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Rethinking GLCs/GLICs in a time of stakeholder capitalism

By Liew Chin Tong, REFSA Chairman

[For Bahasa Malaysia version please click here]

There are three fundamental questions that we need to consider when it comes to government-linked corporations (GLCs) and government-linked investment corporations (GLICs).

First, should the State get involved in the economy?

Second, should the GLCs/GLICs, which are essentially agents of the Malaysian State, act as if they were private actors?

Third, what purpose should GLCs/GLICs serve in the new era of stakeholder capitalism?

The stakeholder capitalism debate and the principles of sustainable investing under the moniker ESG (Environmental, Societal and Governance) have to enter the lexicon of Malaysian GLCs and GLICs quickly.

 

First, should the State get involved in the economy?

There is one school of thought that claims that the State, as in the Government, should stay out of the economy as much as possible and not interfere with the free market. From this perspective, GLCs/GLICs have no role at all to play in the economy, which should be solely driven by private actors. In particular, an oft-made argument is that public investment from the Government crowds out private capital.

However, from the world’s recent experience, especially during the Covid-19 pandemic, it is clear that the Government plays a major role in the economy. The State is the regulator, without which we wouldn’t know which vaccine is safe. More strikingly, the Government decides on which day to shut down the economy and on which day to reopen it.

The State is often also the largest consumer of goods and services in most societies, and the insurer of last resort. As we’ve seen in recent history, when crises hit, the State is always called upon to rescue banks, businesses and workers.

On a more positive note, the State is often also a crucial angel investor. Without State funding, technologies like the internet, GPS, smart voice assistants like Siri or medical research that provided the basis for the vaccines we need would not exist. Private investors are far less likely to invest in long-term innovations and basic R&D, which have high risks of failing. Yet, when they succeed, they bring huge benefits to the public.

Therefore, all things considered, should the State get involved in the economy? The answer is yes.

Forty years ago, Ronald Reagan famously said at his inauguration that “government is not the solution to our problems; government is the problem.” Today, nations are searching for enlightened and empathetic states to deal with the grave challenges brought out by the pandemic. The world is currently writing the obituary for the Reagan/Thatcher worldview.

By now, I hope we can put an end to the silly idea that the State has no role in the economy, and move on to debate the question of how the State should get involved for maximum benefit to the public.

 

Second, should the GLCs/GLICs, as agents of the Malaysian State, act as if they were private actors?

We must be very candid about the state of affairs of state-owned enterprises, statutory bodies, and GLCs and GLICs in Malaysia. It’s time for a major rethink.

For instance, what are the most common businesses that the GLC’s are engaged in? If we leave out Petronas, it is either property development or palm oil or both, followed by banking and private healthcare. These are all established and well-developed sectors that would have no issue in attracting private capital.

That doesn’t necessarily mean these sectors should be entirely out-of-bounds for GLCs. But a huge chance is missed when they hire cheap foreign labour to maximise profit, and then turn some of their land into private houses to be sold to the masses. The same applies to those GLCs that perpetuate a two-tier healthcare system, where we see government hospitals have 30 percent of doctors for 70 percent of patients, while private hospitals have 70 percent of doctors for 30 percent of patients.

Instead, GLCs should be trailblazers in developing new production processes and new business models. They should be looking for palm oil production processes that are more efficient, move up the value chain and develop new crops that can replace palm oil. They should be looking for ways to bring state-of-the-art healthcare to everyone, instead of building more private hospitals for the few. And in the process, they should always look to create good jobs for Malaysians. As agents of the State, GLCs should pursue not only a profit-maximisation objective, but also a broader objective for the public good, that aims to address our big societal challenges of today.

Another example where this applies is the property market. GLCs and GLICs are also heavily involved in the property market, both directly (acting as property developers) and as shareholders. Here too, it is time that the GLCs and GLICs rethink their roles and move away from being the main contributors to urban sprawl, via the “plantation estate to housing estate” model. They should instead set themselves as the leaders supporting the return of Malaysians to sustainable housing in inner cities, including supporting a rental housing model; the GLICs are even stuck with huge investments into tolled highways that they find difficult to extricate themselves from.

With several massive projects emerging in KL’s inner city – TRX 106, PNB 118, Bukit Bintang City Centre, Bandar Malaysia, and possibly the Kampung Baru redevelopment, policy makers, GLCs and GLICs, as well as leaders in the private sector, must rethink our economic model and find one that suits the new Kuala Lumpur and beyond.

We may have to consider building rental housing for the middle class working population. These housing units would allow them to walk, cycle or commute a short distance by public transport. Hence there would be no need to build carparks, which would save costs for the developers. GLCs could be instrumental in introducing new forms of financing for these housing units, for example using REITs.

Until now, GLCs have somehow entrenched an urbanisation model driven by excessive financialisation. The consequences are the death of inner cities, an urban sprawl that makes the daily commute of workers costly and tiring, not to mention bad for the climate. The one-person-one-car commuting model also takes away a significant amount of disposable income. We must look for a new model that could free up this amount and hence improve the overall standard of living.

It’s time for us to rethink and rewind. The GLCs/GLICs should stop acting merely as a private player trying to extract maximum profits out of sectors such as properties, private healthcare, and commodities. Instead, they should also be run with social objectives in mind, minimising damage to the environment, mitigating climate change, creating good jobs for Malaysians and generally working towards a prosperous and fair society for all.

 

Third, what purposes should GLCs/GLICs serve in the era of stakeholder capitalism?

By now, you can see that I am all for the State’s involvement in the economy, but at the same time we are critical of the reality that the Malaysian GLCs/GLICs today are concentrated in sectors which are bad for the climate, bad for Malaysian workers, bad for health equity, and enabling too much financialisation. There are also accusations that some GLCs practices lack integrity and prone to be abused by politicians, which must be dealt with.

However, let’s not throw out the baby with the bath water. We must reorient the GLCs/GLICs to achieve common societal goals, not call for their total demolition.

We are indeed in an interesting time. After subscribing to Milton Friedman’s notion of “shareholder capitalism” which claims that the existential purpose of a private firm is to maximise shareholder value, businesses around the world, including the World Economic Forum’s Klaus Schwab, are now promoting the idea of “stakeholder capitalism”.

That the purpose of a firm is to serve not only its shareholders, but also its workers, clients, consumers at large, and the environment. Firms also have a collective responsibility to rein in the excesses of private capitalism, lest they threaten to lead to its collapse as a whole. The survival of capitalism is now deemed to be dependent on firms paying their workers better, taking care of the climate, and providing its consumers the best quality of services and products. Perhaps more importantly even, firms now have to reckon with the collective conscience of better informed and more vigilant consumers, who will call out products produced by slave labour or by burning the forest. The uncomfortable spotlight shone on Malaysian glove makers by international news outlets for their use of cheap foreign labour is just a small taste of things to come. Increasingly, firms are being held to a higher standard and asked to play their part  in ensuring that inequality is reduced for example, thereby reducing the risk of capitalism being disrupted, challenged and toppled.

This is of course what the ESG principles are all about – firms acting with environmental, societal, and governance responsibilities in mind, in addition to profit.

In such a context, we should examine the role and purpose of the Malaysian GLCs/GLICs. If private enterprises are now being asked to think about their existential social purposes and their stakeholders’ wellbeing, the Malaysian GLCs/GLICs have no excuses to ignore their public purpose. If private firms around the world have to grapple with ESG principles, they should top the agenda for a state-owned firm, whether a GLC or a GLIC.

The purpose of the GLCs/GLICs is not only, and perhaps not even primarily, to make a profit, and certainly not at the expense of ordinary Malaysians. The providers of state-owned capital should enshrine “economic security and economic dignity of Malaysians” as their existential purpose. The State should play an activist role in the economy to mobilise societal resources, particularly those of GLCs and GLICs, to address the biggest challenges in our society and to create a milieu conducive to both public and private investment. For Malaysia to move forward, we need to take into consideration the stakeholder capitalism debate and the ESG principles when we re-assess the GLC’s and GLIC’s.

Below are some examples, although the list is far from exhaustive.

First, oil.

Given that clean energy is the way to go, the world’s dependence on oil will drastically reduce in the decades to come, Petronas should be directed to embark on a large-scale R&D programme for clean energy for Malaysia. This is squarely in Petronas’ own self-interest, but a successful outcome would greatly benefit the nation as a whole.

Second, housing.

The GLCs and GLICs that own huge plots of land in and around Kuala Lumpur must be told not to effect more urban sprawl, but to invest in creating more housing in inner-city Kuala Lumpur. Further, they should espouse a mixed model, meaning not all houses are for sale, but many of the units should be for long-term rental for the middle class. Also, GLCs and GLICs that own empty office buildings in the inner city should examine the possibility of converting these old unused office towers into rental urban housing for the youth, for example.

Third, plantations.

My parliamentary colleague Ngeh Koo Ham has an insightful view about the future for the palm oil sector. He recalled that the transition from rubber to oil palm meant a great productivity gain, as the same plot of land would need seven persons to grow rubber, while only one is required for palm oil. Indonesia and other oil palm planting countries have a much cheaper labour cost structure than Malaysia’s. Further, our soils, at least in the peninsula, may not be as fertile as that of our neighbouring countries anymore. It’s time to have a 20-year plan to gradually diversify and transition from palm oil into other crops.

Apart from high yielding food supplying agriculture, Ngeh is of the view that high value timber planting may be a way out, not least because it enables a leap in productivity similar to the shift from rubber to palm oil. With a long-term plan, planters can shift to timber when the time for replanting is due. Our globally acclaimed furniture industry into this conversation, so that a sustainable downstream industry is engineered. Moreover, with a thriving timber-planting sector on the already existing palm oil estates, the authorities can move very firmly to ban all forms of logging in natural forests.

Who should make the first move? This should be the explicit mission for GLCs that own palm oil plantations. Their mission should be to create a long-term plan of sustainable land usage to benefit the Malaysian economy, workers, industries and environment, and lead the way for the private sector in implementing it.

Fourth, healthcare.

The GLCs or GLICs that own hospitals or other health-related enterprises should be directed to work on a new model for health financing that will ensure great quality of healthcare for all Malaysians, in anticipation not only of another pandemic, but more importantly to cope with our aging society.

We actually have three different systems of healthcare providers at the moment: the Government hospitals, the private hospitals owned by GLC’s and major conglomerates, and the ubiquitously available private clinics owned by individuals and small players. Failure to tap into the private hospitals and private clinics in the fight against Covid-19 has turned out to be a major mistake on the part of the Health Ministry. Covid-19 won’t be the last health crisis Malaysia will face. We need to find a way to somehow integrate all three systems into a platform that can collectively meet Malaysians’ healthcare needs. As of now, I don’t have a firm answer as to what that looks like. Is it a IJN model – incorporated but prioritises public interest? Is it an insurance scheme? Or funded by public-private matching payment? The GLICs, particularly EPF and perhaps SOCSO, should be tasked to find out the answer given that the health of their contributors has a bearing on the funds’ future financial position.

Fifth, banks.

As for any other GLC, state-owned banks should not be governed just for profit, especially if that were to contribute to a credit bubble and resulting property glut. Obviously, banks should not serve anyone’s personal interest, thus any politician or board member who wants to misuse the banks’ loans for personal favours must be prosecuted aggressively.

More widely, state-owned banks must start to apply the ESG principles in their lending and investment decisions. Malaysia is no stranger to such constraints through its leading position in Islamic banking, which stipulates industries to avoid and even the form of the financial instruments. In the future, banks should make it a badge of honour to avoid any loans that would cause pristine forests to be felled or the environment to be polluted by a toxic industry. As mentioned higher, if the banks decide not to act, their depositors, investors and the general public will be more conscious about these issues in the years to come. Banks should recognise this and start acting accordingly now.

 

Conclusion

To sum up, I find the current Malaysian debate about GLCs/GLICs a bit stale. It remains stuck on whether the State should intervene in the economy or not. One side argues the State should get out of the economy. The other side defends the GLC’s/GLIC’s either as Malay champions or as efficient-run private entities providing much-needed revenue to the state. Both arguments miss the point.

With the global financial crisis and now the Covid-19 pandemic, the debate over the state’s involvement in the economy is closed, and the answer is a resounding yes. The debate now is over what shape that involvement takes. We deserve a smart state. We deserve an enlightened and empathetic state, just as we reject a corrupt state, a heartless state, and an incompetent state. The point now is to get down to discussing what the State should do to create the conditions for stakeholder capitalism to thrive, and for Malaysians to feel economically secure, living their lives with dignity, in prosperity and in an empowering, self-confident, dynamic society.