STATE INCORPORATED AND PRIVATISATION POLICY

1. STATE INCORPORATED AND PRIVATISATION POLICY Dr. Chee Kim Loy (Associate Professor) Faculty of Business, Economics and Policy Studies, (FBEPS) UBD

2. OUTLINE OF PRESENTATION • State Inc and Privatisation Policy: A Development Management’s Perspective • A Framework for Managing Privatisation (national level) • A Case Study of Malaysia’s Experiences

3. Main messages… • Global recovery, though still fragile, is now underway, and developing countries are likely to grow faster than rich countries. • The Doha Agenda has the potential to speed growth, raise incomes, and reduce poverty, and all countries have an interest in its success. • But to realize this potential, governments have to tackle inequities in the world trading system – and to forge an agreement than benefits the poor.

4. The rich countries: a moderate recovery... Real GDP, percent change High income countries Forecast East Asia financial crisis Early 1990s recession 2001 downturn Early 1980s recession

5. Global prospects The rich countries: investment now rising.... Real fixed investment, percent change at annual rates Japan Euro Area United States

6. The developing countries: a robust outlook Real GDP, percent change for developing countries Forecast Early 1980s debt crisis 2001 Global downturn East Asia financial crisis 1990s recession Transition countries

7. CONCEPTS AND PERSPECTIVE Concept of State Inc Concept of Privatisation Development Management’s Perspective 1

8. State Incorporated: A Definition It is a national development strategy to accelerate economic (esp. industrial) development through formal and informal cooperation and collaboration between the government and the private business sector. The private sector is believed to be the main generator of economic growth; the close alliance is to facilitate the expansion of the private sector.

9. MALAYSIA INCORPORATED “The Malaysia Inc concept, therefore, requires that the private and public sectors see themselves as sharing the same fate and destiny as partners, shareholders and workers within the same ‘corporation’, which in this case is the Nation. The ‘corporation’ will prosper if its commercial and economic arm, that is the private sector does its best... while optimizing its returns on investment. The service arm …the Government will provide all the support it needed.” Dr, Mahathir, PM of Malaysia, 1984.

10. PRIVATISATION: DEFINITIONS • Narrow Definition • The sale of public assets to private shareholders ( i.e. 100% or at least majority share) • Broader Definition • Changing the status of a business, service or industry from state, government or public to private ownership or control

11. THREE MAIN APPROACHES TO PRIVATISATION • Change in ownership of an enterprise (or part of it) from public to the private sector • Liberalisation or deregulation, of entry into activities previously restricted to public sector • Provision of a good/service is transferred from public to private sector, while retaining ultimate responsibility for supplying it

12. GOALS OF DEVELOPMENT POLICY IN DEVELOPING COUNTRIES • Economic Growth • Political Stability • Social Welfare • Cultural Values • Sustainable Development

13. DEVELOPMENT POLICY’S PERSPECTIVE • Economics’ Perspective • Market based • Political Perspective • State based • Development Management’s Perspective • ‘Strategic Pragmatism’ based

14. STATE vs MARKET DEBATE IN DEVELOPMENT POLICY “The consequences of an overzealous rejection of government have shifted attention from the sterile debate state vs market to a more fundamental crisis in state effectiveness…… “State-dominated development has failed, but so will stateless development. Development without an effective state is impossible” World Development Report, 1997

15. THE CONTEXT OF DEVELOPMENT MANAGEMENT POLITICAL IDEOLOGY GLOBALISATION IMPACTS FISCAL CRISIS SOCIO- CULTURAL VALUES ICT TRANSFORMATION TRADITIONAL PUBLIC / DEVELOPMENT ADMINISTRATION TENSION PARADIGM SHIFT IN DEVELOPMENT MANAGEMENT ( e.g. STATE INCORPORATED) ECONOMIC / ORGANIZATION THEORY MANAGERIALISM MANAGING GOVERNMENT ACTIVITIES FOR DEVELOPMENT PRIVATISATION VOLUNTARY / NON- PROFIT ORGANISATIONS CONTRACTING FOR SERVICES ORG. NETWORKS/ PARTNERSHIPS DE-REGULATIONS / RE-REGULATIONS IMPROVING BUREAU- -CRATIC MANAGEMENT

16. ‘Market-Friendly’ Development Model: (World Bank- IMF) • Emphasis on the virtue of market with minimal intervention by the state • Market conforming economic policies of the government • Focusing on closer integration with the world economy • Stress on ‘state effectiveness’ in the role of the government in development

17. TWO-PART STRATEGY OF AN EFFECTIVE STATE • Matching state’s role to its capabilities • Reinvigorating the state’s capability

24. EAST ASIAN DEVELOPMENT MODEL • AN EXAMPLE OF A REGION WITH ‘EFFECTIVE STATES’ ’ IN ACHIEVING RELATIVELY HIGH LEVEL OF ECONOMIC AND SOCIAL DEVELOPMENT IN RECENT DECADES (1960-2000) AMONG THE LESS DEVELOPING COUNTRIES OF THE WORLD.

25. The ‘Strategic Pragmatism’ Development Perspective • Period: 1970s-1997 • The East Asian development ‘miracles’ • Vigorous economic roles and selective state interventions • Strategic but not total integration with the world economy • Industrial policy to guide the market towards planned structural change • (e.g.State Inc and privatisation policy)

26. What is Industrial Policy? “It means the initiation and coordination of government activities to leverage upward the productivity and competitiveness of the whole economy and of particular industries in it. Above all, positive industrial policy means the infusion of goal-oriented, strategic thinking into public economic policy….it is the logical outgrowth of the changing concept of comparative advantage” Johnson, 1984

27. State Inc: Various Examples • Japan Inc • Korea Inc • Taiwan Inc • Singapore Inc (GLC) • Malaysia Inc • China Inc (?)

28. END OF PART I

29. A FRAMEWORK FOR MANAGING PRIVATISATION

30. A FRAMEWORK FOR MANAGING PRIVATISATION • Planning and Goal Setting • Programme Development • Structural Reforms • Implementation

31. FRAMEWORK FOR PLANNING AND IMPLEMENTING PRIVATISATION DEFINE PRIVATISATION MACROPOLICY REFORMS Economic Political Governmental SET SCOPE OF PRIVATISATION PLANNING & GOAL SETTING PROGRAM DEVELOPMENT STRUCTURAL REFORMS IMPLEMENTATION CHOOSE ORGANISATIONAL STRUCTURE INSTITUTIONAL REFORMS Market Private Sector Civil Society DEVELOP MANAGEMENT REQUIREMENTS AND PROCEDURES DEVELOP STRATEGIC MANAGEMENT PLAN CREATE CONDITIONS FOR PRIVATISATION AGENCY SUCCESS CHOOSE APPROPRIATE METHODS ASSESS POTENTIAL ADVANTAGES & ADVERSE IMPACTS ASSESSMENT AND FEEDBACK

32. Planning and Goal Setting • Defining privatisation • Determining the scope of privatisation • Choosing the organizational structure • Creating the conditions for agency success • Assessing potential advantages • Assessing potential adverse impacts

33. Programme Development • Developing a Strategic Management Plan • Choosing appropriate methods of privatisation

34. Structural Reforms • Enacting Economic and Political Reforms • Developing Institutional Capacity

35. Implementation • Management Requirements • Management Procedures • Management of Social Issues

36. A Final Quote on Privatisation • “Although privatisation is an essential instrument for transforming government-controlled economies into market-oriented systems and for making established market economies more efficient, it is neither a panacea for all government’s ill nor sufficient to ensure economic progress. Privatisation is most effective when it is part of a broader programme of economic policy reforms and institutional development” D.Rondinelli (1996)

37. END OF PART 2

38. MALAYSIA INC AND PRIVATISATION POLICY ( a Case Study )

39. Malaysia Inc and Privatisation Policy: Presentation Outline • The Political Development Context • The Growth and Performance of State Owned Enterprises (SOEs) • The Formulation of Malaysia Inc • ‘Privatising’ Malaysia

40. Political Context of Malaysia Inc and Privatisation Policy • 1957-69 • ‘Bargain of 1957’: The Alliance laissez-faire Policy • 1970-81 • ‘NEP: The First Decade-The Public Enterprises Era’ • 1982-91 • ‘NEP: The Second Decade- The Era of Privatisation - First Phase’ • 1991-97 • Mahathir’s Vision 2020: The Era of Privatisation -Second Phase • Post-1997 • Adaptation to New Realities of Globalisation

41. Size and Structure of SOE Sector in Malaysia-1990 • 1,158 SOEs -Total Paid-up Capital $23 billion • About 25% of GDP • 396 (or 34%) were 100% Government-owned • 429 (or 37%) were majority owned • 333 (or 30%) were minority equity stake • Government equity share was 70.3% ($16.7 billion) • About equal share between Federal and State Governments • Debt-equity ratio of 180% as compare with 100% for private sector

42. Relative Performance of SOEs 1980-1988 Year ‘80 81 82 83 84 85 86 87 88 (%) Profitable 61 60 54 58 58 52 52 53 60 Unprofitable 39 40 46 42 42 48 50 47 40 • About 12-19% of these SOEs were ‘sick’ companies i.e. with negative shareholders’ fund and 24-30% were not making profits at all!

43. Major Reasons for Poor Performance • Internal microeconomic weaknesses in the sector rather than the failure of the macroeconomic environment • Management weaknesses • Poor or non-existing shareholder discipline • Poorly designed incentives structures • Easy access to soft finances, poor resource allocation • Operational inflexibility

44. Malaysia Inc: 1984-1990 – Phase I • Use the concept to formulate an effective framework for carrying out administrative reforms in the Malaysian public service. It enabled the public sector • to identify the private sector as their main client and to zoom in on specific components of the private sector that required specialised support • to earmark improvements to their own administrative systems and processes used in the interface wit the private sector.

45. Malaysia Inc : 1991- 2001 Phase II • New Mechanisms and Structures • Malaysian Business Council (MBC),1991 • PM as Chairman • Members from public, private and NGOs • Development Administrative Circular No 9 ,1991 • Formalise a comprehensive /integrated approach • The Malaysian Incorporated Officials Committee(MIOC) • Chaired by the Chief Secretary • Members from public, private sectors and NGOs • Agency-based Consultation Panels • Dialogue Sessions

46. Some Encouraging Results • 1998 Survey by the Political and Economic Risk Consultancy Ltd (PERC) placed Malaysian public service as the 3rd most business-friendly in Asia • 1997 World Competitiveness Report by the Geneva-based International Institute for Management ranked Malaysia Government as the 4th most competitive in the world

47. PRIVATISATION POLICY of MALAYSIA

48. PRIVATISATION POLICY • Concept and Methods of Privatisation • Key Success Factors of Privatisation • Privatisation Policy and Practices in Malaysia • A Brief Profile • Malaysia Privatisation Master Plan ( 1991) • Privatisation Achievements • Key Success Factors • Criticisms

49. Privatisation in Malaysia: A Brief Profile • Started in 1983: Guidelines on Privatisation • 1991: Privatisation Masterplan (PMP) • By late 1990s • More than 400 projects implemented • Saving in capital expenditure - about $130 billion • Proceeds from sales of assets/equities - $22 billion • Reduction of about 105,000 public servants • After 1997 • Additional features of privatisation • Potential of more projects from Multimedia Super Corridor (MSC)

50. Malaysia’s Privatisation Masterplan (PMP) • FIVE OBJECTIVES • FOUR MAIN MODES OF IMPLEMENTATION • SIX RECOMMENDATIONS