The following is a statement from G25 Malaysia:
The political wrangle surrounding FGV shows clearly the difficult environment in which this Felda subsidiary, a public listed company, has to operate as a commercial enterprise in the market place. With Felda as the majority shareholder of FGV and Ministry of Finance Inc. having the “golden share” in the company, giving the government the ultimate power over the board, there is a heavy political presence that makes good corporate governance difficult to achieve. Felda itself is highly political as it is a statutory body set up by the government 60 years ago to spearhead the country’s land development and resettlement programme for the landless.
With big government sitting on top of both the statutory body and the operating company, FGV is in a double jeopardy situation. Changing the board chairman and directors is only part of the solution.
There are other statutory bodies like Felda which have companies involved in business. They include Mara, Risda, Felcra, Tabung Haji and State Development Corporations. The chairmanships and board positions in these bodies are treated as political rewards for the boys. However qualified the political appointees may be, they cannot escape the tentacles of cronyism and corruption associated with the politics of party patronage.
The government carried out the GLC Transformation Programme with the objective of introducing good corporate governance practices into the management of government owned companies. The primary objective of the GTP is to remove ministerial control and political influence over the running of GLC companies so they can operate in a professional manner, with clear checks and balance in the decision making process at both the board as well as at the management level. One rule in corporate governance is that no politically connected person should be appointed on the board. This rule is also applied by Bank Negara Malaysia in the banking and financial sector. It is being strictly observed in the Khazanah Group of companies. The government should extend this important governance principle to all statutory agencies and their business corporations to disqualify politically linked persons from sitting in any of their boards.
Another important recommendation coming out of the GLC Transformation Programme exercise as well as in the New Economic Model and other economic reports is that the government should consider divesting its large stake in the economy and limiting its corporate ownership to strategic sectors like utilities and infrastructure. It is a universal truth that the government is not suited to run businesses, especially in a competitive market. It is also a fact that when government related companies operating in commercial business seek loans from the banking system, the banks are often reluctant to lend them money because of the “moral hazard” and require such loans to be fully covered by collateral or government guarantee letters.
As a result of these guarantees, the government contingent liabilities on the debts of NFPEs (Non-Financial Public Enterprises) which include GLCs have grown so big in recent years that if they were all to materialise, the whole financial system will suffer badly, plunging the ringgit and triggering another economic recession. Today, government guaranteed loans have reached 15% of GDP, and the IMF assessment is that this poses a medium to high impact risk on the economy.
The private sector has rightly often complained about the “crowding out” effect of government or GLC participation in the business sector and its unfair competition with private enterprise, especially with regard to access to financing and government contracts. As the scale of unfair competition gets larger, the investment climate especially among local entrepreneurs gets worse. When local business sentiments are depressed, funds flow out of the country to seek better opportunities in other countries. A large increase in fund outflows is indicative of weakening local business sentiments, which can also be a factor in depressing the exchange rate of the ringgit.
It is essential that the government learns from the experience of the political tussle in FGV and the financial failures in several government owned enterprises over the past three decades to begin divesting its holdings and loosen its control over the economy. This will reduce the contingent debt overhang on the government’s financial position and credit worthiness and free up resources to invigorate the economy. A strong divestment policy will provide the best incentive for private investment in Malaysia to revive and drive the economy to 6 -7 % growth rates necessary for us to reach the ranks of the highly developed economies within the period envisaged under TN50.
The Malaysian economy has traditionally been led by the private sector. As this characteristic has been the success factor in our past performance, it is necessary for the long term growth of the country that we return business activities to where they belong. It is in the private sector that high paying jobs are created to raise incomes and living standards. The more we provide our entrepreneurs with the incentives of a free economy, the higher the quality our GDP growth will be.