Malaysia must shrink its GLCs

Malaysia has spent decades building a large network of government-linked companies (GLCs) on the premise that state ownership can accelerate development, protect strategic industries and generate returns for the public.

There is merit to some of these arguments. Many GLCs are profitable, professionally managed and economically important.

Investments in major companies have also generated significant dividends and capital gains for government institutions over the years.

But the profitability of selected companies should not prevent Malaysia from confronting a more fundamental question.

Why does the government need to own so many businesses in the first place?

Several years ago, a research led by Prof Edmund Terence Gomez showed that just seven federal government-linked investment companies or GLICs controlled over 68,000 companies directly and indirectly through minority interests.

A related question is: Why should the government continue to wield substantial influence over mature commercial institutions such as Malayan Banking Bhd and CIMB Group Holdings Bhd when these companies are capable of standing on their own with greater private ownership?

Meanwhile, repeated episodes of financial mismanagement involving government-owned entities have shown what can happen when political influence, commercial decision-making and public money become too closely connected.

The ongoing brouhaha surrounding Tabung Haji is a perfect example.

Political appointments can weaken boards. Commercial decisions can be influenced by objectives that have little to do with profitability.

Acquisitions can proceed despite questionable economics, while companies may accumulate debt because creditors assume that the government will eventually intervene.

When problems become serious, taxpayers frequently bear at least part of the financial consequences.

This creates a governance problem that cannot be solved merely by replacing directors after losses have occurred.

Malaysia needs to reconsider the scale of government ownership itself.

Divestments should therefore become a central part of GLC reform, not simply an occasional exercise conducted when the government needs revenue.

The objective should not be to privatise everything.

There are companies where government ownership remains commercially lucrative or strategically justified. Certain infrastructure, utilities and businesses involving national security or essential public services may require substantial government participation.

But substantial government ownership should become the exception rather than the default.

A useful starting point would be to establish an ownership ceiling for government stakes in companies operating in competitive industries.

Instead of allowing ministries, agencies or state governments to retain controlling interests indefinitely, Malaysia could consider limiting government ownership to perhaps 20% in companies where there is no compelling strategic reason for control.

The exact percentage is open to debate. What matters is establishing the principle that government control must be justified. Even a 20% stake can provide considerable influence in companies with dispersed ownership.

The government could continue benefitting from dividends and capital appreciation without necessarily controlling appointments, procurement, management strategy and corporate expenditure.

Exceptions should be permitted, but they should face much greater scrutiny.

Any government seeking to retain more than the prescribed threshold should be required to explain why control is necessary, what public interest objective it serves and why regulation cannot achieve the same goal.

Such exemptions should also be reviewed periodically rather than granted indefinitely.

The same reforms must apply to state governments.

Discussion about GLC reforms in Malaysia tends to focus heavily on federal institutions, yet states have created extensive networks of corporations, subsidiaries, investment arms and development companies of their own.

Some perform legitimate economic functions. Others operate in sectors where private companies are already capable of competing.

Every additional state-owned company introduces another layer of directors, senior management, subsidiaries, procurement processes, related-party transactions and financial exposure requiring effective oversight.

The issue becomes particularly important when political appointments extend into these companies.

A board seat in a government company should never be treated as compensation for political service.

Directors should be appointed because they possess the financial, industry, legal or operational expertise required to supervise a commercial organisation.

Management should similarly be evaluated against measurable financial and operational targets.

Malaysia cannot promote a culture of excellence while maintaining a system in which political access can influence appointments.

Reforming GLCs therefore requires more than divestment.

A proper monitoring framework should first identify every significant company owned directly or indirectly by federal and state governments. Their purpose should then be reviewed.

Companies performing functions that can be carried out competitively by the private sector should face a clear presumption towards divestment.

Companies serving genuine public policy objectives should have those objectives explicitly stated and their costs transparently accounted for.

Commercial and social objectives should not be mixed without proper disclosure.

If a company is required to provide a public service below commercial returns, the cost should be clearly recognised rather than concealed within its corporate accounts.

Government ownership also creates another economic concern.

When state-controlled companies compete extensively across property, construction, financial services, plantations, infrastructure, hospitality and other sectors, private businesses may find themselves competing against shareholders with regulatory influence, cheaper access to financing or an implicit perception of government support.

Reducing unnecessary state ownership can strengthen competition and expand opportunities for private capital.

Divestment would also free up government capital that could be redirected towards areas where public investment is genuinely necessary, including healthcare, education, transport infrastructure and fiscal consolidation.

Malaysia does not need to abandon GLCs, but it needs to define their limits.

Government investments can remain an important source of national wealth, while strategic ownership can remain appropriate in selected industries.

But ownership should not automatically mean control, and control should not become permanent simply because it has existed for decades.

The next stage of GLC reform should therefore ask a more difficult question than how these companies can be managed better: how many of them does the government really need to own at all?