Minister of Finance Incorporated

Ownership and Control of Corporate Malaysia

Edmund Terence Gomez, Thirshalar Padmanabhan, Norfaryanti Kamaruddin, Sunil Bhalla, Fikri Fisal

• Publisher: Palgrave Macmillan
• Year: 2017
• Print ISBN: 9789811048968
• eBook ISBN: 9789811048975
• Topic: Politik & Internationale Beziehungen
• Subtopic: Internationale Wirtschaft

This is a study of Malaysia's new political economy, with a focus on ownership and control of the corporate sector. It offers a pioneering assessment of government-linked investment companies (GLICs), a type of state-owned institution that has long prevailed in the corporate sector but has not been analysed. Malaysia's history of government-business ties is unique, while the nature of the nexuses between the state and the corporate sector has undergone major transitions. Corporate power has shifted from the hands of foreign firms to the state to the ruling party, and well-connected businessmen, and back to the state. Corporate wealth is now heavily situated in the leading publicly-listed government-linked companies (GLCs), controlled through block shareholdings by a mere seven GLICs under the jurisdiction of the Minister of Finance. To indicate why these GLICs are important actors in Corporate Malaysia, this study provides a deep assessment of their ownership and control of Bursa Malaysia's top 100 publicly-listed enterprises.

© Institute for Democracy and Economic Affairs (IDEAS) 2018

Edmund Terence Gomez, Thirshalar Padmanabhan, Norfaryanti Kamaruddin, Sunil Bhalla and Fikri FisalMinister of Finance Incorporated https://doi.org/10.1007/978-981-10-4897-5_1

Begin Abstract

1. Introduction

Edmund Terence Gomez¹ , Thirshalar Padmanabhan¹, Norfaryanti Kamaruddin², Sunil Bhalla¹ and Fikri Fisal¹

(1)

Faculty of Economics and Administration, University of Malaya, Kuala Lumpur, Malaysia

(2)

INTROP, Universiti Putra Malaysia, Serdang, Malaysia

Edmund Terence Gomez

Email: [email protected]

Keywords

GLICsGLCs1MDBCorporate MalaysiaOwnership & Control

End Abstract

The Government’s Business

In September 2009, a few months after Najib Razak was appointed Prime Minister, the Terengganu Investment Authority (TIA), a government-owned enterprise operating at the state level in the federation of Malaysia, was renamed 1Malaysia Development Bhd (1MDB). 1MDB came under the control of an opaque but extremely important company, the Minister of Finance Incorporated (MoF Inc.), under the jurisdiction of the federal government’s Ministry of Finance. In one of the major anomalies of Malaysia’s system of public governance, the Prime Minister has also served as the Minister of Finance since 2001, a situation that would emerge as a key concern when the 1MDB scandal broke a few years later.

In the early 2010s, 1MDB’s reputation grew as it became a key player in major infrastructure projects and corporate activities. In July 2012, when Najib launched the first phase of the construction of the Tun Razak Exchange (TRX), the site of Malaysia’s proposed international financial hub situated in the heart of the city of Kuala Lumpur, 1MDB was tasked with developing the project. 1MDB was also responsible for constructing Bandar Malaysia, a project on the single largest remaining tract of development land in Kuala Lumpur. ¹ 1MDB went on to raise US$6.5 billion through three bond sales to fund investments in major energy-related projects. These bond sales were arranged and under-written between 2012 and 2013 by the international investment consultancy, Goldman Sachs (Wall Street Journal 7 June 2016).

A few weeks after the third bond sale, Najib announced the dissolution of parliament in order to hold a general election on 5 May 2013. In this closely fought election, during which an enormous volume of funds was spent (Weiss 2013), Najib led the ruling Barisan Nasional (BN, or National Front) coalition to victory. However, the BN lost the popular vote, returning to power only because it had secured a simple majority in parliament, an outcome allegedly attributed to gerrymandering and the malapportionment of seats. ²

Not long after this election, rather disconcerting reports about 1MDB began to emerge. When 1MDB’s 2013 annual report was released, it was disclosed that the enterprise had debts amounting to RM36.3 billion (Bloomberg 2 February 2016). Important government-owned enterprises were linked to 1MDB’s ventures. For instance, Lembaga Tabung Haji (LTH, or Pilgrims Fund Board), a prominent government-based savings institution, also known as a government-linked investment company (GLIC), offered to buy the TRX land, a transaction that eventually transpired in 2015. LTH reportedly acquired this land at an inflated price, approximately 43 times the price 1MDB had paid the government (Malay Mail 20 May 2015). ³ The government’s pension-based scheme, Kumpulan Wang Persaraan Diperbadankan (KWAP, or Retirement Fund Incorporated), provided an RM4 billion loan in 2011 to SRC International Sdn Bhd, a company linked to 1MDB and owned by MoF Inc. (New Straits Times 6 April 2016). ⁴

1MDB’s business ventures also involved activities in a number of countries. The controversies surrounding 1MDB would eventually be described by the British Guardian newspaper (28 July 2016) as “the world’s biggest financial scandal”. When the United States’ Department of Justice released a report on 1MDB, it alleged that US$3.5 billion had been misappropriated from this government-owned enterprise. ⁵ Prime Minister Najib, his close business allies and executives at Goldman Sachs were implicated in the controversy, while investigations on international financial flows linked to 1MDB commenced in numerous countries including in Singapore, Switzerland and the United States (The Straits Times 22 July 2016). While Malaysia’s Attorney General exonerated Najib of any wrongdoing in the 1MDB controversy (see Financial Times 21 July 2016), investigations into the company’s activities continue.

These controversial issues linking 1MDB and certain government-owned enterprises drew attention to a core issue: the important role of GLICs in Malaysia’s corporate sector. The International Monetary Fund (IMF) corroborated this point in a report it published in 2013, ⁶ which stated that the GLICs have substantial de facto ownership of the financial sector and are by far the most influential players in the Malaysian capital market, with significant interconnectedness. However, many Malaysians are unaware that the government operates enterprises classified as GLICs and that they have such a prominent role in the economy. ⁷ It is for this reason that this study focuses on GLICs, revealing how they have evolved, how they are now owned, controlled and employed, and the extent of their involvement in Malaysia’s corporate sector.

Malaysia’s GLICs

Seven institutions have been classified by the government as GLICs: in addition to MoF Inc., LTH and KWAP, they are Permodalan Nasional Bhd (PNB, or the National Equity Corporation), the Employees Provident Fund (EPF), ⁸ Khazanah Nasional Bhd and Lembaga Tabung Angkatan Tentera (LTAT, or Armed Forces Fund Board) (see Table 1.1). ⁹ These GLICs function in various forms—as a holding company, pension fund, special purpose fund, sovereign wealth fund and trust fund manager. While Khazanah and PNB were incorporated under the Companies Act, the other five GLICs are statutory bodies.

Table 1.1

List of GLICs

1.	Minister of Finance Inc. (MoF Inc.)
2.	Permodalan Nasional Bhd (PNB)
3.	Khazanah Nasional Bhd (Khazanah)
4.	Employees Provident Fund (EPF)
5.	Lembaga Tabung Angkatan Tentera (LTAT) (Armed Forces Savings Fund)
6.	Lembaga Tabung Haji (LTH) (Pilgrims Savings Fund)
7.	Kumpulan Wang Persaraan Diperbadankan (KWAP) (Retirement Fund Incorporated)

Source: Ministry of Finance

Four of the seven GLICs—EPF, KWAP, LTH and LTAT—are pension or special purpose funds. EPF and KWAP, pension funds for employees of the private and public sectors respectively, have a long history, going back to the colonial period. LTH, whose roots can be traced to the early 1960s, is a special purpose fund for Muslims who intend to save for their hajj pilgrimage. LTAT was established in 1972 and serves as a pension fund for members of the armed forces. These funds were not created to act as the government’s investment holding arms but would evolve to function in this manner. Two GLICs, PNB and Khazanah, were established after the government began intervening actively in the corporate sector to rectify social injustices. PNB functions to redistribute corporate wealth more equitably among all Malaysians, while Khazanah is the country’s only sovereign wealth fund. MoF Inc., the government’s most important GLIC, was incorporated in 1957 and functions as its investment holding company.

Table 1.2 indicates how the six men who have served as Prime Minister of Malaysia have employed the GLICs. The first three Prime Ministers, Tunku Abdul Rahman (1957–1970), Abdul Razak (1970–1976) and Hussein Onn (1976–1981), were responsible for establishing most of these GLICs and there is no evidence of any abuse of these enterprises. Razak used LTH for agriculture-focused investments while Hussein pursued the affirmative action-based New Economic Policy (NEP), initiated by Razak, by forming PNB. Mahathir Mohamad, the fourth Prime Minister, who served for 22 years, from 1981 until 2003, used the GLICs to nationalize foreign-owned firms while actively privatizing government companies, a number of which he eventually bailed out following the 1997 Asian currency crisis. Mahathir can be credited for Malaysia’s rapid modernization, achieved through...

Table of contents

• Cover
• Frontmatter
• 1. Introduction
• 2. History of GLICs
• 3. GLICs and Corporate Ownership
• 4. GLIC Control
• 5. Conclusion: The Implications
• Backmatter