Wednesday, December 4, 2013

GLCs And The Public-Private Nexus

I got a call from a reporter the other day asking about this, so I’m going to set my thoughts down on paper (figuratively speaking, of course).

There’s this idea that government and government linked companies (GLCs) dominate Malaysia’s corporate landscape – Maybank, CIMB, Sime Darby, Tenaga, Telekom, and the like. These companies are either virtual monopolies, or dominate their respective industries, possibly crowding out competition and investment.

This idea is partially true – these companies are indeed big, and take a bigger chunk of the corporate sector. The trouble I have with this perception is that government linked and government controlled are not quite the same thing. More importantly, just because the investment institutions involved are government or government related, doesn’t automatically mean government money or government influence is involved – which is a claim I heard from one radio commentator recently.

There are seven major government linked investment companies (GLICs) and a few smaller ones as well. But of this bunch, only Khazanah Nasional, 1MDB and Ekuinas could be said to be directly under the government and use/have used government finance. While this isn’t exactly small potatoes – Khazanah alone manages over RM100b – they’re decidedly dwarfed by the rest. And these other institutions, while public or semi-public, aren’t managing government money.

Numero uno on that list is KWSP (or EPF), which has nearly half a trillion Ringgit under management.  EPF manages mandatory retirement savings for private sector contributors. Number two is PNB with over a quarter trillion under management, operating unit trusts i.e. voluntary investments made by Malaysians.

Third and fourth are KWAP and LTAT, which run pension funds for the civil service and armed forces respectively, with each managing approximately RM90b. Bringing up the rear is LUTH with about RM35 billion under management, investing personal savings intended for use in the Hajj. Then there’s the smaller funds, like Pelaburan MARA Berhad for example, another unit trust operator.

The difference here is that none of the funds listed above use government money for investment. While with the exception of PNB the big ones all operate under the government, their prime directive is to maximise risk adjusted returns to their contributors – not implement industrial policy.

Obviously, governance is a potential issue here (*cough* Tabung Haji *cough*), but for the most part, the latter funds operate at arms length from the government. Not wholly independent, but not exactly subject to the whims and fancies of the political wind.

Given the circumstances, it would also be difficult to say where the line should be drawn between GLC and non-GLC. Is SP Setia a GLC? Or KLK? Or Public Bank? They all have GLICs as substantial shareholders. That’s purely in the nature of things – pension and investment funds have to be invested and earn a return. In advanced economies, it’s a matter of little moment, but here we’re held to a different standard.

For the sake of comparison, CalPERS is the largest public sector pension fund in the United States, managing over a quarter trillion US dollars in assets. The fund is also well known for being an “activist” shareholder, pushing for better corporate performance, better corporate governance, shareholder rights, and ethical corporate behaviour in the companies it invests in.

Given those characteristics, which are somewhat similar to what the GLICs are doing under the GLC Transformation Program (which incidentally, goes back nearly a decade, and thus predates the ETP/GTP), can investments made by CalPERS be called GLCs? Judged under Malaysian standards, they certainly would be.

The days of active industrial policy e.g. Proton and Hicom, are well past. The government rarely tries to “pick winners” anymore, and certainly not on anything like as grand a scale as Tun Mahathir tried to achieve. The vast majority of “GLCs” are really run as any other private company would be run. Government influence over most GLCs is overrated – witness Utusan’s blatant and mostly futile attempt at bolstering its ad revenue. Nor is government involvement in the economy as pervasive as people think it is.


  1. Dear Hisham

    1) in terms of corporate wealth in malaysia, how much does GLC control? Also... is the wealth distribution in line with corporate wealth distribution by races? some ppl argue that GLC wealth is equivalent to Malay wealth and it dwarf the wealth of other races, even the Chinese.

    2) on a related question, the other day u mentioned only 25% of govt assistance which bottom 20% of population. How bout the middle 40% and upper 20%? Is it possible that high incomers consume 50% of govt assistance (i.e. subsidy)?

    1. @anon

      1. Depends what you mean by corporate wealth...and what you mean by GLCs. That's the point of my post - there are many listed companies with substantial stakes held by EPF, PNB, KWAP, LTAT, etc. Are these GLCs? By Western standards, they're not, which makes the question kind of meaningless. And the idea that holdings by EPF, KWAP, LTAT, etc are de facto Bumi wealth is totally loco. Even PNB has non-Bumi investors.

      2. The regressiveness isn't that steep. Generally speaking the proportions are only slightly skewed - approximately 60% of subsidies goes to the top 50% of the income distribution.

    2. Dear Hisham

      1) Hm, there is this prevailing argument that GLC are pro-Bumi (e.g. they hire mainly Bumis who usually are not good enough for other private usually non Bumi companies, only put Bumis in top positions, work with mainly Bumi suppliers). Companies like Petronas, Proton, Media Prima, Sime Darby etc get this description the most. Hence, because of the pro-Bumi policy, GLC is seen as de-facto Bumi companies. I think it is loco too but the perception that GLCs are pro-Bumis are quite unchallenged within the public space.

      Corporate wealth as in share in the stock market and private equity. Does the stake held by EPF, PNB, KWAP, LTAT, etc exceed stake held by private sector ? and how does GLC stake hold up against those held by private Malay, Chinese and Indian?

      2) Thank you for the info.

      Regarding fuel subsidy, I found this interesting stat within the New Economic Model report: high income groups make up 70% of the beneficiary of the subsidies for fuel product. Based on data compiled by DOS, households earning more than an average of 7k per month amount to 20% of total households. Assuming I interpret this right, we are looking at a situation where 70% of subsidy is being consumed by a mere 20% of household who make up the high income group.

      That's a massive misallocation of govt funding!

      1) The fuel subsidy usage stat came from (Page 17)
      (the reference used is from National Economic Advisory Council (NEAC). (2009). New Economic Model for Malaysia, Part 1. Putrajaya)

      2) The DOS stat
      worksheet = 1.6(i)

    3. @anon,

      1. Based on the data I have (top 20 companies under PNB), at senior exec level the split is about 50/50. For all execs, the split is about 60% Bumi, 40% non-Bumi. The data doesn't support popular perception.

      With respect to corporate wealth, that's the problem - by virtue of the funds they manage, EPF, PNB, LTAT, etc ARE private sector.They're not managing public money, they are managing the money of ordinary Malaysians like you or me. In fact PNB is literally private sector, because its 100% owned by a non-profit foundation and carries no government guarantee.

      As for the percentage, that's hard to figure out because the GLICs are not fully invested in equities. EPF for instance is legally required to hold a percentage of its AUM in MGS. The GLICs also hold an (undisclosed) portion of their assets overseas and in alternative assets.

      However I can say that private individual holdings of stocks is small at less than 20%. Most holdings are institutional, GLICs or otherwise. The actual portion of the population who are active in the stock market is about 3%.

      2. I don't think the ratio is that high. It boils down to what definition the NEM used for high income. I suspect its anything above 50% of the income distribution, which would what I know.

    4. Dear Hisham

      1) Interesting data. Is the ratio similar to companies under Khazanah and EPF? Do you have similar data for companies like Proton, Petronas?

      Which is the biggest investor, the GLICs or private institution? there's this allegation that GLIC artificially push up Bursa.

      2) based on DOS data (worksheet 1.6i), the top 50% households makes more than RM3.5+/-k per month. NEM was prepared in 2008, so the lower limit of Top 50 household income must have been below RM3k. will be damn inaccurate if NEM consider these folks high income when BR1M target households below RM3k.

    5. @anon

      1. I don't have data on the other GLICs, but I wouldn't be surprised if they were similar.

      From a back of the envelope calculation, the breakdown should be about 30-40% GLICs, 40% other institutional investors, and 20% individuals.

      As for GLICs "artificially" pushing up the KLCI, that's hardly uncommon. Many private funds do window dressing at their respective year-ends. Another reason is smart investing - the best time to buy is when valuations are low i.e. everyone else is selling. I suppose this could be considered "artifically" boosting the stock market.

      2. There's really no generally accepted definition of "high income" in Malaysia. I know who actually wrote the NEM, and I don't think they went into that kind of detail.

    6. Dear Hisham

      1) thank you for the info. really appreciate that you took the time to answer my questions. can I belanja you pizza? haha

      2) ah. then it kinda make the statement frustratingly ambiguous which defeats the purpose ("higher income group makes up 70% of the beneficiary of the subsidy for fuel product")

      but it is in-line with a study by IMF on 20 countries: on average the top 20% consume 40% of subsidy assistance whereas only 7% of subsidy assistance reached the bottom 20%.

      if we remove blanket subsidy all-together and let market prices reign (i.e price increase), will targeted cash assistance (eg BR1M) be able to maintain the current lifestyle of our bottom 80%? or does everyone need to "ubah gaya hidup" irregardless? keeping in mind my question is qualified prior to the completion of cheaper, more sustainable substitutes (eg better public transport)

      and how will subsidy removal affect unemployment and salary?

      Baig, T., Mati, A., Coady, D. & Ntamatungiro, J. (2007). Domestic petroleum product prices and subsidies:
      Recent developments and reform strategies.Washington D.C.: International Monetary Fund.

    7. @anon

      The IMF has a more up to date (and comprehensive) study on energy subsidies, which I've already highlighted:

      For your other question, the answer is no, BR1M as currently constituted will not be sufficient to offset the increase in transport costs. It would have to be bumped up significantly higher. Having said that, the biggest impact will be on middle income earners, as their expenditure on petrol and gas are much higher but they receive much less government assistance.

      The impact on employment and wages would depend a great deal on what the government does with the money it saves. It could spend it in social transfers, it could cut taxes, or even repay debt - the specifics matter.

    8. Dear Hisham

      1) Thank you for the link

      2) No doubt BR1M amount must be increased and must include the middle 40%. But the worry for most people is that it won't be enough i.e increase in transport cost and price for goods/services will exceed the assistance given. behind the scenes, is there any plan to extend BR1M towards middle income group? other than the article on the media couple months back/

    9. @anon

      Simple calculation. A Myvi has a 35 liter tank, and a full tank @RM2.10 costs RM73.5. Assuming market price is @RM2.70, this cost rises to RM94.50, a difference of RM21. Let's say a full refill is required four times a month i.e. the subsidy per month is RM84. Multiply by 12, and you get RM1,008. Standard motorcycles would be considerably less. BR1M is probably enough for the lower income group, but not the middle income earners, as you can see.

      As far as I know, there are no further plans to extend BR1M to middle income earners, beyond what was announced in the budget.

    10. Dear Hisham

      Your calculation gave me a bit of hope. I recall fuel subsidy expense is around RM40 billion. Assuming Malaysia has 6 million households and we remove subsidy then channel rm25bill to direct cash assistance for bottom 90%. poor mental arithmetic disclaimer: we could provide RM4.6k of cash assistance annually per household. That might just cover the increase in cost of living for the bottom 80% and the <10k/month top20% households that deserve some help too.

      Ah. then it is unfair for the middle income earners esp the young graduates/school leavers. Lack of impact management by the govt subsidy rationalization plan IMO

  2. Hi Hisham,

    Jayant Menon had written on this matter.

    1. Hi Greg,

      Yes I know. This post is in part a response to his paper. There's an identification problem - some of the "GLCs" he lists are true government linked companies of national interest, but some are no more than investments made to provide a return to pensioners/investors. Is this really industrial policy, or investment for social security? How do you distinguish between the two?

      A second problem I have with his paper is that he asserts a causal mechanism (affirmative action policies) for lower investment, which isn't actually part of his model specification - but that's a separate issue.

  3. Has anyone done a comparison between GLCs in Singapore and Malaysia and the respective roles of Temasek Holdings and Khazanah?

    Also what are the market cap percentages of GLCs on SGX and Bursa Malaysia respectively?

    I don't see the GLCs in Singapore being called upon to do "national service". They are run, in the main, as profit-oriented entities.

    Are the expectations in Malaysia different, and if they are, is it an unfair burden on Malaysian GLCs?

    1. @anon 4.47

      There are a few books out there on SWFs. However, Temasek doesn't disclose its holdings or the actual size of its AUM. However, they are more strongly concentrated outside of SG than Khaz is I think, although Khaz is rapidly catching up.

      The GLC transformation program (set up in Pak Lah's time) was intended to improve the performance of GLCs - so the wind's changing towards a greater profit orientation.

  4. I think that instead of looking at this along these lines maybe we should try to look at it along a different line.. talking about wealth distribution GLC/MNC occupies 70% of wealth in Malaysia and employs 40% of the country whereas SMEs employs 60% of the country with only 30% share of its wealth.. there should be policies in place which should try and protect some markets from the profit maximising efforts of GLC/MNCs.. for example FELDA IS doing house catering with its enourmous might and it will eventually kill the smaller companies in the industry.. the govt has a role to play in terms of protecting the weak because if not, we will continue to see the gap widening between the rich and the poor.. if you think that this might be a performance issue on the sme part than might you try and study how much capital is being invested in sme as opposed to glc/mnc.. or how much share of the annual growth our sme need to achieve to contribute more than 40% of gdp because to me is a wealth distribution issue and much of it relates to opportunities in the market.. govt policies have a significant impact on this and currently its not doing enough i believe to steer it right..

  5. Is not confidence in a source of unlimited funds from wealthy GLCs a driver of their market value? Was it not EPF funds that once saved failing Malaysian Airlines from being sold for cheap? So to play down the involvement of govt./bumi involvement in deals with political links is being somewhat naive