1.

0 INTRODUCTION

Malaysia is among the first few developing countries that implemented a large scale

programme of privatization of public enterprises. The Privatization Policy was launched in

1983 by Tun Dr. Mahathir Mohammad to support the Malaysia Incorporated Policy towards

increasing the private sector’s role in the country’s economic development. To implement the

policy, a Privatization Section which earlier known as Privatization Special Task Force was

formed by the Government and was put under the Economic Planning Unit of the Prime

Minister’s Department (EPU, PMD). It’s act as the secretariat to the Privatization Committee,

which in turn is made up of various agencies working towards finalising and confirming the

proposals on privatization for the Minister’s Council’s approval.

Generally, Privatization Policy is a process of transferring the control of an enterprise

from the government sector to the private sector. According to Director General of Economic

Planning Unit (EPU), “Privatization is a strategy by the government of rolling back its

involvement in favour of freedom, competition, efficiency and productivity”. Privatization

Policy can be defined as a systematic transfer of the activities and functions which are

currently perform by the public sector entities to the private sector entities. It does not only

includes the existing enterprises that already owned by the government but also the new

enterprises which have been in the domain of public sector.

Among the achievements in the implementation of Privatization Policy are its

provided infrastructure facilities of world class stature such as the North-South Highway, the

development of the Light Rail Transit (LRT) and Kuala Lumpur International Airport (KLIA)

projects. Besides that, it created local conglomerate companies which are successful and

competitive such as Tenaga Nasional Berhad and Telekom Malaysia Berhad. Furthermore,

due to the participation of Bumiputra entrepreneurs, the Privatization Policy also provided

employment opportunities and producing a professional work force in the private sector.

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2.0 CONCEPT OF PRIVATIZATION

The Privatization Policy involves the transfer of various government interests or

investments to the private sector. More specifically, privatization can be defined as a

systematic transfer of the activities and functions which is traditionally performed by the

public sector entities to the private sector entities. The transfer does not only include the

existing enterprises already own by the government but also the new enterprises that have

been in the domain of the public sector.

The transfer that associated with the process of privatization generally involves three

basic components which is management responsibility, assets and personnel. Conceptually,

privatization must involve the transfer of at least one basic component. However, in actual

practice, the process of privatization is said to be incomplete if it does nit actually lead to an

effective transfer of all three components.

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3.0 OBJECTIVES OF PRIVATIZATION

The Privatization Policy is designated to achieve several objectives that may give

benefits to the government economy. The main objective of the Privatization Policy is to

reduce financial burden of the government. The government’s aim to provide a large number

of resources of development programmes to ensure rapid economic growth. Moreover, the

Privatization Policy is a new approach in relieving financial burden due to the exceeding of

rapid growth of government expenditure than the growth of government revenue where it’s

resulted in the widening of the resource gap.

Besides that the Privatization Policy is also expected to improve efficiency and

productivity. Due to the restrictive rules and procedures, the government agencies are often

constrained and thus it’s affect the decision making process. The government also feels that

protections of several public enterprises are inefficiency and low productivity. Thus, the

implementation of the Privatization Policy is more effective since the private sector is likely

to be more efficient and innovative than the public sector. (Jeff Tan, 2008, p.59)

According to EPU, the Privatization Policy is expected to contribute in facilitating

economic growth by enlarging the role of private investment in the economy and widen

opportunities for private enterprise. Since several activities and public enterprises will be

privatized under the Privatization Policy, thus it can provide incentives to the public sector to

acquire assets and make the more profitable. Moreover, the government will able to gain

more revenues to finance its development plans due to the higher efficiency of private

enterprises. Besides that, privatization of new project will result in further growth because the

government might suspend the project due to the financial constraint.

Another objective of the Privatization Policy is to reduce the size of the public sector

through withdrawal by the government from active and direct participation in economic

activities. In 1970s, the public government’s role in the economic had extended beyond the

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traditional area in order to provide goods and services but the development is not healthy.

Therefore, the government decided to withdraw its involvement so that it can encourage the

private sector to participate.

Lastly, the Privatization Policy is expected to provide vast opportunities towards the

achievement of National Economic Policy where the principle of equitable distribution

through growth. While the numbers of Bumiputra entrepreneurs and their participation in the

economic activities have been growing, there is an urgent need to achieve further rapid

progress in respect of restructuring the ownership pattern in the economy. Thus, the in the

implementation on Privatization Policy it would enable the Bumiputra to participate directly

or indirectly in the privatizations projects.

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4.0 IMPLEMENTATION OF PRIVATIZATION

The Economic Planning Unit (EPU) under the Prime Minister’s Department was in

charge in implementing the Privatization Policy by looking into the overall problems in its

implementation and monitors its progress. Thus, to studies the issues, technical committees

comprising of personnel from relevant departments and ministries are formed. Necessary

steps are taken based on their recommendation to initiate the process of privatization of the

undertaking.

According to Public Private Partnership Unit (UKAS) under Ministry of Finance

Malaysia, since the implementation of Privatization Policy from 1983 to April 2009, about

500 privatised projects have been implemented throughout the country. The Government has

benefited through savings in the form of capital expenditure amounting RM161 billion and

annual management expenditure which is the operations amounting to RM7.79 billion. The

burden of the Government’s administrative expenditure was successfully reduced following

the privatization of 58 Government agencies which involved the transfer of 113,440

government employees to the private sector. Thus, the savings has enabled the Government

to redistribute it to the more needy sectors such as the education, health and poverty

eradication programme.

It shows that the methods used by the Malaysian Government for Privatization Policy

of public entities are quite varied. According to Bakul H Dholakia and Ravindra H Dholakia

(1994, p.27), the Privatization Masterplan (1991) prepared by the Economic Planning Unit

(EPU) with the help of committee has vividly describes several methods for implementing

Privatization Policy.

First method of Privatization Policy in Malaysia is sale of equity. This method is

applies to government companies and its result in the transfer of three components namely

management responsibility, assets and personnel. Sale of equity can either be partial or

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complete. A partial sale represents a transfer of less than 100 per cent while a complete sale

represents a transfer of 100 per cent government equity in a company. Examples of

privatization that applying this method are Tenaga Nasional Berhad, Sports Toto Malaysia,

Malaysia Airlines System Cement Industries of Malaysia and Malaysian International

Shipping Corporation.

Second method is sale of assets. This method can apply to any kind of government

organization either it is a company or any other type of entity. Sale of assets method is may

or may not involve the transfer of the three components which is management responsibility,

assets and personnel. Examples of sale of assets method are Quarries in Selangor, Perak and

Pulau Pinang and Motel Desa Sdn. Bhd.

Third method of Privatization Policy is lease of assets. This method involves the

transfer of rights to use the assets for a specified period of time in return for specified

payments. The length of the period is depends on the type of the project. For example, in the

case of the North-South Highway it takes 28 years while in the cases of Malaysia Airports

Berhad, it takes 60 years respectively. It is applicable to fixed assets if the assets are large and

strategic in nature such as the airports. Therefore, lease rentals are based on future business

prospects and not on the current value of the assets while the payments are calculated on the

basis of a stream of income and expenditure flows over the lease period. However, for the

corporatized entities, lease rentals during the initial stages could be only nominal rates

applicable for a period of five years or when the entity is privatized, whichever is earlier.

Then, the lease rentals are based on the market rate after the initial period is over. Examples

of lease of assets method are Institute Jantung Negara, Shah Alam Abattoir and Syarikat

Printing Malaysia.

Fourth method is Management Contract where it involves contracting of private

sector managed expertise to management government entities for a specified fee. It does not

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involve transfer of personnel and transfer of assets but it entails the transfer of management

responsibility. An example of Management Contract method is the privatization of the

management of water treatment plant at Semenyih Dam.

Lastly is Build-Operate-Transfer (BOT) and Build-Operate (BO) method. Build-

Operate-Transfer (BOT) is applicable for privatizing new projects such as roads and water

supply projects. BOT involves the following steps : the private sector constructs the facility

using its own fund, operates for a concession period and later on transfers it to the

government. While Build-Operate (BO) is similar to BOT but it does not involve the transfer

of facility to the government. Both BOT and BO are accompanied by a grant of license. Some

examples are Jalan Kuching-Kepong Interchange, North-South Highway, Second Crossing

(BOT) and TVS (BO).

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5.0 THE ADVANTAGES / IMPACTS OF PRIVATIZATION

The Privatization Policy which is implemented in 1983 gives more advantages to the

government of Malaysia especially toward the economy. The Privatization Policy seems to be

successful and it can be said that it has facilitated Malaysia’s remarkable economic recovery

especially after 1989. Build-Operate-Transfer (BOT) projects gives more impact because it is

effectively implemented by the private sector companies and at the same time using its own

resources. This projects does not only augmented the rate of investment in the economy but

has also enhanced the development of basic infrastructure required for industrial growth. For

instance, a study made by the EPU show that prior to the privatization of Klang Container

Terminal, the average turnaround time per vessel was 11.7 hours which declined to 8.7 hours

per vessel after two years of privatization.

According to the objective it shows that the government’s financial burden has been

reduced considerably as a result of successful privatization of several entities. The one time

revenue accruals from the partial sale of equity in government enterprises produced RM 8.6

billion. Moreover, the government also enable to reduce its current expenditure to RM 4.8

billion directly on account of saving of operating expenditure it would have otherwise

incurred on the entities that were privatized. Besides that the corporate tax collections have

also shown rising in recent year partly on account of higher corporate taxes paid by privatized

entities.

The services and management of privatization also has improved significantly as it

shows that the increasing in efficiency and productivity indicators. It was due to the

upgrading of facilities by the companies which able to acquire new and modern technology,

expanded capacity and service network, fostered changes in management and organization, as

well as inculcated positive attitude among their employees. In addition, privatization also led

to faster implementation of projects especially highway and port projects. For example, the

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construction of the Port of Tanjung Pelepas in Johor was completed six months ahead of

schedule, while the construction of the Damansara-Puchong Highway was completed in 28

months instead of 36 months.

Besides government, public also gains benefit from the privatization as the facilities

provided were made available earlier than they would have been if the projects are taken by

the Government. The delayed is due to the limited resources on the part of Government. The

public will benefited through the provision of more efficient and wider coverage of services.

The most successful project is the aril services such as Keretapi Tanah Melayu Berhad

(KTMB) Commuter Services, Light Rail Transit System I (LRT-STAR) and LRT System II

(LRT-PUTRA) which provided a fast and efficient alternatives transportation system in

Klang Valley. These rail services has reduced travelling time and contributed to ease the

urban traffic congestion.

The quality of services of privatized utilities also shows improvement. About 98 per

cent of calls made by subscriber trunk dialling (STD) were successful on the first attempt,

while 96 per cent of calls made to Telekon Malaysia Berhad (TMB) operators were answered

within 10 seconds. Besides that, consumer also gained from the improved performance of

Tenaga Nasional Berhad (TNB). Incident of breakdown were substantially reduced fom

311,190 upon privatization, to 42,850 in 2000. This translated to a System Average

Interruption Duration Index (SAIDI) from 770 minutes per customer per year in 1996, to 319

minutes per customer per year in 2000.

National Development Policy (NDP) which is produced to replace National Economic

Party (NEP) focusing that Bumiputera entrepreneur’s participation was given further

emphasis through the privatization programme. The participation of Bumiputera entrepreneur

will become wider in commercial and industrial activities through the management-buy-out

(MBO) exercise, contracting works and vendor developments programme. In addition,

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collaborations or joint ventures were encouraged between the Bumiputera and non-

Bumiputera companies as well as institutional investors including State agencies and

cooperatives.

In order to increase the productivity and efficiency, privatized entities undertook in

house and on-the-job training to improve the key functional skills in finance, marketing,

personnel management and public relations. Moreover, the private entities have make an

effort to provides special training programmes to enable the employees to make a smooth

transition from the public to the private sector. In the year 1996 until 2000, a total of 256,760

employees were trained, of whom 216,666 were Bumiputera and 44,094 were non-

Bumiputera. The total amount expended for this purpose during the period was RM323.7

million.

Lastly, the implementation of Privatization Policy also enhances the development of

technology. Privatized project, which is implemented under the build-operate-transfer (BOT)

and build-operate (BO) methods, adopted state-of-the-art technologies and enabled the

transfer of technologies such as the construction and management of a modern integrated

hazardous waste treatment facility. The energy sector provided opportunity more Malaysian

companies in the transmission and distribution activities such as cable-laying or construction

of transmission towers. New techniques were adopted including micro-piling and recoiling

for road surfacing and fully automated and driverless system in light rail transit. Thus, the

transfer of technology was also facilitated through management and technical training.

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6.0 THE DISADVANTAGES / ISSUES OF PRIVATIZATION

The Malaysian government has already amended a number of laws which could have

posed serious unintended obstacles to the privatization programme. For instance, the

Pensions Act (1980), the Telecommunications Act (1950), the Port Authorities Act (1963)

and the Electricity Act (1949) have already been amended to facilitate smooth

implementation of the Privatization Policy. Moreover, through deregulation, the government

mainly intends to allow maximum practical degree of competition in privatized industries so

that free play of market forces would dictate economic decision making in such industries.

The sale of equity in privatization requires appropriate valuation of the amount of

equity to be sold. Some of the standard methods of equity valuation considered in Malaysia

are the Net Tangible Asset (NTA) method, the Price-Earnings Multiple (PE Ratio) method

and Discounted Cash Flow (DCF) method. Malaysia Government has used the PE Ratio and

DCF methods for valuation of equity because they take into account the future earning

prospect of the privatized entity duly incorporating the opportunities as well as the constraints

implicit in market-oriented operations.

Besides that, it also shows that the larger the size of the public sector, the larger will

be the burden that privatization would exert on the private sector’s financial resources.

Hence, a necessary pre-condition for successful implementation of Privatization Policy is the

development and strengthening of the country’s financial sector including the stock exchange

which is very important in mobilizing private financial resources to raise the required debt as

well as equity capital. Therefore, strengthening the Kuala Lumpur Stock Exchange (KLSE)

will effectively absorb the impact of the broadening of the equity base such as Syarikat

Telekom Malaysia Berhad and National Electricity Board.

Based on the objectives of Malaysia’s Privatization Policy is to achieve redistribution

of wealth by restructuring economic activities so that the participation of Bumiputras in the

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corporate sector of the economy is increased. Sometimes the issue of absorbing the

Bumiputras is a constraint in the implementation of Privatization Policy. Therefore, in order

to fulfil this objective, the government need to systematically promote and encouraged

effective collaborations between large local institution investors and individual entrepreneurs

as well as the companies.

Besides that, the implementation of Privatization Policy may leads to the corruption.

A monopolized function is prone to corruption because decision making are made primarily

for political reasons, personal gain rather than the economic ones. However, corruption

during the privatization process can result in significant under-pricing of the asset. It will

allow more immediate and efficient corrupt transfer of value, not just from on-going cash

flow but from the entire lifetime of the asset stream.

The issue of lack of market discipline also arise during the implementation of

Privatization Policy. Poor management of the companies are insulated from the same

discipline as private companies, which could go to bankruptcy, their management removed or

will be taken by other competitors. Private companies often take greater risks and then seek

bankruptcy protection against creditors if is become serious.

Political influence is one of the common issues in Malaysia. Nationalized industries

are prone to interference from politicians for political reasons. For examples, making an

industry to buy supplies from local producers and forcing an industry to freeze their prices to

satisfy the electorate or control inflation, increasing its staffing to reduce unemployment or

moving its operations to marginal constituencies.

In addition, corporation exist to generate profits for their shareholders. Profit is made

by private companies by enticing consumers to buy their products in preference to their

competitor’s or by increasing primary demand for their products or by reducing costs. Private

corporations will earn more profit if they serve the needs of their customer well. Corporation

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of different sizes may target different market niches in order to focus on marginal groups and

satisfy their demand. Therefore, a company with good corporate governance will efficiently

meet the customers need.

Finally, the nature and extent of foreign participation in the privatization programme

would always remain crucial issues that need to be resolved. Thus the government has

decided to consider foreign participation in the several types of cases such as where their

expertise is needed to upgrade efficiency and such expertise is not available locally. Foreign

participation in a privatized entity is limited to a maximum 25 per cent of its share capital.

For project that is strategic and national importance, foreign ownership will have to be

widespread in nature so as to ensure that no single foreign party will have undue influence on

the company.

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7.0 CONCLUSION

As a conclusion, the Privatization Policy should be continued because it has

contributed to increased efficiency and productivity of the privatized entities and at the same

time it give more benefits to the public and spur economic development. Emphasis will be

given to viable projects that have high multiplier effects and meet the objectives. The success

of any privatization arrangement, whichever technique is adopted will be dependent on the

sincerity of government to pursue it with unblemished policy implementation, support, coo-

operation and understanding of the citizen. Eventhough, the implementation of Privatization

Policy will take a long run but its benefits are immeasurable towards the government and

public.

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