,raise efficiencyHigh capital costs,uncertain operatingrevenue, cyclical demandFinancial structuring, lossmakingdomestic sectorOperational efficiency,financial performanceSome improvement inoperational efficiency butstill inefficient by regionalstandards; financialposition deteriorated badlyPrivatization design,previous managementdecisions, presentgovernment policiesFailure to integrate system Failure to restructure debtand intervene earlierAccelerate technologytransferHigh capital costs, product/production technologies,economies of scaleTechnology acquisition,local contentFinancial performance,production capacity,exports, protection,technology transfer, localcontentImproved financialperformance but ongoingprotection; production andexports increased butbelow targets; sometechnology transfer;increased local content athigher costProject viability, regulatoryframeworkFailure to enforceconditional learning rents
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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
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2 Privatization, rents andrent-seek
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Privatization, rents and rent-seeki
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Page 42 and 43: Privatization, rents and rent-seeki
Page 50 and 51: What is needed to make privatizatio
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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
Page 124 and 125: Kuala Lumpur Light Rail Transit 107
Page 132 and 133: Table 5.01 Kuala Lumpur LRT: Financ
Page 136 and 137: Table 5.03 Regional urban rail syst
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Kuala Lumpur Light Rail Transit 125
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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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PRIVATIZATION Privatization in Malaysia, Regulation, rent-seeking and policy failure

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