Minister of Finance Incorporated

This chapter deals with a core question: what are government-linked investment companies (GLICs) and how do they function in the Malaysian economy? The chapter introduces the seven enterprises classified by the Malaysian government as GLICs, namely the Ministry of Finance Incorporated (MoF Inc.), Permodalan Nasional Bhd (PNB, or National Equity Corporation), Khazanah Nasional Bhd, Employees Provident Fund (EPF), Lembaga Tabung Angkatan Tentera (LTAT, or Armed Forces Savings Fund), Lembaga Tabung Haji (LTH, or Pilgrims Savings Fund) and Kumpulan Wang Persaraan Diperbadankan (KWAP, or Retirement Fund Incorporated). Four of these GLICs—EPF, KWAP, LTH and LTAT—are pension or special purpose funds, while PNB functions as an equity trust fund commissioned to redistribute corporate wealth equitably among all Malaysians. Khazanah is the country’s only sovereign wealth fund. MoF Inc., the government’s most important GLIC, functions as its investment holding arm.

 These controversial issues relating to 1MBD and related government-linked investment-based enterprises draw attention to a core issue: the important role of GLICs in Malaysia’s corporate sector. Of equal concern is the nature of the state in Malaysia, which has been described by political scientists as a single party dominant state. This chapter briefly reviews the domineering presence of GLICs in corporate Malaysia and highlights the importance of the concepts of ownership and control that will be employed to assess how these companies function, particularly in a context where a strong state is in power. The methodology employed for this study is discussed, specifically the focus on ownership and control of publicly listed government-linked companies (GLCs) among the top 100 companies quoted on the domestic stock exchange, the Bursa Malaysia.

This chapter provides a historical review of the evolution of the GLICs. This study traces why these seven GLICs were incorporated and how they have emerged as major actors in Malaysia’s corporate sector. Each of the seven GLICs was incorporated at a different point in Malaysian history, with the earliest ones being the pension-based funds, KWAP and EPF. MoF Inc., the government’s holding enterprise, was created in 1957 to hold the corporate assets of the British colonial government. LTH was in created in the 1960s, in particular to help poor Muslims save funds for the hajj pilgrimage, while LTAT was incorporated to protect the well-being of armed forces staff after they retired from service. The role of these GLICs in the development of Malaysia’s economy as well as domestic enterprises, specifically those owned by Bumiputeras, is reviewed here. This chapter also outlines how the GLICs differ in terms of their economic and social roles, as well as how they have been employed by Malaysia’s six Prime Ministers since Independence in 1957.

Epochal moments that had a bearing on how these GLICs were employed by these Prime Ministers are identified and analysed. These include the riots of 1969, after which the 20-year, affirmative action-based New Economic Policy (NEP) was introduced in 1970. The NEP justified extensive government intervention in the economy, seen primarily through the creation of some GLICs and a large number of GLCs. During this period, PNB was formed to acquire corporate assets on behalf of the Bumiputeras, as a mechanism to redistribute wealth more equitably among all ethnic groups, while Khazanah was created in 1993 to serve as a sovereign wealth fund. The privatization of the GLCs from the late 1980s to the mid-1990s is reviewed, as through this policy the government transferred state-owned assets to Bumiputeras in order to create a new Malay capitalist class.

The second defining moment was the 1997 Asian currency crisis which led to the bailout of a number of companies owned by well-connected Bumiputeras by the GLICs. Following these bailouts, the GLICs and GLCs emerged in the early 2000s as key actors in the economy and the corporate sector. The government’s introduction of the GLC Transformation Programme in 2004, to improve the financial performance and governance of the GLICs and GLCs, is the third critical historical juncture. Following these reforms, the presence of politicians in the GLICs and GLCs declined appreciably, an interesting outcome as this concentrated even more power in the office of the executive.

This chapter deals with GLIC ownership structures, looking particularly at the companies in which they have a majority interest among the top 100 enterprises quoted on the domestic stock exchange, the Bursa Malaysia. These GLICs have majority ownership of 35 companies publicly listed among the top 100 enterprises in terms of market capitalization. In this chapter, the development of these 35 GLCs is traced, with specific focus on how the GLICs have come to obtain ownership of these firms. The ownership patterns of these companies are assessed from a sectoral perspective, that is, utilities, plantations, property development and construction, oil and gas, banking, media, services and healthcare. The chapter pays particular attention to how the GLICs have come to acquire a significant presence in four core sectors: plantations, banking and finance, property development and construction, and media.

 This chapter then studies how these seven GLICs function as business groups. Although all the GLICs can be classified as business groups, they fundamentally differ from each other in terms of the way they function, the business ownership methods they employ and how they control the companies in which they have an equity interest. This chapter identifies how the ownership patterns of the GLCs by the seven GLICs differ. While some GLICs have majority equity ownership of GLCs, others merely hold a minority interest in a large number of quoted companies. Block shareholdings are common, where two or more GLICs have an equity interest in GLCs. In most of these block shareholding situations, however, one GLIC has majority ownership of the GLC. Also noted here is the use of obscure private companies by the GLICs to function as shareholders of some important GLCs as a means to shield the extent of government ownership of a particular enterprise—a pattern most obvious in the media sector. What these ownership patterns indicate is that one company, MoF Inc., has overwhelming influence over the other six GLICs, with the possible exception of LTAT, long led by a corporate figure closely associated with Prime Minister Najib Razak. Although the focus of this study is GLICs associated with the federal government, the presence of state government investment arms such as Johor Corporation or State Financial Secretary Sarawak is noted and discussed.

This chapter analyses the control mechanisms employed by the government when dealing with the seven GLICs. The primary control mechanisms used are legislation, public policies, business groups and pyramiding, and directorships and investment panels. The chapter reviews each of these control mechanisms carefully, tracing how they are employed by the government to control the GLICs and the GLCs it owns.

Since five of these GLICs are statutory bodies—PNB and Khazanah are companies—this chapter examines the legislation that governs how they operate. In these pieces of legislation, attention is also paid to the authority that the Minister of Finance has over the GLICs, to determine their investment patterns as well as approve senior appointments, specifically members of the board of directors. The legislation overseeing LTAT and LTH accords with the fact that other federal ministers have jurisdiction over these GLICs. This chapters analyses in depth the backgrounds of the directors of these GLICs as well as the members of their investment panels.

A thorough analysis of board members and investment panel members reveals a clear decline of UMNO presence in the corporate sector. A major finding is that a new breed of corporate professionals has taken over the management of the GLICs, occupying positions on both the boards of directors and the investment panels. Crucially, the important posts of managing directors of the GLICs and GLCs are occupied by a group from the professional elite. This professional elite ensures that the GLICs and GLCs are able to perform well, though they remain subservient to Minister of Finance.

The GLICs function primarily as investment holding companies, with a business group control structure that serves as an important mechanism for one institution to control a large number of enterprises. For this reason, the corporate holdings structures of the seven GLICs as they stood in 2013 are presented and analysed in this chapter. These figures indicate that a number of quoted GLCs come under the umbrella of each GLIC. These quoted GLCs, in turn, function as business groups, involving the use of a holding company—and, in some cases, cross-holdings—reflecting that this is an extremely important corporate control mechanism. The GLICs, collectively, have common shareholdings of a range of publicly listed firms, though in numerous cases one of them has majority ownership. Block shareholding of listed enterprises, including through obscure private firms, is common among the GLICs. Block shareholdings help safeguard the collective majority ownership that GLICs have over major quoted companies.

The main findings of this study revolve around a single key question: who owns corporate Malaysia today? The chapters have revealed a major transition that has occurred in Malaysia’s political economy, namely, how corporate power has shifted from UMNO and well-connected businessmen to the government. Huge groups of GLICs have emerged, controlled by the government and dominating key sectors of the economy. UMNO members no longer figure as owners of leading publicly listed companies or as directors of government-owned enterprises. The GLICs and the listed companies under their control are now led by well-credentialed, highly competent professionals with no involvement in the political system. However, these professionals are ultimately responsible to the Minister of Finance who has significant control over the corporate sector through the GLICs and GLCs that come under his jurisdiction.

 The Ministry of Finance sits at the apex of a complex business group structure comprising its holding company, MoF Inc., as well as other GLICs, quoted GLCs and a huge number of unquoted private firms. MoF Inc. is evidently a super entity given its enormous influence over the corporate sector through its substantial ownership and control of the other GLICs and the financial sector, comprising Malaysia’s leading commercial banks as well as development financial institutions. This business group structure encompasses multiple layers of publicly listed GLCs with links to a range of unlisted companies, augmenting their control over the economy. MoF Inc.’s vast network of business interactions constitutes only one part of the government’s complex system of control over the corporate sector.

 The implications of these important findings on the corporate sector and on Malaysian politics are reviewed in this final chapter. One crucial concern is that, through this GLIC-led framework, politicians in power can intervene in the economy in distinct ways through different types of business organizations. The chapter reviews the current institutional framework to determine if sufficient checks and balances are in place to ensure that the GLICs and GLCs are not abused in order to serve vested political interests: this is a core concern given the numerous scandals involving firms linked to the government. However, what is also evident is that the leading publicly listed GLCs have been registering impressive turnovers and profits, are professionally managed and continue to remain among the top publicly listed companies. The chapter ends with an analysis of this paradox.