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Economic Viewpoints on Privatization

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Published: Mon, 20 Nov 2017

CHAPTER 3

ECONOMIC VIEWPOINTS OF PRIVATIZATION

Initial Approach to Privatization towards Economic Improvement

In 1983, the government announced the privatization policy in hope to increase the role of the private sector in economic development. The urge to improve in economic aspect has greatly demonstrated in the objectives of the said policy, which are to reduce the financial and administrative burden on the government, to improve efficiency and to facilitate national economic growth.

The privatization approach was introduced to boost economic development in accordance with the principles of transparency and proper management. In fact, the policy had made remarkable improvement in the late 1980s till mid-1990s. However, lack of clear framework and private monopolies became the factors that violate the real intention of implementing privatization for the public good.

According to the book section written by Goh and Sundram (1998), when a public entities legally formed as a government department or statutory authority, is privatized, it must entails the formation of a limited company incorporated under the Companies Act 1965.

In next section, the positive and the negative sides of privatization will be discussed with examples of privatized companies.

Privatization: A Boon or Bane to National Economic Development?

There are several reasons to implement privatization to boost economy growth. Private companies could work more efficiently as profit making is the main concern. It led to higher efficiency and productivity in handling large projects such as highways and ports construction. For instance, the construction of the Damansara-Puchong Highway only took 28 months to complete instead of 36 months and the construction of the Port of Tanjung Pelepas was finished 6 months ahead of schedule. The privatized companies have profit incentive to be more efficient in carrying task.

Besides that, privatization offers less bureaucracy boundary and political interference in running businesses. It is often said that the governments are poor economic managers as they are mostly motivated by political pressures rather than business sense. For example, a public enterprise may hire surplus employees regardless of their working performances. The government may be reluctant to get rid of these group of workers because of the negative publicity involved in job losses. Hence, the public companies may hire too many workers with low job performance. Whereas, a privatized company will consider the efficiency of workers and lay off is common in private sectors. Private sector is more likely to cut costs and interested in making profit.

Not only that, the privatization policy allows more firms to enter the private industry and thus inducing more competitiveness of the market. This increase in competition will encourage the other companies to improve in efficiency. However, the increased competition phenomenon depends on the nature of market. For example, there is very little competition within the railway industry due to lack of common business competitors.

Also, privatization has been related to the enhancing economic growth (Huat, 1991). Growth pattern had been generated in private companies previously monopolized by the government. It shows considerable potential in Malaysia’s stock market too. The public listing on the Kuala Lumpur Stock Exchange (KLSE) of the thirteen privatized companies by June 1992 raised market capitalization by RM 201.09 billion, accounting for 28 percent of the overall capitalization and making KLSE the largest stock market in Southeast Asia and the fourth largest in Asia (Malaysian Business, 16 August 1992). The 15 privatizations on the KLSE had involved RM29.89 billion, as of 22 February 1994 (New Straits Times , 9 March 1994).

The annual revenue generated had tremendously rose due to the higher efficiency of privatization.

Table 3.1: Annual revenue of privatized companies.

Privatized Companies

Revenue (RM)

Before Privatization

After Privatization (2000)

Telekom Malaysia Berhad

1227 (per subscriber)

1755 (per subscriber)

Tenage Nasional Berhad

3.3 billion

14.3 billion

Johor Port Berhad

29.1 million (profit)

83.4 million (profit)

Penang Port Sdn. Bhd.

30.7 million (profit)

44.7 million (profit)

     

Source from the (Economic Planning Unit, 2001-2005)chapter 7, table 7-2

Gains to Government

Privatization brought economic benefits to the government in saving costs from the public expenditure. One significant benefit is reducing the government administrative burden. The Eighth Malaysia Plan (2001) reported that a total of 17442 public servants was transferred to the private sector throughout years from 1996 till 2000. Resources used for recruitment, promotion and training of personnel could be reduced and allocated to other sectors, such as education and healthcare.

Besides that, the total savings in capital expenses to the government amounted to RM 49.3 billion, since 1983 of RM 72.8 billion and 1991 of RM 51.59 billion. The policy had generated revenue from the corporate tax and concession payments. The following table shows the data extracted from the Eighth Malaysia Plan.

Table 3.2: Proceeds, Savings and Reduction in Public Sector Employees, 1996-2000

Items

1996-2000

1991-1995

1983-1995

Savings (RM billion)

     

Capital Expenditure

49.25

51.59

72.76

Proceeds (RM billion)

     

Sale of Equity

20.84

11.81

19.13

Sale of Assets

2.43

2.31

2.39

Number of the Public Sector Employees Transferred

17442

43038

96756

Sources: The Seventh Malaysia Plan(1996-2000) and Eighth Malaysia Plan (2001-2005), chapter 7, table 7-2, 7-5

Gains to Employees

Privatization could also benefited the employees in monetary means. The increased revenues gained by the privatized companies could provide the employees more year-end bonuses and wages increases. Some of the privatized companies also provide bonuses in term of shares through various schemes, such as Employee Share Option Scheme and Employee Loyalty Share Option Scheme. Privatization policy allows the employee to participate and hold shares in the privatized companies.

Promotions to higher position, including the top management is possible in privatized industries. More opportunities for career development is available for the employees compared to the public servants. For example, one of the privatized transportation companies, MAS could appoint any employee as the CEO by its own, without much bureaucracy process involved.

Successful Privatized Company Example- TELEKOM MALAYSIA BERHAD

Telekom Malaysia was established as the Department of Telecommunication of Malaya in 1946 and privatized in 1987. Financially, Telekom Malaysia Berhad has performed well (Telekom Malaysia Berhad, 2015). Within 4 years after privatized, it was listed on Bursa Malaysia. Telekom Malaysia is a steady growing company, posting a group revenue of RM 11.24 billion, an outstanding growth of 5.7 per cent from RM10.63 billion in year 2014.The group reported Profit Before Tax (PBT) rose 5.7 percent to RM 1.11 billion, against previous year of RM 1.05 billion.

Also, the group Normalized Net Profit (PATAMI) stood at RM 941.2 million and improved its capex/revenue ration at 16.3 per cent against 17.5 per cent in year 2013. Total capex spend for 2014 was RM 1.84 billion. With these financial results, Telekom Malaysia Group has achieved all its three Headline Key Performance Indicators (KPI) target of a revenue growth of 5 to 5.5 per cent.

For the quarter year financial review, the group revenue increased by 6.0 per cent from RM2.98 billion to RM 3.16 billion in 2014, which mostly contributed from the increase in revenue for Internet, Data and Others services. Below attached with the financial news report extracted from Telekom Malaysia Berhad (2015).

Figure 3.1: Financial News Report extracted from Telekom Malaysia Berhad (2015).

 

Successful Privatized Company Example- TENAGA NASIONAL BERHAD

Tenaga Nasional Berhad (TNB) was incorporated in 1990 by the Electricity Supply Successor Company Act 1990, to replace the former National Electricity Board (NEB) of the Malaya period. It is proudly stood as the largest electric utility company in Malaysia and maintain its status of the largest power company in Southeast Asia with RM 99.03 billion worth of assets.

The financial report of TNB had showed positive increment (Tenaga Nasional Berhad, 2014). The operating revenue rose over the five years statistics. Its revenue for 2014 increased by 15.25 per cent to RM 42792.40 million from the previous year. Also, the operating profit grew 21.57 per cent to RM 7181.00 million. The net profit attributable to the owners amounted to RM 6467.00 million, up 20.74 per cent from the previous year’s total of RM 5356.20 million. The promising financial records have made the TNB an attractive listed company on the stock exchange. Below is the group financial statistics of Tenaga Nasional Berhad over the years of 2010 to 2014.

Table 3.3: Financial statistics of Tenaga Nasional Berhad (2014).

Year Ended 31 August

2010

2011

2012

2013

2014

Operating Results (RM million)

Revenue

30317.40

32241.20

35848.40

37130.70

42792.40

Operating Profit

4180.00

1816.80

6680.80

5906.90

7181.00

Profit before taxation and zakat

4019.40

1156.70

5821.10

5925.10

7114.70

Net profit attributable to owners of the company

3200.80

965.40

4410.50

5356.20

6467.00

           

Source: Five-Year Group Financial Summary from Tenaga Nasional Berhad (2014).

Controversy against Privatization in Economic Aspect

Despite all the benefits claimed by the government in implementing privatization, the mechanism of driving this policy seems being exploited due to lack of clear operating framework constraint. Very often, the policy has not involved the protocol of an open tender system, or the ‘first come first serve” basis. Projects that had been identified for highly profitable under public ownership, were often awarded to individuals or companies with political connections.

For example, Goh and Sundram (1998) stated that in 1986, the RM1.4 billion worth of water supply projecs had been awarded to Antah Biwater without open tender. The said company is 51 percent owned by the Negeri Sembilan royal family’s Antah Sembilan Berhad.

Another case happen in the same year, the North-South Highway project was awarded to United Engineers (Malaysia) Bhd. (UEM). This case caused a big chaos at that time, as the company had no previous experience in the construction of highways, yet it was awarded the project even though the company has not submitted the best offer in terms of cost, duration, consumer charges and subsidized financing requirements to the government. Despite the least qualified among the four tenders submitted, the issue of conflict of interest had raised. UEM was controlled by an UMNO holding company, Hatibudi, in which the UMNO president, deputy president, secretary-general and treasurer were trustees (Asian Wall Street Journal, 28 January 1988).

Also, another example is the Indah Water Konsortium (IWK) Sendirian Berhad, led by Vincent Tan’s main listed entity, Berjaya Group Berhad, was awarded the RM 6.27 billion project without any tender process (The Star, 18 May 1993). This decision raised doubts as the company has never built anything the size of a national sewerage project (Far Eastern Economic Review, 1 April 1993).

In many cases, the privatization process is held behind closed doors and beyond ethical understandings. Somehow, the policy has been exploited by certain parties to transform public monopolies into private, making the whole process diverged from the initial objective, that is, for the overall welfare of society. This unspoken truth inhibit the competition within the market and there is very little chance of enhancing the consumer welfare and product quality.

Another example resulting in declined consumer welfare could be seen in public transport sector. A natural monopoly occurs when the number of firms in the particular industry is very few or the only one. For example, the railway industry. In this case, privatization would create a private monopoly which set higher prices to exploit consumers. KTM Berhad was able to report a good profit of RM5.7 million after only 5 months of privatization (The Edge, 20 November 1995). However, the services by the railway company have been slightly improved in marginal scale although the passenger fares were raised twice within five months of privatization. The increase in passenger fare is shown in table below. The consumer welfare was not protected at this extend.

Table 3.4: Railways: passenger fare increases.

 

From 1.8.84 (sen/km)

Effective 1.10.92 (sen/km)

Increase (%)

Effective 1.1.93 (sen/km)

Increase (%)

First class

12.14

13.96

15

15.00

24

Second class

5.47

5.74

5

6.50

19

Third class

3.36

3.53

5

3.65

7

Supplementary charge for air-conditioned coach*

RM3.00

RM4.00

33

RM4.00

33

Berth charge for first class coach*

RM15.00

RM 25.00

67

RM25.00

67

Source: Passenger Division, KTM Berhad.

*This is a standard charge irrespective of distance.

An irony situation hit in when the government need to pay higher costs with public funds to bail out the failed privatized companies, with the initial policy objective of reducing the financial burden on the government. For example, the LRT bailout issue in 1999 (Bloomberg News, 1 September 2001). The government raised RM 6 billion to rescue the Kuala Lumpur’s light- rail transit operators, PUTRA (Projek Usahasama Transit Ringan Automatik Sdn. Bhd.) and STAR (Sistem Transit Aliran RIngan Sdn. Bhd. PUTRA received RM 2 billion loan from the government in 1999. The government gave STAR more than RM 600 million in loans through Employee Provident Fund (EPF) even though the company was operating at a loss. The loss resulted in share drop amounting to RM96 million in 1999. Both companies were allowed to continue to operate and manage the national LRT systems despite of their poor management and incompetency.

Conclusion

Fair Competition and Transparency Framework

In the privatization of public utilities companies, fair competitions are encouraged so that there will be no monopoly happen on any particular industry by the government agency. Competitions are expected to increase the quality of products or services. It is also to ensure the products or services can be continuously improvised. It is a must to make sure the competition in the market is free of intervention and distortion, from any party from the government or anchor firms in the market. The suppliers of goods and services should not receive any special treatment or protection.

All these years, the implementation of privatization policy is not accountable for public interest due to lack of a well-defined operation framework. The government should maintain the principle of transparency towards the privatized companies. The main intention of implementing privatization must be kept in mind that it is for the mean of overall welfare of society, rather than the interests of particular parties.

References

Asian Wall Street Journal, 28 January 1988. s.l.:s.n.

Bloomberg News, 1 September 2001. Kuala Lumpur Revives Rail Takeover Plan. Kuala Lumpur: s.n.

Economic Planning Unit, 1996-2000. Seventh Malaysia Plan, s.l.: s.n.

Economic Planning Unit, 2001-2005. Eighth Malaysia Plan, s.l.: s.n.

Far Eastern Economic Review, 1 April 1993. s.l.:s.n.

Goh, W. & Sundram, J., 1998. Privatisation In Malaysia: A Social and Economic Paradox. In: Who Benefits from Privatisation?. New York: Routledge, pp. 183-200.

Huat, T. C., 1991. International Diversification: Role of the Public Sector in Singapore. International Journal of Public Sector Management, 4(2).

Jones, L. & Abbas, F. A., 1992. Kelang Container Terminal. Washington D.C., s.n.

Malaysian Business, 16 August 1992. s.l.:s.n.

New Straits Times , 9 March 1994. s.l.:s.n.

Telekom Malaysia Berhad, 2015. TM Delivers Steady Performance for FY 2014. [Online] Available at: https://www.tm.com.my/AboutTM/NewsRelease/Pages/TM-DELIVERS-STEADY-PERFORMANCE-FOR-FY-2014.aspx [Accessed 20 May 2015].

Tenaga Nasional Berhad, 2014. Group Financial Statistics. [Online] Available at: http://www.tnb.com.my/investors-media/financial-info/group-financial-statistics.html [Accessed 20 May 2015].

The Edge, 20 November 1995. s.l.:s.n.

The Malaysian Insider, 2014. Telekom Malaysia reports lower pre-tax profit in FY2013. [Online] Available at: http://www.themalaysianinsider.com/business/article/telekom-malaysia-reports-lower-pre-tax-profit-in-fy2013 [Accessed 20 May 2015].

The Star, 18 May 1993. s.l.:s.n.


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