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

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.

Main messages…Main messages…

0

1

2

3

4

5

1981 82 83 84 85 86 87 88 89

1990 91 92 93 94 95 96 97 98 99

2000 1 2 3 4

2005

Early 1990s recession

East Asia financial crisis

2001 downturn

The rich countries: a moderate The rich countries: a moderate recovery...recovery...

Real GDP, percent changeReal GDP, percent change

Early 1980s recession

High income countriesHigh income countries

ForecastForecast

The rich countries: investment now The rich countries: investment now rising....rising....

Global prospectsGlobal prospects

Real fixed investment, percent change at annual ratesReal fixed investment, percent change at annual rates

-16

-12

-8

-4

0

4

8

Q2 01 Q3 01 Q4 01 Q1 02 Q2 02 Q3 02 Q4 02 Q1 03 Q2 03

Euro Area

United States

Japan

0

1

2

3

4

5

1981 82 83 84 85 86 87 88 89

1990 91 92 93 94 95 96 97 98 99

2000 1 2 3 4

2005

Early 1980s debt crisis

1990s recession Transition countries

East Asia financial crisis

2001 Global downturn

Real GDP, percent change for developing countriesReal GDP, percent change for developing countriesForecastForecast

The developing countries: a robust The developing countries: a robust outlook outlook

CONCEPTS AND PERSPECTIVE

Concept of State IncConcept of Privatisation

Development Management’s

Perspective1

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

Market based Political Perspective

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 IDEOLOGYGLOBALISATION IMPACTS FISCAL CRISISSOCIO- CULTURAL VALUESICT TRANSFORMATION

TRADITIONAL PUBLIC /DEVELOPMENT ADMINISTRATION

TENSION

PARADIGM SHIFT IN DEVELOPMENTPARADIGM SHIFT IN DEVELOPMENT MANAGEMENTMANAGEMENT ( e.g. ( e.g. STATE INCORPORATED)STATE INCORPORATED)

ECONOMIC /ORGANIZATIONTHEORY

MANAGERIALISM

MANAGING GOVERNMENT ACTIVITIES FOR DEVELOPMENT

PRIVATISATION

VOLUNTARY / NON- PROFIT ORGANISATIONS

CONTRACTING FOR SERVICES

ORG. NETWORKS/PARTNERSHIPS

DE-REGULATIONS /RE-REGULATIONS

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

PLANNING & GOAL SETTINGPLANNING &

GOAL SETTING

PROGRAM DEVELOPMENT

PROGRAM DEVELOPMENT

STRUCTURAL REFORMS

STRUCTURAL REFORMS

IMPLEMENTATIONIMPLEMENTATION

SET SCOPE OF PRIVATISATION

DEFINE PRIVATISATION

CHOOSE ORGANISATIONAL

STRUCTURE

CREATE CONDITIONS FOR PRIVATISATION

AGENCY SUCCESS

ASSESS POTENTIAL ADVANTAGES &

ADVERSE IMPACTS

DEVELOP STRATEGIC

MANAGEMENT PLAN

CHOOSE APPROPRIATE

METHODS

INSTITUTIONAL REFORMS

MarketPrivate SectorCivil Society

DEVELOP MANAGEMENT REQUIREMENT

S AND PROCEDURES

MACROPOLICY REFORMSEconomicPolitical

Governmental

ASSESSMENT AND FEEDBACK

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 ‘Bargain of 1957’: The Alliance laissez-

faire Policy 1970-81

‘NEP: The First Decade-The Public Enterprises Era’

1982-91 ‘NEP: The Second Decade- The Era of

Privatisation - First Phase’ 1991-97

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 100% for private sector

Relative Performance of SOEs 1980-1988

Year ‘80 81 82 83 84 85 86 87 88 (%)

Profitable 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 business-friendly 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 Before After Return on Assets(%) 4.0 9.3 Speed of Access (services) 35 60

Projek Lebehraya Utara Selatan Revenue per employee ($)77.7 217.6 Traveling Time(hours) 15.4 7.5

Penang Port Sdn Bhd Gross Annual Profit 24.14 41.48 Av. Container Throughput 331 386

(in 1000’s TEU)

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 Efficiency gains release resources for

corporate expansion and multiplier effects in the economy

Reduce public sector budget and reduce infrastructure bottlenecks 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 rent-seeking 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