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STATE INCORPORATED AND
PRIVATISATION POLICY
Dr. Chee Kim Loy
(Associate Professor)
Faculty of Business,
Economics and Policy
Studies, (FBEPS)
UBD
OUTLINE OF PRESENTATION

State Inc and Privatisation Policy:
A Development Management’s
Perspective

A Framework for Managing
Privatisation (national level)

A Case Study of Malaysia’s
Experiences
Main messages…

Global recovery, though still fragile, is now
underway, and developing countries are likely
to grow faster than rich countries.

The Doha Agenda has the potential to speed
growth, raise incomes, and reduce poverty,
and all countries have an interest in its
success.

But to realize this potential, governments have
to tackle inequities in the world trading system
– and to forge an agreement than benefits the
poor.
The rich countries: a moderate
recovery...
Real GDP, percent change
5
High income countries
4
Forecast
3
2
East Asia
financial crisis
1
4
20
05
3
2
1
98
97
96
95
94
93
92
91
89
19
90
88
87
86
85
84
83
82
99
20
00
2001 downturn
Early 1980s recession
19
81
0
Early 1990s recession
Global prospects
The rich countries: investment now
Realrising....
fixed investment, percent change at annual rates
8
Japan
4
0
-4
Euro Area
-8
-12
United States
-16
Q2 01
Q3 01
Q4 01
Q1 02
Q2 02
Q3 02
Q4 02
Q1 03
Q2 03
The developing countries: a robust
outlook
Real GDP, percent change for developing countries
Forecast
5
Early 1980s
debt crisis
4
3
2001 Global
downturn
2
East Asia financial crisis
1
1990s recession
Transition countries
4
20
05
3
2
1
99
20
00
98
97
96
95
94
93
92
91
90
19
89
88
87
86
85
84
83
82
19
81
0
CONCEPTS AND PERSPECTIVE
Concept of State Inc
Concept of Privatisation
Development Management’s
Perspective
1
State Incorporated: A
Definition
It is a national development strategy
to accelerate economic (esp.
industrial) development through
formal and informal cooperation
and collaboration between the
government and the private
business sector.
The private sector is believed to be
the main generator of economic
growth; the close alliance is to
facilitate the expansion of the
private sector.
MALAYSIA INCORPORATED
“The Malaysia Inc concept, therefore,
requires that the private and public sectors
see themselves as sharing the same fate
and destiny as partners, shareholders and
workers within the same ‘corporation’,
which in this case is the Nation. The
‘corporation’ will prosper if its commercial
and economic arm, that is the private
sector does its best... while optimizing its
returns on investment. The service arm
…the Government will provide all the
support it needed.”
Dr, Mahathir, PM of Malaysia, 1984.
PRIVATISATION:
DEFINITIONS


Narrow Definition
 The sale of public assets to
private shareholders ( i.e. 100%
or at least majority share)
Broader Definition
 Changing the status of a
business, service or industry
from state, government or public
to private ownership or control
THREE MAIN APPROACHES TO
PRIVATISATION



Change in ownership of an enterprise
(or part of it) from public to the
private sector
Liberalisation or deregulation, of
entry into activities previously
restricted to public sector
Provision of a good/service is
transferred from public to private
sector, while retaining ultimate
responsibility for supplying it
GOALS OF DEVELOPMENT POLICY
IN DEVELOPING COUNTRIES





Economic Growth
Political Stability
Social Welfare
Cultural Values
Sustainable Development
DEVELOPMENT POLICY’S
PERSPECTIVE

Economics’ Perspective


Political Perspective


Market based
State based
Development Management’s
Perspective

‘Strategic Pragmatism’ based
STATE vs MARKET DEBATE IN
DEVELOPMENT POLICY
“The consequences of an overzealous rejection
of government have shifted attention from the
sterile debate state vs market to a more
fundamental crisis in state effectiveness……
“State-dominated development has failed, but
so will stateless development. Development
without an effective state is impossible”
World Development Report, 1997
THE CONTEXT OF DEVELOPMENT MANAGEMENT
POLITICAL IDEOLOGY
GLOBALISATION IMPACTS
FISCAL CRISIS
SOCIO- CULTURAL VALUES
ICT TRANSFORMATION
ECONOMIC /
ORGANIZATION
THEORY
TENSION
TRADITIONAL PUBLIC /
DEVELOPMENT ADMINISTRATION
PARADIGM SHIFT IN DEVELOPMENT
MANAGEMENT
( e.g. STATE INCORPORATED)
MANAGERIALISM
MANAGING GOVERNMENT ACTIVITIES FOR DEVELOPMENT
PRIVATISATION
CONTRACTING FOR
SERVICES
DE-REGULATIONS /
RE-REGULATIONS
VOLUNTARY / NONPROFIT ORGANISATIONS
ORG. NETWORKS/
PARTNERSHIPS
IMPROVING BUREAU-CRATIC MANAGEMENT
‘Market-Friendly’ Development
Model: (World Bank- IMF)




Emphasis on the virtue of market with
minimal intervention by the state
Market conforming economic policies of
the government
Focusing on closer integration with the
world economy
Stress on ‘state effectiveness’ in the
role of the government in development
TWO-PART STRATEGY OF AN
EFFECTIVE STATE
Matching state’s role to its
capabilities
 Reinvigorating the state’s
capability

EAST ASIAN DEVELOPMENT
MODEL

AN EXAMPLE OF A REGION WITH
‘EFFECTIVE STATES’ ’ IN ACHIEVING
RELATIVELY HIGH LEVEL OF ECONOMIC
AND SOCIAL DEVELOPMENT IN RECENT
DECADES (1960-2000) AMONG THE LESS
DEVELOPING COUNTRIES OF THE WORLD.
The ‘Strategic Pragmatism’
Development Perspective





Period: 1970s-1997
The East Asian development ‘miracles’
Vigorous economic roles and selective
state interventions
Strategic but not total integration with
the world economy
Industrial policy to guide the market
towards planned structural change
 (e.g.State Inc and privatisation
policy)
What is Industrial Policy?
“It means the initiation and coordination
of government activities to leverage
upward
the
productivity
and
competitiveness of the whole economy
and of particular industries in it.
Above all, positive industrial policy
means the infusion of goal-oriented,
strategic thinking into public economic
policy….it is the logical outgrowth of
the changing concept of comparative
advantage”
Johnson, 1984
State Inc: Various Examples






Japan Inc
Korea Inc
Taiwan Inc
Singapore Inc (GLC)
Malaysia Inc
China Inc (?)
END OF PART I
A FRAMEWORK FOR
MANAGING PRIVATISATION
A FRAMEWORK FOR
MANAGING PRIVATISATION
Planning and Goal Setting
 Programme Development
 Structural Reforms
 Implementation

FRAMEWORK FOR PLANNING AND
IMPLEMENTING PRIVATISATION
DEFINE
PRIVATISATION
MACROPOLICY
REFORMS
Economic
Political
Governmental
SET SCOPE OF
PRIVATISATION
PLANNING &
GOAL SETTING
CHOOSE
ORGANISATIONAL
STRUCTURE
CREATE
CONDITIONS FOR
PRIVATISATION
AGENCY SUCCESS
ASSESS POTENTIAL
ADVANTAGES &
ADVERSE IMPACTS
PROGRAM
DEVELOPMENT
STRUCTURAL
REFORMS
DEVELOP
STRATEGIC
MANAGEMENT
PLAN
IMPLEMENTATION
INSTITUTIONAL
REFORMS
Market
Private Sector
Civil Society
CHOOSE
APPROPRIATE
METHODS
ASSESSMENT AND FEEDBACK
DEVELOP
MANAGEMENT
REQUIREMENTS
AND
PROCEDURES
Planning and Goal Setting






Defining privatisation
Determining the scope of
privatisation
Choosing the organizational
structure
Creating the conditions for agency
success
Assessing potential advantages
Assessing potential adverse
impacts
Programme Development
Developing a Strategic
Management Plan
 Choosing appropriate
methods of
privatisation

Structural Reforms


Enacting Economic
and Political Reforms
Developing
Institutional Capacity
Implementation



Management
Requirements
Management Procedures
Management of Social
Issues
A Final Quote on Privatisation

“Although privatisation is an essential instrument
for transforming government-controlled economies
into market-oriented systems and for making
established market economies more efficient, it is
neither a panacea for all government’s ill nor
sufficient to ensure economic progress.
Privatisation is most effective when it is part of a
broader programme of economic policy reforms
and institutional development”
D.Rondinelli (1996)
END OF PART 2
MALAYSIA INC
AND
PRIVATISATION POLICY
( a Case Study )
Malaysia Inc and Privatisation
Policy: Presentation Outline




The Political Development
Context
The Growth and Performance of
State Owned Enterprises (SOEs)
The Formulation of Malaysia Inc
‘Privatising’ Malaysia
Political Context of Malaysia
Inc and Privatisation Policy

1957-69


1970-81


‘NEP: The Second Decade- The Era of
Privatisation - First Phase’
1991-97


‘NEP: The First Decade-The Public
Enterprises Era’
1982-91


‘Bargain of 1957’: The Alliance laissez-faire
Policy
Mahathir’s Vision 2020: The Era of
Privatisation -Second Phase
Post-1997

Adaptation to New Realities of Globalisation
Size and Structure of SOE
Sector in Malaysia-1990








1,158 SOEs -Total Paid-up Capital $23 billion
About 25% of GDP
396 (or 34%) were 100% Government-owned
429 (or 37%) were majority owned
333 (or 30%) were minority equity stake
Government equity share was 70.3% ($16.7
billion)
About equal share between Federal and State
Governments
Debt-equity ratio of 180% as compare with
Relative Performance of SOEs
1980-1988
Year
Profitable
‘80 81 82 83 84 85 86 87 88
(%)
61 60 54 58 58 52 52 53 60
Unprofitable 39 40 46 42 42 48 50 47 40

About 12-19% of these SOEs were ‘sick’ companies
i.e. with negative shareholders’ fund and 24-30%
were not making profits at all!
Major Reasons for Poor
Performance

Internal microeconomic weaknesses in
the sector rather than the failure of the
macroeconomic environment
 Management weaknesses
 Poor or non-existing shareholder
discipline
 Poorly designed incentives structures
 Easy access to soft finances, poor
resource allocation
 Operational inflexibility
Malaysia Inc: 1984-1990 –
Phase I

Use the concept to formulate an effective
framework for carrying out administrative
reforms in the Malaysian public service. It
enabled the public sector
 to identify the private sector as their main
client and to zoom in on specific
components of the private sector that
required specialised support
 to earmark improvements to their own
administrative systems and processes
used in the interface wit the private sector.
Malaysia Inc : 1991- 2001
Phase II

New Mechanisms and Structures
 Malaysian Business Council (MBC),1991
 PM as Chairman
 Members from public, private and NGOs
 Development Administrative Circular No 9 ,1991
 Formalise a comprehensive /integrated approach
 The Malaysian Incorporated Officials
Committee(MIOC)
 Chaired by the Chief Secretary
 Members from public, private sectors and NGOs
 Agency-based Consultation Panels
 Dialogue Sessions
Some Encouraging Results


1998 Survey by the Political and
Economic Risk Consultancy Ltd
(PERC) placed Malaysian public
service as the 3rd most businessfriendly in Asia
1997 World Competitiveness Report
by the Geneva-based International
Institute for Management ranked
Malaysia Government as the 4th most
competitive in the world
PRIVATISATION POLICY
of
MALAYSIA
PRIVATISATION POLICY



Concept and Methods of Privatisation
Key Success Factors of Privatisation
Privatisation Policy and Practices in
Malaysia
 A Brief Profile
 Malaysia Privatisation Master Plan
( 1991)



Privatisation Achievements
Key Success Factors
Criticisms
Privatisation in Malaysia:
A Brief Profile




Started in 1983: Guidelines on Privatisation
1991: Privatisation Masterplan (PMP)
By late 1990s
 More than 400 projects implemented
 Saving in capital expenditure - about $130 billion
 Proceeds from sales of assets/equities - $22
billion
 Reduction of about 105,000 public servants
After 1997
 Additional features of privatisation
 Potential of more projects from Multimedia Super
Corridor (MSC)
Malaysia’s Privatisation
Masterplan (PMP)



FIVE OBJECTIVES
FOUR MAIN MODES OF
IMPLEMENTATION
SIX RECOMMENDATIONS
Five Objectives of PMP





Relieving the financial/administrative
burden of the government
Improving efficiency and productivity
Facilitating economic growth
Reducing the size and presence of the
public sector
Helping to meet the National
Development Policy
Six Recommendations






Privatisation should be part of a comprehensive
process of economic liberalisation reform;
Privatisation strategies have to be more carefully
tailored to meet national objectives;
The machinery for policy implementation has to be
improved;
Appropriate reforms to the legal framework are
needed;
Enhance official and public support for the
programme;
Careful management of staff sensitivities.
Four Main Modes of
Implementation




Sale of assets or equity
Lease of assets
Management contract
Built-operate-transfer (“BOT”)
Built-operate-own (“BOO”) for new
infrastructure
Built-transfer(“BT”)
Arguments for Privatisation
Policy in Malaysia





Reduce financial/administrative burden of the
government
Promote competition, improve efficiency and
increase productivity
Stimulate private entrepreneurship and
investment
Reduce the presence and size of the public
sector, with its monopolistic tendencies and
bureaucratic support
Help to achieve NEP/NDP objectives
Privatisation Achievements
NOTE


Privatisation is only one major
component of a broad structural
reform programme
Economic success of a country cannot
be attributed to privatisation alone.
Reducing Financial and
Administrative Burden




Saving in capital expenditure $130
billion
Sales of Assets/equity
$ 22 billion
Lease rentals
Reduction in public service payroll
105,000 persons
 (Telecoms, Electricity, Postal –
65% of total)
Efficiency/Productivity Gains:
Some Cases

Telekom Malaysia Bhd




After
4.0
35
9.3
60
Return on Assets(%)
Speed of Access (services)


Before
Projek Lebehraya Utara Selatan
Revenue per employee ($)
Traveling Time(hours)
77.7
15.4
217.6
7.5
Penang Port Sdn Bhd


Gross Annual Profit
Av. Container Throughput

(in 1000’s TEU)
24.14
331
41.48
386
Promoting Competition

Monopoly status to limited
competition



Fixed telephony services and cellular
phone (5 companies)
Independent power producers (11
companies)
Innovative services from Pos
Malaysia Bhd.
Facilitate Economic Growth

Corporate expansion and greater
utilisation of growth opportunities
through private sector motivation


Reduce public sector budget and reduce
infrastructure bottlenecks


Efficiency gains release resources for
corporate expansion and multiplier effects in
the economy
The 882 km North-South Highway was
completed 14 months earlier
Effect on the capital market

Improvement in KL Stock Exchange
Meeting National Development
Policy Targets



Enhance role and participation of the
Bumiputra community
Benefit other Malaysians through
collaboration and joint-venture
projects
Create new class of entrepreneurs
e.g. in infrastructure projects and
automobile manufacturing
Distinctiveness of Malaysia
Privatisation Policy



Balance between NEP interventionism
and against the laissez-faire ideals of
privatisation
UMNO (and allies)/ has become a key
player as a party through corporate
ownership and holding companies
Encouraging FDI-led development,
allowed for rapid emergence of shorter
term capital flows/portfolio type rather
than longer term productive investment
Key Success Factors





Strong commitments and realistic
approach
Adoption of new administrative
procedures
Systematic and coordinated policy
implementation
General acceptance by Malaysian public
through effective communication
Private sector capacity and enthusiastic
support
Implementation Issues






Increase in Tariff Rates or Service
Charges
Regulatory System
Bumiputra Participation
Legislation: Amended or New
Greater Transparency
Economic Downturn
Economic Crisis: Additional
Measures




Special focus on projects which
contribute to economic recovery
Implementation of contracts in
phases
Use of more local contents - building
materials and equipments
Financing from local banks and
financial institutions for new projects
Criticisms of Malaysia Inc and
Privatisation



Malaysia Inc viewed as ‘Crony Capitalism’
Dominance of Partial Divestiture – a
reflection of Malaysia Inc Policies
 Best of both worlds or worst of both
worlds!
Privatisation has been most successful
with regard to Bumiputra wealth
acquisition but not to other aspects of
NEP’s equity objectives
Criticisms of Malaysia Inc and
Privatisation…con’t

Privatisation has encouraged rentseeking behaviour associated with
political involvement by government in
business affecting investment
priorities and activities
Criticism….con’t


May undermine public welfare as a
result of the strengthening of
private monopolistic interests
Alternatives to privatisation policy
have not been critically examined
 Competition and enterprise
reforms are the key to economic
efficiencies not ownership per se
CHALLENGES AHEAD


What further lessons can we learn
from the East Asian development
in recent years (1997-2001)?
 From ‘miracles’’ to ‘mirage’?
What lessons can Brunei learn
from these East Asian countries to
manage her development agenda
effectively?
THANK YOU