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Khazanah: time to get back to basics

  • Khazanah and other government-linked investment entities such as KWSP, KWAP, LTAT and other sovereign pension funds should have a more different role to play.

By Ten Kiat Loong

Asia's newly industrializing economies such as South Korea, Taiwan and Malaysia manged to chalk enviable economic growth rates and rapid industrialization from 1980 through the 1990s.

As a matter of fact, their transformation from agriculture-based to manufacturing-based economy to a very large extent hinged on their governments' proactive interventive roles in industrial development.

On the one hand, the Malaysian government identified strategic industries for long-term development and mobilized government machinery and resources to provide substantial subsidies, loans, tax incentives and other forms of assistance to participating companies. On the other hand, the government also set up government-linked companies (GLCs) to act as its investment arms, including Minister of Finance Incorporated and Khazanah Nasional.

The government subsequently installed public institution elites and technocrats in such government-linked subsidiaries in a bid to lead local emerging operators under the stewardship of large government corporations. GLCs began with bringing in foreign investments and technical cooperation, and then through learning and transfer of technology and setting up of spinoffs to achieve the purpose of building up the local supply chain as well as industrial ecosystem.

Nevertheless, it seems that such a propulsion force with the state leading the forward charge of emerging industrial players began to abate after 2000. Some thought it was a consequence of rising globalization and market liberalization trends. However, according to the 2017 study report Minister of Finance Incorporated by Universiti Malaya's Professor Edmund Gomez, there were signs the government never exited from the market and had instead stepped up its effort in market participation, often at the expense of private enterprises, with transactions by GLCs estimated to constitute almost 40% of the whole market. As such, improper management on the part of the government as well as fiscal crunch faced by the government were reasons behind such decline.

From the macroeconomic point of view, indeed the government was badly bruised financially during the 1997 and 2008 regional financial crises. The government's direct debts soared rapidly from slightly over RM100 billion in 2000 to nearly RM750 billion today.

At the same time, development expenditure allocations as a percentage of annual budget totals have been shrinking by the year, from almost 30% in the 1990s to only 17.4% this year. This has forced the government to remarkably withdraw policy instruments and expenditure allocations that could have been used to stimulate the economy and market.

To plug the financial hole, coupled with the then BN administration having to face the advancing threats of Pakatan Rakyat after the 2008 general elections, government-linked companies were compelled to produce a more impressive record book by pursuing quick money, distributing lucrative dividends, and involving themselves in anything from cross-border real estate investments to private medical care services.

Money was made, indeed. For example, it is beyond doubt that the market capitalization of companies under Khazanah Nasional jumped three-fold within ten years. Nevertheless, did we ever produce any unicorn companies? No! Petronas remains the only Malaysian company on Fortune 500. China, which had a much slower start than Malaysia, claims to have 129 on Fortune 500 this year, overtaking the US (121) for the first time.

This is why Prime Minister Tun Mahathir has singled out Khazanah Nasional as having deviated from its original raison d'être these past few years by investing in irrelevant businesses. For instance, Khazanah divested a 16% stake in IHH Healthcare Bhd to Mitsui & Co in end-2018, and its more recent sale of Prince Court Medical Center in Kuala Lumpur. These two institutions are private hospitals providing high-end medical services. What is the rationale behind the government's investment in luxurious private hospitals whereby local public hospitals remain plagued by perennial fund shortages?

Khazanah and other government-linked investment entities such as KWSP, KWAP, LTAT and other sovereign pension funds should have a more different role to play.

Khazanah was set up by the government with the initial objective of carrying out long-term strategic investments on behalf of the government in order to develop emerging industries in the country, or what Mahathir said “shares no one would buy”, and later reap the benefits when these companies became more matured or began to make money, and then spinoff to the private sector to achieve the goal of wealth redistribution.

As such, Khazanah should focus more on digital economy, artificial intelligence, big data, Internet of Things and other frontline sectors that require a lot of innovation and enormous R&D inputs, not to engage itself in already matured industries to compete with the private sector for a slice of the market.

In the meantime, to ensure that GLCs are moving on the right track, it is essential for parliamentarians on both sides of the political divide to actively push for the establishment of a parliamentary GLC select committee in a bid to optimize the operation, accountability and transparency of GLCs and to prevent excessive political intervention or political appointments.

(Ten Kiat Loong is Ampang Jaya Municipal Councilor.)


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