When we read up about government-linked corporations (GLCs) in Malaysia or state-owned enterprises (SoEs) as known in other countries, it doesn’t take long for one to notice that the opinions surrounding these entities are definitely mixed. Even in my own personal experience, starting a conversation about our nation’s GLCs is like opening up a Pandora’s box – there are many conflicting thoughts and insights, both positive and negative. To be fair, both sides of the discussion have sound justifications that they bring forth.

Now, conventional wisdom has always suggested that governments should continually reduce their interest in business to avoid overcrowding the private sector and thereby kill innovation. However, I disagree. I believe such a thought has many layers and nuances that we have to consider.

The reasons for my position, at least within the Malaysian landscape, are as follows:

1. The increased demand of resources to sustain a minimum of three generations of the Rakyat (citizens)

Ultimately, Malaysia is able to stand among the top tier of the middle of country rankings primarily thanks to our rich natural resources and certain key decisions related to how we manage them. This advantage is temporary in nature and will diminish over time. We can already see this with the rise and fall of tin, rubber and the slow depletion of our oil and gas reserves. 

However, the conundrum is that people are living longer, causing more generations of the Rakyat to live in the same time period. All with different experiences, expectations and demands. The ability to cater to these demands is what will lead to the rise and fall of governments.

At the heart of this issue is that the resources we have aren’t enough to keep up with the demands of the rakyat who are living longer and are demanding better services in line with the increasing standards of living. Governments must fund the services for these demands via  cash earned through income tax and levies. To lessen the burden of the government having to bear more and more on its own, they then aim to ensure the creation of a robust private sector market who can hire the Rakyat with high paying jobs. Yet, as much as we try to grow our private sector to create high value jobs, this comes with challenges and if we follow traditional outdated investment policies, it comes at the cost of reducing the tax base of the Government – see the following next points. 

2. Malaysia doesn’t have the the same innovation ecosystem and talent draw as more established western countries

Whether you believe this is due to policy mismanagement or unfair colonial exploitation, we have to concede that Malaysia does not have the same ecosystem and talent draw as more established western countries. 

The more established western countries have already founded centres and locations that are driving innovation and new technology of various sectors, thereby enriching the companies and individuals based within their borders. At a company level, this is what is leading your Grabs, Carsomes etc. to exit Malaysia and set up their headquarters in other localities. Unfortunately, what this means is that the Government then loses its income tax gains. Conversely, at the individual level, this leads to a talent draw to these localities due to the higher salaries and perceived better lifestyle in those countries i.e. the brain drain issues that most developing countries face. A good example of this would be Silicon Valley, US.

Do note that this is not to say we can’t create a conducive ecosystem, but rather it will be harder to do and we don’t exactly have the population market advantage of say, China. On this side note, this is why the ASEAN free flow market is important to Malaysia to adjust for its low population. But this is a separate and whole long other article if we were to discuss it in detail.

3. Complex dynamics involving foreign investment, corporatocracies and external competition that Malaysia faces as a developing country

For the longest time, the prevailing wisdom for development is for countries to invite foreign investors to come and set up infrastructure in the hope that technology transfers will occur to its citizens. Foreign companies would then benefit from cheaper production due to lower land and labour and, depending on where their markets are, cheaper logistics costs. Countries will give them land or tax breaks for as long as they operate in the country. This makes sense if you have no industrial or R&D capabilities (i.e. you are a least developed country) as it would in theory be a win-win arrangement.

However, I feel the dynamics of this has changed in the era of globalisation and is no longer suitable for Malaysia that has partially developed some level of industrial capacity and is trying to jump from middle to upper tier i.e Malaysia is a developing country. What makes me say so, you ask? 

One, it is becoming harder to meaningfully engage large corporations to invest in Malaysia as our labour costs and land costs are increasing in line with our Rakyat’s earning capacity and expectations. This means the tax breaks and incentives need to be more and more costly to the government to even attract them when they are spoiled with choice from other developing and least developed countries, all of whom are competing to get them to come. There are of course some advantages like English language mastery, better basic infrastructure etc. but over time, these advantages are becoming less and less advantageous as other countries rise up – our flip flop language policies also don’t help the situation.

Two, unequal bargaining power, resources and understanding of the technology they bring. As mentioned before, the corporations that are potential investors today are huge cologmarates like Facebook, Tesla, Shopee, Google and Alibaba, whose revenues bypass even some countries’ revenues. As much as they are willing to help out to develop our nation, it comes with an open agenda of maximising their profits and keeping key trade and technology secrets within their organisations. I have always hated how some ministries will shout out low value collaborations with these MNCs instead of developing more innovative ways to encourage technology transfers. For instance, e-commerce MNCs (i.e. your Shopees and Lazadas) that collaborate with ministries only by doing subsidies for online sales vs actual training, upskilling and hiring of web application and software developers among Malaysians which is the higher paying job – all while flooding our market with cheap China goods that kills our manufacturing capabilities. To be fair, I understand, we do not have a large enough domestic market that can dictate companies like China does, but we have seen examples where successful government interventions like in Singapore can result in more meaningful impact from foreign investment. But I digress: in short, the technology transfer of foreign investors will only really be a reality if our government has smart policies and conditions in place – and this is quite a challenge to do as they must balance the unfair advantages that foreign corporations have. 

As a nation, our past leaders recognised early on that we cannot keep following Western countries’ practices for nation development because we don’t have the advantages they have; they are developed nations, while we are still developing. Introducing new tax incentive schemes to foreign companies will open the door for them to take advantage of the government, and even if we make our expectations clear to them on what we wish them to do for our local ecosystem, there are implications on local private companies that were created from first round of of tax incentive trade offs when we climbed from an agricultural economy to an industrial one (least developed country to developing country).

We actually need to approach foreign investment with a more tailored and bespoke approach that also considers how the sector will develop/enhance new/existing local champions. Failure to do so will lead us to be relegated as a follower of these foreign companies instead of leading innovation with our own local Malaysian companies. In some more dire circumstances, missteps and bad government decisions here would end up killing what little industrial capacity is built up by local private companies from the first round of tax incentive trade offs.

There is always the risk that these purely private (and even local) foreign companies will leave in the event of changes within the business environment. Should the country implement a higher minimum wage or end certain special tax incentives, for instance, these corporations can simply shift their business to other more willing countries.

GLCs as the answer for Malaysia

Just based on the above, we can clearly see the situation that our past leaders have always known: in order to survive and thrive in global business, as a country, Malaysia cannot simply follow what the west has done and are currently doing. As a developing country, the challenges we face are inherently unique and different, requiring a solution that is not practised (or even needed) in developed countries. When we consider the situations mentioned above – aside from my quick rant on better foreign investment policy – in my opinion, the best way for Malaysia to truly maximise its resources and ensure adequate protection of its citizens as a developing country is to utilise government linked-corporations (GLCs).

With GLCs, the resources of a country can be maximised to generate revenue. They can help ensure sustainable income generation for the nation, and they would also be incentivised to develop ecosystems that actually benefit the country. 

GLCs, If managed correctly, can be (and has been shown to be) the key to the rise of a developing country. In my experience working with governments of other developing nations, I have witnessed myself what our GLCs have managed to do for us to carry the nation forward thus far; I often think about how poorer Malaysia would be if we had never built the GLCs that we have now.

The roles GLCs play

In short and without going into too much detail of why and how GLCs evolved in Malaysia, there was a push beginning mostly in the 1980s to privatise government assets to increase efficiency, returns and performance of these assets while not being encumbered by government bureaucracies and processes. This was a time when our private sector was almost non-existent and had to be developed and nurtured through various approaches including the set up of GLCs, statutory bodies, outright sale to private individuals, etc. Note; for the purpose of this article, I will not be discussing the distinction between GLCs, statutory bodies and special purpose corporations.  

On that basis, the roles that GLCs have evolved to play include:

1. Answer a very specific social-business mandate 

More often than not, a GLC is set up to answer a specific social-business mandate with the idea of profits or sustainability for the benefit of the Rakyat.

For instance:

Employees’ Provident Fund (EPF) – An entity under the purview of the Ministry of Finance that manages the compulsory savings plan and retirement planning for private sector workers in Malaysia. This was set up to address the issue of ensuring retirement funds for workers who were not part of the government as they did not actively plan out their retirement savings. Today,  it actively invests the compulsory savings of its contributors to generate the necessary savings for the private workers for their retirement, to address existing issues of citizens who would end up requiring welfare post-retirement.

Retirement Fund (Incorporated) (KWAP) – Civil Service Pensions used to be wholly paid by the government but it was deemed unsustainable as the government would allocate funds for immediate disbursements. Instead, KWAP was established to act as an investment entity to generate returns which will pay for the pensions, thus addressing the issue.

Petroliam Nasional Berhad (PETRONAS) –  Upon the discovery of oil in Malaysia, to ensure the wealth stays in Malaysian hands, Petronas was set up. Today, it is Malaysia’s only Fortune 500 company which manages the oil resources of the country. As Malaysia does not have a direct Ministry in charge of oil and gas, the regulation of the sector is mostly done indirectly by them while growing out various parts of the oil and gas industry within Malaysia.

Lembaga Tabung Haji (TH) – A government-linked financial organisation whose purpose is to facilitate the Muslim community’s savings and travel arrangement for the Hajj pilgrimage. Prior its establishment, Muslim Malaysians would bankrupt themselves to go for Hajj by selling their lands and possessions, thereby being a burden on their families and the government upon their return. TH today actively invests the savings provided by members and uses the profits to subsidise the cost to perform Hajj so that Muslims will not be penniless from performing this act of worship.

There are many other examples, and in fact, some of the examples cited above don’t do justice to the actual scope of benefit these GLCs bring given how they have evolved from their initial set up days with multiple subsidiaries reaching out in many sectors and industries.

2. Wealth creation & assets maximisation

As can be seen from the above examples, at the heart of the GLC idea is to generate profits and funds to pay for their social objective. Its operations must therefore be profitable and maximise the initial assets and funds it was allocated. It is not about being a charity though over the years as can be seen in role 4, we have utilised the funds from the GLCs to partially play this role too.

3. Job creation and talent development 

Over the years, these same GLCs have also been the primary mover in Malaysia when it comes to job creation and talent development. Due to its funds and mandate, they tend to directly hire upwards of 500,000 Malaysians – see YAB PM’s recent interview in the Star dated 13 March 2022.

The human resource departments of these GLCs are also more quick to be able to spend on talent development programmes and support higher pay for staff. Even today, their compensation packages are significantly better than the majority of corporations operating in Malaysia save for select MNCs. This is especially true at the higher levels of management. This I would argue is in part due to the initial similarities to government staff, whereby the staff of GLCs are perceived as voting banks for ruling political parties as well as the argument of talent poaching by international companies (whether you agree this is a good thing in terms of talent and expertise retention is a topic for another article). 

In fact it’s my own conjecture (based on my observations from working with of both the Tanzanian and Malaysian Civil Services) on the evolution of pay structure by GLCs and global competition for talent that led to the unadvisable practice of the Government of Malaysia to open new agencies with better pay structures to perform roles that Ministries needed to function. This is a whole separate article on civil service reform that I will write at a later date. 

4. CSR work & contribution to society 

Given the initial abundance of resources and the initial less regulated governance of these GLCs, they did in fact begin to use their funds to also conduct significant CSR and charity works in Malaysia. In the best cases, these include setting up foundations/universities that relate to their mandate that spark environmental conservation efforts, educational opportunities, alleviate poverty, and even cultural and arts performance. In the not so great cases, they paid for hobbies and interests of their leadership in areas not relating to their mandate. In even more questionable cases, their resources would be mobilised to suit ruling political parties’ agendas in key electoral areas leading up to the General Elections. 

On this point in particular, forgive the overgeneralisation of this article – I do acknowledge that there are differences depending on the GLC and not all GLCs are successful. Yet, even in their not so great cases, one can still argue some benefits did flow to the Rakyat to a certain extent.

That is not to say GLCs in Malaysia have been perfect model organisations. We have had many failed ventures in the journey to set up our GLCs. And of course, we have seen our fair share of scandals like 1Malaysia Development Berhad (1MDB), issues on alleged falsification of Tabung Haji dividends and status of assets, bailouts for Malaysian Airlines, etc. In addition, some research like the Asian Development Bank’s (ADB) working paper in 2013 states that GLCs’ involvement has had a negative impact on private investment in the country, which has never recovered from the Asian Financial Crisis in 1997. These are arguments that I often hear against GLCs in the country and why the Government should move out of business and divest its GLCs..

Still, I strongly believe that we cannot ignore the stark truth that without our GLCs, Malaysia would not be where it is today. In my observations, I find that our GLCs have largely done more good than bad for this country. If I compare my observations from experience working with some African countries and governments in the past with where Malaysia is today, there is a lot that we need to be thankful for. There are some African countries I have seen that are rich with resources and had gained independence close to when we gained ours; yet the countries still struggle, where we (thankfully) were able to prosper thanks to our GLCs.

How we can maximise our GLCs advantage

That is not to say, however, that there is no room for us to mitigate existing issues and do better. While we have done reasonably well so far, there is significant room for improvement especially in light of the situation mentioned above on the scarcity of resources and the need to acknowledge that we don’t have the advantages of developed countries nor their corporations. 

If Malaysia is to not only survive as a country but to do well for its Rakyat, we will need to maximise our GLCs’ advantage so that we can break out of the middle income trap.

Moving forward, there are a few things that I believe the government/our GLCs can do to better support the country.

1. Focus on balancing revenue generation with the GLC’s public aim.

This sounds simple I know but in reality it is hard to do. I find there are typically two approaches that are being deployed depending on the GLC:

1. Profit growth at all cost even at the expense of the original social aim it was created.
2. Focus on the social aim with unrealistic revenue models/afterthought on the profit generation aspect of the entity

At the end of the day, GLCs are a business. They should be generating enough revenue that they can be self-sufficient and not keep on relying on the government for funds or backup in case things go downhill. Rather, the most ideal is if these GLCs can give back funds to the government/take care of a social issue so that it doesn’t burden government funds. 

Based on the nature of their social aim, the level of priority for revenue generation will thus be different for each GLC. It takes a very good alignment and understanding of the GLC mandate to understand to what extent do you balance the two aims of profit vs social. And this needs to be understood not just by the GLC staff but also Government officials who oversee these entities. 

Most, if not all GLCs, have a social, development or strategic objective that they hold for the nation. They are built to finance a specific aim and/or to develop a particular sector for the benefit of the nation. 

The level of priority for revenue generation will thus be different for each GLC depending on that aim. It is the objective and priority for Khazanah Nasional Berhad, for instance, to grow the strategic assets/industries in Malaysia and diversify its revenue sources for long-term economic benefits. EPF, in contrast, manages the compulsory savings plan and retirement planning for private workers in Malaysia and thus should focus on ensuring the funds are kept safe and growing. Therefore, it’s obvious that investments and revenue generation is less of a priority for Khazanah compared to EPF. .

PETRONAS, for instance, is entrusted with the responsibility to develop and add value to the oil and gas resources in Malaysia, and thus have a vested interest to engage in broad petroleum activities and generate income from them. In contrast, Prasarana Malaysia Berhad was established to own and develop the public transport assets and restructure Malaysia’s public transport system. Thus, it has an interest to ensure affordable public transport for the citizens while still developing the public transport infrastructure in the country – it’s not about growing profits yearly but how the profits generated continue to sustain cheap public transport for the Rakyat. 

For GLCs, going back to the reason behind their incorporation goes a long way to relook at their strategic decisions and what they are here for, while still ensuring their obligations are met to shareholders.

2. Overarching framework on nature and exit plan for the GLC

Without getting into the details of the hierarchy of the main six to seven Government Linked Investment Companies in Malaysia that basically controls a majority of the GLCs in Malaysia (I say majority as in my experience, I have found that, contrary to popular assumption, not all GLCs are actually under the purview of these GLICs); there is a need for strategic oversight and planning at the government level. 

Either MoF who currently has a specific department monitoring these GLCs – or at the very least at the GLICs level – need to have a framework to assess the value of the GLC and its contribution to Malaysia vs its actual social aim. It’s not just about jobs and revenue. 

We need a matrix that holistically assesses the contributions of the GLC and reassess the overarching end goal of the GLC. Depending on its social aim, we can potentially look at how it is growing local industries, fostering innovation, and keeping up with competitors etc. It would be interesting to introduce newer and more relevant KPIs like the ratio of business/revenue being generated from Government entities/other GLCs. By right, the dependency on Government contracts should be reduced the longer it is in operations and subject to its social aim. This would even be a great KPI to roll out within GLC vendor development programmes.

There should be assessments to see if the social aim of the GLC is still relevant whether they are achieving the social aim. It’s not about the KPIs, but rather the intention behind the KPIs that need to shine through with the assessment of GLCs. 

Only then can we really have a conversation of divesting government interest vs needing the government to stay in the ecosystem. 

3. Realign the CSR role to the social mandate of the GLC and look to support local private companies  

GLCs need to be more strategic about their CSR role. While it is very visible and popular, one-off CSR programmes that are not really related to their mandate is actually a drain on resources. Some scenarios to consider:

In cases where the social aim is to develop industries or better manage key assets like transportation, GLCs ideally should be aware of how the current ecosystem of the industries they partake in is developing. There should always be periodical assessments made to assess whether they are suppressing local private companies. 

They should want to grow Malaysian companies to support them and perhaps even take over from them (refer to the Matrix/Framework mentioned above in point 2). Reviews should be made internally to understand where the GLC wants to be vs where Malaysians are and where there is no local expertise that warrants participation of foreigners. Don’t overcrowd the local private sector space.

If the GLC’s role is to develop a particular industry, the CSR could be in the form of loans for local companies and the award of contracts to help companies grow. Ideally, local companies should be able to someday surpass their need for GLCs’ support and play a more dominant role in the field. See the suggestion above on the KPI on the ratio of business/revenue generated from government/GLC contracts.

In cases where revenue generation is the higher priority, in my opinion, the CSR role held by the GLC should also be examined – there may not be a need to conduct one-off CSRs for the sake of doing CSR. For example, EPF could have its CSR be more focused on financial literacy given that this was the reason they needed to be established in the first place. 

In short, let’s maximise the CSR work in favour of their social mandates.

4. Appoint the right people with the right expertise and ideology.

When it comes to GLCs, political interference should be reduced. The top management positions within GLCs are not there to reward politicians or retired members of the civil service, nor should they be dominated by those from privileged backgrounds. Rather, the leadership should be appointed with those who have demonstrated the right ideology and possession of the right expertise. 

5. Apply appropriate governance mechanisms within reason.

The recent scandals have proven, if anything, that there is a need for a robust governance mechanism in place for GLCs. Rules for procurement and approvals should be in place, and constant revisions and checks should be made to reduce and eliminate corruption. However, it can’t be made too inflexible as for the most part, we don’t want to constrain the businesses under the entities. 

Furthermore, we need to be careful in adopting standards that may affect the country negatively as a whole. For example, a recent trend is for companies to pass ESG/sustainability frameworks/guidelines. This is a great step in environmental protection and governance as a whole but the initiatives themselves must act to benefit Malaysia and its people. There must be weightages and guidelines in place so that local vendors and innovative local pilot projects are placed at the front and not just rules that will end up having foreigners supply and support GLCs with no multiplier effects to the Rakyat.   

Clearer and customised guidelines that balance these considerations of national service need to be in place to ensure that GLCs and foreigners do not dominate the field and that GLCs are always re-evaluating their role and position within the field.

In conclusion, governments today need to be more flexible and versatile in dealing with the challenges and opportunities of globalisation and technology given the scarcity of resources and the need to cater to a minimum of at least three generations’ wants and needs. This is where GLCs can be the answer for Malaysia.

 On a separate note, a part of me also wonders if we need to develop GLCs whose sole focus is to invest and generate funds for the government. Minor but significant (though not controlling) stakes should be taken in corporations that can generate funds that will in turn help ensure sustainable and continuous cash flow for our nation. This is  different from the role of developing strategic industries, but more for passive revenue generation that isn’t tax related.

In any case, one thing is clear: the rise and fall of entire nations will depend on how well governments can handle these issues. To ensure the nation has more options and means at its disposal, abundant and sustainable resources for the country both now and in the future need to be ensured. Our GLCs need to be nurtured and not suppressed for this to happen.