The state assembly was in session from 30 March to 9 April 2015. In this session, my policy speech focused on my concern over government involvements in business. Below are the details of my speech on this issue and the reply by the state government. In addition, I tabled five select committee reports (see below).
Note: Select Committees are legislative committees which roles are to check on the government at different aspects of governance. I am in two of the 10 select committees in Selangor State Assembly - GLC and Raw Water Management. We have weekly select committee meetings and table reports every state assembly session. The government will have to respond to each recommendation on the reports the next state assembly session. Such legislative scrutiny is the result of legislative reforms in Selangor State Assembly and aims to improve the accountability and transparency of the government. As backbenchers, we are not to be the rubber-stamp of our own government. Our role is to continue to check and monitor the government, speak out when it is not doing right and ensure continuous improvement in governance.
Menteri Besar Incoporation (MBI) of Selangor has recently announced its intention to develop a total of 5,000 acres different parcels of state land to townships through joint venture with private developers. The total gross development value of these developments is estimated at RM 60 billion. I have reservation for such a plan and raised my concern in the recent state assembly session.
I am not a proponent of government entering into business. I believe that profit-maximizing companies in the free market will generate greater economic impact than government-linked companies (GLCs), i.e creating more jobs and generating higher economic output.
Nevertheless, it is not uncommon to see different types of GLCs at both federal and state level in Malaysia. In fact, Malaysia is among the countries in the world with the highest GLCs presence, ranking fifth after China, United Arab Emirates, Russia and Indonesia.
Researches have found that GLCs usually generate less return compared to private companies in the same competitive industry. According to a McKinsey study, the average return on assets (ROA) at GLCs in China was less than half that of the private sector. The Economist also published similar results in an article “Fixing China Inc” dated 30 August 2014. It further elaborates the inherent problems for GLCs in China, which are also widely seen in Malaysia and Selangor, namely the social obligations of GLCs, bureaucracy, rent-seeking behavior due to lack of transparency and the lack of comparable industrial benchmarks.
In Selangor context, according to the report tabled by Selangor GLC Select Committee in the state assembly session November 2015, Perbadanan Kemajuan Negeri Selangor (PKNS) and Permodalan Negeri Selangor Berhad (PNSB), which are state GLCs in property development, perform much worse than property developers with private management. PKNS and PNSB recorded ROA of 0.12 and 0.0027 compared to Sunway 7.31, YTL Land 1.21, Mah Sing Group 6.97 and UEM Sunrise 6.92. The same goes to return on equity (ROE) with PKNS and PNSB recorded 0.21 and 0.069 while Sunway 16.39, YTL Land 2.61, Mah Sing Group 17.67 and UEM Sunrise 11.59.
The Myth of Joint Venture
We have often heard that joint venture with private companies will increase the return for GLCs. It is not necessarily so. According to the answer to my written questions in state assembly session November 2015, there are a total of 38 projects completed by PNSB through joint venture. However, PNSB still suffer return that is much lower than industry average.
We have also always heard that joint venture will help to transfer skills to GLCs. It is also not necessarily so. I would like to point out one example here - Selaman Sdn Bhd. According to auditor-general (AG) report 2013 Series 2, Selaman was formed in 1977 and have been using joint venture to develop its lands. Unfortunately, up until 2013 when the audit was done, the company was reported to be unable to do the development itself. From 1999-2013, Selaman managed to complete 14 projects, out of which only there projects were developed solely by the company itself. For the 3 projects, one at Sg Bakau, Kundang, Gombak was canceled, another one at Sg Merab, Dengkil, Sepal is still having land problem, and the only completed one was Karya Residensi 1 and it was also delayed for 52 weeks. This example shows that joint venture doesn't guarantee skill transfers.
As a matter of fact, we see that most of the time GLCs become sleeping partners in the joint ventures and sometimes being ‘manipulated’ or ‘play-out’ by the business partners.
In Selangor, we have no less bitter experience in GLC joint ventures. One of the most recent one is PJ Sentral case, of which PKNS entered into joint venture with Nusa Gapurna and was later forced out of it due to unfavorable clauses signed in the shareholder agreements, resulting in a lost of more than RM20 million in cash and 8 acres of prime land in Petaling Jaya. We also do not forget how “smart partnership” with Djiya for the 1,172 acres of Canal City land has turned into a “not so smart” deal for the government.
What is the business of the government?
All in all, what we really need to ponder is why does the government involve in business and what business should the government be involved in?
I believe that the government should only enter into business for one of the three reasons: i. to correct negative externalities of free market economy to achieve social and economic justice, for example, building low-cost flats as a result of income inequality ii. to manage the important natural resources, for example Petronas for Malaysia’s oil or water in Selangor iii. to stimulate the growth of certain strategic industries.
Therefore, I do not agree with MBI entering into joint venture with private developers to develop townships. Instead, I believe the state government through MBI should look into the strategic direction of certain parcel of lands, bringing in strategic international or local investors and tender out different parcels of lands according to that strategic direction. When joint venture is needed for strategic reason, such joint venture should be conducted in an open and transparent manner.
I believe it is more important for the government to attract investment, technology advancement and most importantly human talents to a particular area than to be involved in building the concretes. I believe the business of the government is to create the macroenvironment that is conducive for businesses to grow and flourish, not getting into the business ourselves.
As a government, we should mind our own business.
REPLY FROM THE GOVERNMENT ON GOVERNMENT IN BUSINESS AND MBI JOINT-VENTURE PLAN (in Malay):
GLC Select Committee Report on Selaman Sdn Bhd
Raw Water Management Select Committee Report on Sungai Selangor Supply
Raw Water Management Select Committee Report on HORAS 600
Raw Water Management Select Committee Report on Water Disruptions due to Semenyih River Manganese Contamination
Raw Water Management Select Committee Report on Ammonia Contamination at Batu 11 Cheras and Bukit Tampoi in 2014