Thursday, July 2, 2009

Economic reforms – One step forward, one step back .. and watch the implementation

The mainstream media has been trumpeting liberalization measures announced by Prime Minister Datuk Seri Najib Razak at the InvestMalaysia Conference on Tuesday.

Amid the plethora of measures, the one that stands out is removal of the 30% bumiputera quota for companies seeking listing in Malaysia. It is a bold political move indeed, to eliminate this “something for nothing” crutch.

Having said that, the actual impact to bumiputeras is minimal. The pipeline of new listings has hardly been inspiring in recent years. I challenge you to name even one recently-listed prominent company. Also, the policy had been a huge failure in terms of its intention to build bumiputera wealth. PM Najib said RM54bn had been allocated to bumiputeras (I think it is a lot more), but only RM2bn remains. So, bumiputeras kept less than 5% of the amounts allocated to them!

But it is good news, in that it removes a huge impediment to listing. Many owners of successful businesses shied away when told they had to offer 30% of their company to a new “partner” at a large discount. Let’s hope this results in more and better quality listings on Bursa, which would make the stock exchange more attractive and help fuel trading volume.

I am dismayed though, that replacing this 30% quota is another new fund. The RM10bn Ekuinas fund is supposed to invest in “bumiputera companies and entrepreneurs, based on merit”. Such government-run funds have awful records. And what is Ekuinas going to do that existing institutions do not?

A better approach would be to work with the private sector. For example, the government could offer to share the risks of such loans and investments with banks and venture capitalists. It could agree to bear, say, half the losses if the entrepreneurs fail. That way, the process of credit allocation is still primarily private sector driven, which should be more efficient and it saves the government having to build a duplicate infrastructure of officers to administer and monitor the investments.

As for “watch the implementation”, I am referring to the “stern” directives to:
1. Government-investment corporations (GICs) to reduce their stakes in the government-linked corporations (GLCs), in the name of raising free-floats and market liquidity; and
2. The GLCs to divest non-core businesses.

All sensible reasons, and if properly done, will be good for the economy. “Properly” is of course the crucial word. In particular, I want to see:

1. Transparency in the appointments of the brokers and the fees and commissions paid when the GICs reduce their stakes; and
2. Similarly, transparency when the GLCS sell their non-core businesses. Valuations must be fair – the businesses must not be sold at unduly cheap prices to influential parties – and all the costs, including commissions and advisory fees disclosed.

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