By Stuart Grudgings and Siva Sithraputhran
KUALA LUMPUR, April 7 Wan Abdullah Wan Ibrahim,
managing director of Malaysia's UEM Land, thought it
was a "match made in heaven" when his state-linked property firm
bought out Sunrise, a successful property developer owned by
ethnic Chinese, in 2010.
Critics, however, saw it as a sign that Prime Minister Najib
Razak's promise to roll back the state's overbearing influence
in business and dismantle polices favouring ethnic Malays was
already ringing hollow less than a year after it was made.
Najib will this month fight what is shaping up to be the
closest election in Malaysia's 56-year post-colonial history.
Despite his promise, state-controlled firms remain stubbornly
dominant in Southeast Asia's third-largest economy and are even
moving into new sectors like property.
Some high-profile government divestments turned Kuala Lumpur
into Asia's IPO hotspot in 2012. But the enduring role of
Malaysia's "GLCs" (government-linked companies) is stunting the
private sector and entrenching an economic malaise dating back
to Asia's 1997/98 financial crisis, according to a study by two
Asian Development Bank (ADB) economists seen by Reuters.
"They can present evidence that they are divesting and yet
move into new sectors and move vested interests to new
opportunities," said Jayant Menon, one of the senior economists
who wrote the report. "It's classic politics."
The GLCs are also central to policies favouring majority
ethnic Malays over other races, including the economically
dominant Chinese minority.
Najib wants to double Malaysians' incomes by 2020 but the
economists' report is a sobering challenge to his contention
that his government is breaking Malaysia out of its
"SOMETHING TERRIBLY WRONG THERE"
Najib acknowledged in 2010 that the state's overbearing
influence on the economy was crimping Malaysia's growth and
dynamism. He says the private sector must "return to the
driver's seat" of the economy.
The government points to the $3.1 billion listing of palm
oil firm Felda in 2012 and the $2.1 billion debut of
IHH Healthcare as proof its plan to divest stakes in
33 firms is on track.
But critics point to an expansion of state involvement in
other new areas, in particular the property sector, as evidence
that vested interests within the bureaucracy and the ruling
ethnic Malay party, the United Malays National Organisation
(UMNO), have pegged back Najib's early reform ambitions.
The ADB economists say in their report that, under Najib's
rule, the real record on state firms was "more of a
diversification than a divestment". It said the deterrent effect
on private investment was contributing to Malaysia's status as
the only major Southeast Asian nation with net capital outflows.
"What we do know is that investment has slumped in Malaysia,
both foreign and domestic," said Menon.
"The fact is there is a net outflow of capital in a country
that transformed itself with huge inflows in the past. Surely
there is something terribly wrong there."
Private investment levels in Malaysia have picked up under
Najib but have never fully recovered from the Asian financial
crisis in the 1990s that signalled the end of rapid growth
fuelled by exports and high foreign direct investment.
Najib dissolved parliament on April 3, paving the way for an
election within weeks where he hopes to regain the two-thirds
parliamentary majority the UMNO-led coalition lost for the first
time in 2008. He came to power a year after that poll debacle.
In early 2010 he set out a transformative "New Economic
Model", pledging the government would move away from being an
"orchestrator" of the economy to being a "facilitator".
One stated goal of the planned 33 divestments is to help
increase the share of national equity held by Malays to a
long-held target of 30 percent. So far, 15 have been completed,
but the pace slowed to four in 2012 from 11 in 2011.
Announcing the 2012 report card for his economic programme
last month, Najib hailed a 22 percent rise in private
investment, compared with a 12 percent gain the previous year.
That, however, includes spending by the GLCs.
Total committed investments under the programme fell to 32
billion ringgit ($10.2 billion), down 82 percent from 179
billion ringgit in 2011. Foreign direct investment fell 26
percent to 29.1 billion ringgit in 2012.
GLCs play a big role across Malaysia's economy, taking up 56
percent of banking assets, 67 percent of the communication
sector and 88 percent of utilities, according to the ADB.
Defined as companies with commercial goals but with some
government control over decisions, they include Malaysia's two
biggest banks, CIMB and Maybank.
Seven out of Malaysia's top 10 listed companies are
majority-owned by the government, and GLCs make up about 36
percent of the stock market's capitalisation.
Their political role has also been underlined in the run-up
to the election, with Najib announcing that 40,000 employees of
Telekom Malaysia and postal group Pos Malaysia
would receive a 500 ringgit ($160) bonus.
He also authorised a 1,000 ringgit bonus for the 40,000
employees of state oil giant Petronas.
"They will think of it as a form of national service," an
analyst with an investment bank in Kuala Lumpur, who declined to
be identified because of the sensitivity of the issue, said of
the pre-election bonuses.
A flurry of recent moves by GLCs into Malaysia's property
sector, like the $450 million Sunrise deal, has expanded the
state's role in a sector traditionally dominated by Chinese
Teh Chi-Chang, director of the opposition-linked REFSA think
tank, called them "backdoor nationalizations" that deter
entrepreneurs in the sector.
In 2011, state investment firm Permodalan Nasional Berhad
(PNB) took a controlling stake in Malaysia's biggest property
firm, SP Setia Berhad. State-controlled plantation
Sime Darby became the largest shareholder in property
developer E&O later that year.
The three-party opposition alliance, led by former deputy
prime minister Anwar Ibrahim, has an outside chance of upsetting
Najib's coalition, according to opinion polls. The alliance
points to the expansion of state-linked firms as evidence
Najib's reform agenda has stalled.
"Malaysia has one of the most vibrant private property
sectors in the world and yet you have the government getting
involved," said Tony Pua, a leading opposition politician.
"There's no point in having our GLCs competing on building
Malaysia's GLCs have increasingly gone international in
their hunt for yield, despite the government's insistence that
there are bountiful investment opportunities at home.
A consortium including Sime Darby, SP Setia, and Malaysia's
Employees Provident Fund, bought Britain's Battersea power
station for more than $600 million last year and plans to build
luxury apartments on the site.
That helped put Malaysians ahead of Russian oligarchs and
rich Chinese on the list of the biggest buyers of London
property in the first seven months of 2012.
The government rejects accusations it is stifling enterprise
in the property market, saying projects like a new publicly
funded $8.4 billion financial exchange in the works in Kuala
Lumpur will generate opportunities for companies.
Mohd Emir Mavani Abdullah, a director at the government's
economic performance unit and a Felda board member, said the
move into London property showed that government-linked firms
were keen to avoid suffocating private firms at home.
The government also notes that many GLCs are strong
performers, with the biggest 20 generating a compound annual
return of 14.5 percent from May 2004 to April 2012, far
outperforming the Kuala Lumpur market.