The need to reform GLCs and SOEs

There has been much debate on the role of GLCs as a tool for the government to achieve its social objectives and how they are crowding out the private sector due to their dominating presence in the capital market.

Let’s delve deeper into the subject of GLCs. There has been much discussion about GLCs and state-owned enterprises (SOEs) crowding out the private sector, due to the sheer size of these companies. While the government says it wants to see growth driven by the private sector, at the same time, GLCs have frequently been used as a tool to achieve social objectives.

On the topic of reforming GLCs, so far, we have only seen changes at the board level of these companies. Moving forward, do you expect the government to move away from using GLCs for its social objectives, and allow the private sector to really take the lead?

Nungsari: If you look at the Employees Provident Fund (EPF), Lembaga Tabung Haji, Lembaga Tabung Angkatan Tentera (LTAT) and Permodalan Nasional Bhd (PNB), for example, these are funds, not GLCs. Later, they introduced the term government-linked investment companies (GLICs) to describe these companies. They are portfolio investors. The real GLIC is only Khazanah Nasional Bhd, because it is government-owned and the funds belong to the government. GLCs, on the other hand, are the companies owned by the GLICs.

On the issue of crowding out the private sector, the problem is that the amount of funds that have been accumulated by these GLICs are so huge, it creates the crowding-out effect. It is not that the government is crowding out private investors, but the punching power of these funds are way too big in relation to the capital market.

The other issue is governance and plugging leakages. If you look at the EPF and PNB, they do not have a problem with governance. The real problem is actually with the statutory bodies or SOEs, which have created many subsidiary companies. The wastages and leakages are at this level. The government has begun to make changes at the board level of these companies, and hopefully, they will exit a lot of the subsidiary companies. But this will also present social implications, as the employees of these subsidiary companies will need a safety net.

Gomez: My view is that we don’t need all these GLCs to achieve social objectives. The statutory bodies can handle it. The statutory bodies come under the Rural and Regional Development Ministry, which receives among the biggest allocations under the budget each year. If statutory bodies like Risda, Ketengah, and others bleed red ink, the public would not mind as much because they are tasked with helping the rural poor, handling issues relating to rural development, and solving the problem of inequality. So, why do we need the GLCs? The question that arises is - why did they set these GLCs up in the first place? This brings us back to the issue of leakages. It is about politics of patronage, and this is where we see issues with procurement, leakages and corruption. The prime minister has said there will be no more corruption under his government and I am happy to hear this, but what about the leakages that happen through the politics of patronage? If we can curb all these leakages, the government will be able to save a lot of funds that can go towards addressing many of the country’s structural problems. Will the budget deal with this?

Lee: On the topic of budget allocations for ministries, the new government has said it will no longer follow the old template. Everything has been reset. This was mentioned in the mid-term review. It has also stated that the assets and liabilities of all the SOEs will be studied.

A special ministerial committee will also be formed to review all the policies and concessions relating to the SOEs. The document even outlines plans to enforce more efficient management of public finances. This is the first time I have seen such a detailed plan that lists how the government will tackle the problem, step by step. For procurement, they will use open tenders, and direct negotiations will be based on international standards.

Procurements make up 15% to 20% of the GDP, amounting to about RM270bil. While it is an important part of implementing a project, it is also a tool for leakages and corruption.

That is why they want to strengthen the framework. I do not think it will be highlighted in the budget, but the message will be conveyed to all the relevant ministries to ensure they abide by the rules. All this has been documented in the mid-term review document.