Wikileaks: GLC'S, unraveling the tangled web

Interesting article from WikiLeaks about Government Linked Companies (GLC's) and the difficulty of unraveling the tangled web of holdings:

http://wikileaks.org/cable/2006/10/06KUALALUMPUR1936.html

I refer to a previous posting on this blog:

http://cgmalaysia.blogspot.com/2011/08/where-is-malaysian-david-webb.html

"Increase transparancy by providing a Malaysian database similar to the one David Webb has provided on his website. This will be a useful tool for all serious investors and bring back their attention. Secondly, this will be a very useful tool for the enforcers themselves. Thirdly, journalists can tap from this source for their stories."


Summary: The Malaysian government,s ability to control market access through its holdings in government linked companies (GLCs) is an important consideration in our ongoing FTA negotiations. Unraveling the tangled web of government holdings is difficult. Much information is publicly available, but tracing through the linkages between government and commercial entities requires close familiarity with the local market and major players. Even then the results can be controversial, as demonstrated by a recent report that leaked from a local think tank. One of our objectives in the FTA negotiations is for the Malaysian government to compile an annual report on GLCs -- as was done in the U.S.-Singapore FTA. Even knowledgeable Malaysian officials will find this a daunting task, but they could be persuaded that it fits with the government,s program for improved GLC performance. End summary.

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Big Players, Thin Skins
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¶2. (U) According to a Malaysian Government website, Government- Linked Companies (GLCs) -- commercial companies in which the GoM has a direct controlling stake ) employ 5 per cent of the national workforce, account for approximately 36 per cent of the market capitalization of the Bursa Malaysia (the local stock exchange), and comprise 54 per cent of the benchmark Kuala Lumpur Composite Index. The Government of Malaysia manages its holdings in the GLCs through seven investment holding companies, or Government- Linked Investment Corporations (GLICs). The GLICs have differing mandates with varying roles and degrees of responsibility with regard to &executing Government policies and initiatives,8 particularly regarding industrial policy and development initiatives. While a number of Malaysia,s GLCs have been loss makers for decades, some efforts are being made to improve their accountability and profitability (see reftel).

¶3. (U) The role of the GLCs in the Malaysian economy is a sensitive matter, as they are inextricably linked with the government,s effort to advance the economic standing of Bumiputeras (ethnic Malays).

Recently, a respected local think tank produced a report for the government that, i.a., included recommendations on the management of GLCs and their use as agents of the government,s socioeconomic policy. The report asserted that through the GLCs, Bumiputeras already hold sufficient corporate shares to have surpassed the government,s headline goal of owning 30% of Malaysia,s wealth (government statistics say Bumis only own 18.9%). This claim caused such a stir that the president of the think tank publicly repudiated the study. The chief researcher resigned in protest. (Comment: We will report on this controversial study in more detail in a separate message.)

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One Hand Washes the Other
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¶4. (U) Sometimes the government exerts itself to protect the GLCs, and sometimes it,s the GLCs that serve the government.

High tariffs and bureaucratic impediments to importing a car -- including limits on the number of approvals and required signatures from three separate government ministries -- clearly were designed to benefit the government-owned automobile manufacturer Proton. On the other hand, Khazanah, the largest GLIC, recently bought back from Singapore a controlling share in Pantai, the company granted sole authority to issue Malaysian medical clearances for foreign workers. One Khazanah employee commented to Econoff that the driving reason for the re-acquisition was not good business but rather, "national pride." There was an understanding that Khazanah would have a majority stake but decision-making would remain in the hands of the company.

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Through a Glass Darkly
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¶5. (U) The level of publicly available information about Malaysia,s seven GLICs varies considerably. Khazanah, the largest GLIC (owned by the Ministry of Finance), publishes its holdings in a flow chart posted on its website, www.khazanah.com.my. Permodalan Nasional Berhad (PNB), a GLIC established specifically to promote the economic advancement of ethnic Malays (Bumiputeras), publishes financial data in its annual report available on its website, www.pnb.com.my. Some of the other GLICs have websites, but offer differing amounts of information on their holdings and strategies. In addition, these figures continually change as fund managers buy and sell on an ongoing basis.

¶6. (U) Information on the ownership of publicly-traded GLCs can be found in their annual reports. The Malaysian Securities Commission enforces requirements regarding publication of financial data on publicly- traded firms. Most listed companies disclose their top 30 shareholders, listing the percentage ownership of each. Summing up the percentages of shares held by the various GLICs among the top 30 is the first step to determining the share of government control. However, it also is important to note which GLICs are major shareholders, as the different GLICs are charged with different objectives ) some more politically driven than others. For example, the Employee Provident Fund (EPF) is charged with investing the retirement savings of Malaysian workers ) a responsibility not as politically charged as Permodalan Nasional Berhad,s (PNB) mandate to advance the economic interests of ethnic Malays. However, almost all the GLICs have at some point made sales or purchases of corporate shares in support of government objectives.

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You Can,t Know the Players without a Score Card
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¶7. (U) When tallying up GLIC holdings familiarity with the local players, including the multiple layers of subsidiaries of the GLCs, is essential. For example, Cement Industries of Malaysia (CIMA) lists only two GLICs in its top 30 shareholders with a combined holding of about 13%. However, CIMA,s top non-GLIC shareholder is UEM World, in which Khazanah holds a a controlling interest. UEM World holds nearly 54% of CIMA. At first glance, the government share appears to be 13 per cent, but tracing the linkages among GLIC subsidiaries it becomes clear that CIMA is effectively government controlled.

¶8. (U) Some other companies provide this information more clearly. For example, Pharmaniaga Berhad, a pharmaceuticals manufacturer, includes in its annual report a list of indirect holdings following its list of direct holdings. The list of the company,s top thirty shareholders does not indicate a majority government stake, but the &indirect8 holdings present quite a different picture: non-GLIC shareholder Trinity Saga is held by UEM World, which is controlled by Khazanah. Add up all the pieces and in fact the government has a controlling interest in Pharmaniaga. Without being familiar with the multiple layers of ownership, Trinity Saga,s GLIC connections would be easy to miss.

¶9. (U) Another example is Malaysian Airline System Berhad (MAS), which lists Penerbangan Malaysia Berhad with a 69.34 per cent holding. The government created this company solely to purchase MAS planes and lease them back to the airline. It is wholly owned by Khazanah. Another 11 per cent of MAS is held by the Employees Provident Fund (EPF). The third-largest shareholder is Amanah Raya Nominees. This is a government-managed trust fund for ethnic Malays.

¶10. (U) Publicly listed companies include the names of their Boards of Directors in their annual reports, often including bios and photos as well. Sometimes the annual report lists Board Members as &Independent8 or &Non-Independent8 as well as &Executive8 or &Non-Executive.8 Again, knowing the local players is essential to determining who has real decision making authority.

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Islamic Banks behind the Veil
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¶11. (U) Fundamental concepts underlying Islamic finance preclude Islamic banks from publishing lists of their shareholders. All depositors are considered &shareholders8 and banks are reluctant to make available to the public a list of top depositors, complete with the size of their accounts. Khazanah,s website reports that Khazanah owns 30% of Bank Muamalat, a local Islamic Bank, but Bank Muamalat,s annual report does not list its shareholders.

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Non-Traded Companies Face Some Disclosure
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¶12. (U) Non-listed companies are not regulated by the Securities Commission, but by the Commission of Companies in Malaysia (CCM). Regulations require non-listed companies to send annual financial statements to the CCM, which will release the information for a nominal fee (currently less than USD 3.00). Most of the larger companies submit financial data regularly; however, enforcement for some smaller companies has been inconsistent. A proposed merger of the SC and the CCM could lead to tighter scrutiny.

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Two "Golden Shares"
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¶13. (U) The government retains a "Golden Share" in two companies, MAS and Telecom Malaysia, dating from the time when these companies were 100 per cent government- owned. The &Golden Share8 effectively gives the Government veto power on Board decisions. Other corporations offer regular shares with one vote per share. We are not aware of any companies besides these two with special voting rights.

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Untangling the Web
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¶14. (SBU) Comment: In view of the role GLCs play in Malaysia,s economy and the government,s use of GLCs as policy agents, increasing the transparency of GLIC and GLC activities is an important goal in our FTA negotiations. But compiling the sort of annual report that Singapore is obliged to produce by our FTA with that country will be a major challenge for Malaysian officials. Not only are the relationships between government and commercial entities more complex in Malaysia than they are in Singapore; the political sensitivities are far, far higher. Malaysian officials will find reporting on GLCs a daunting task, but could be persuaded that this would support the government,s agenda for improved GLC performance (reftel). End comment.

Wikileaks: S’pore government’s top-down approach to entrepreneurship

The following article appeared on the SGentrepeneur website. I have not much to add, I pretty much agree with all that is written, as far as I am aware of what is going on, having been only a bit more than one year in Singapore and being actively involved with angel investing.

http://sgentrepreneurs.com/commentary/2011/09/03/wikileaks-spore-governments-top-down-approach-towards-entrepreneurship/

"Unless you’ve been living in a cave (or too busy working on your app), you would know that Wikileaks has released all its diplomatic cables — 251,287 of them. For Singapore alone, there are 700 cables obtained from the US Embassy. Those looking for scandalous information that will rock the nation will be disappointed — no heads are set to roll. But one cable is of interest to entrepreneurs: Created in 2007, the document charts the Singapore government’s push towards supporting innovation and entrepreneurship, and the obstacles they face in driving the country towards a knowledge-based economy.

An extract follows:

Creativity by Fiat
2. (U) A strong record of economic success notwithstanding, Singapore’s leadership recognizes that further growth will depend on finding economic advantages over the rapidly growing and low-cost economies of China, India, and ASEAN neighbors. As a developed nation, Singapore must also compete with other developed economies. To continue thriving, the GOS (Government of Singapore) believes that Singapore must transform itself from an efficient platform for manufacturing and logistics into a global, knowledge-based and more entrepreneurial economy. With a small population, no natural resources, and a trade-heavy economy, the GOS is acutely aware of the need for Singapore to develop a strong entrepreneurial class that can adapt.

3. (SBU) Pursuing the objective with its usual vigor, the government is pouring in resources. Prime Minister Lee Hsien Loong chairs a Research, Innovation and Enterprise Council (RIEC), established in 2005 to promote R&D and innovation in ”strategic” sectors of the economy. In 2006, the RIEC announced it would provide $916 million (SGD1.4 billion) over the next five years to fund entrepreneurs. Also in 2006, the Ministry of Trade and Industry (MTI) unveiled its Science and Technology 2010 Plan (STP2010) which commits $4.9 billion (SGD7.5 billion) over the next five years to encourage raising R&D spending to 3 percent of Singapore’s GDP by 2010.

The Challenge
4. (SBU) GOS efforts to promote entrepreneurship continue to encounter a risk-averse Singaporean mindset, government domination of the economy, and discouragement of critical thinking and inflexibility in the educational system. The 2007 Global Entrepreneurship Monitor Report (GEM) showed that, among the surveyed OECD and developed economies, Singapore was consistently below the mean for all indicators of social and cultural attitudes toward entrepreneurship. For example, only 57.8 percent of Singaporeans believed that new business success was accorded high status in their country, compared to an average of 66.2 percent among all the countries in the survey, ranking Singapore 21st of 24.

Government Itself a Cause
5. (C) Entrepreneurs continue to face obstacles in a number of sectors in the form of Government-Linked Corporations (GLCs), which account for nearly 60 percent of the national GDP. Temasek Holdings, the government’s investment arm, is by far the largest investor in Singapore, with an estimated 50-percent stake in Singapore’s GLCs. GLCs often compete against each other in key markets, making entry by an independently-held company difficult. For example, SingTel and Starhub, both Temasek Holdings companies, compete directly in the wireless service market and will soon do the same in the cable television market. The strong GOS role in directing the economy likely has the unintended result of ”crowding out” natural economic development, according Dr. Sha Reilly, Chief Knowledge Officer at the National Library Board (NLB), which has a mandate to encourage creativity and entrepreneurship among young Singaporeans. She believes Singaporeans look first to the government, rather than the private sector, to be the innovation leader.

6. (C) Small and medium sized enterprises (SMEs) — a potential source of innovation and commercial nimbleness – find it difficult to secure financing for their businesses since financial institutions, accustomed to an abundance of large corporate customers, are reluctant to lend to riskier SMEs. The 2007 GEM report ranked Singapore 17 out of 21 countries for venture capital availability. The Singapore Stock Exchange (SGX) is similarly inhospitable to SMEs, with many Singaporean entrepreneurs opting to list in other countries. SGX Executive Vice President Lawrence Wong told us that the SGX targets SMEs with a capitalization of SG$500 million to SG$5 billion ($327 million – $3.27 billion). Wong characterized the amount as “not a lot,” but it does put SGX listing out of the range of many SMEs. He says a GOS proposal to develop an exchange catering to smaller firms was ”still under discussion.”

7.(C) While the government has allocated various funds to encourage SMEs, a number of business leaders told us that funding is still inadequate. They suggested that even if sufficient funding were available, it would still take at least a generation before an entrepreneurial culture would truly take root. Of the $4.9 billion STP2010 budget, less then two percent has been allocated for SME financing. Inderjit Singh, a Member of Parliament and an entrepreneur, told us that the proliferation of entrepreneurial schemes for SMEs was “government lip-service that fails to address the critical need to divest GLCs and open markets.”

Political System Discourages Risk-Taking
8. (SBU) The GOS’s tight political control and the “habits of constraint” it fosters have inhibited the development of an entrepreneurial spirit and risk-taking culture, according to Nominated Member of Parliament Kum Hong Siew and others. G. Jahyakrishan, Assistant Director of International Enterprise Singapore (IE), a government entity responsible for helping Singaporean companies grow globally, believes that a prevailing atmosphere of restraint “subtly” leads to less risk-taking behavior by firms and individuals. Siew believes the government’s attempt to encourage economic risk-taking while limiting political and social freedoms is unsustainable because it discourages the kind of critical thinking required for entrepreneurship.

Education System Not Helping
9. (C) Singapore boasts a highly competitive and well-regarded primary and secondary education system, but the number of Singaporeans completing a tertiary education is relatively low. Only 23 percent of Singaporean students entering primary school complete a degree at a local four-year university. In other knowledge-economies such as Japan’s, around 50 percent of students complete a university degree. However, according to Cheryl Chan, Assistant Director of the Planning Division at the Ministry of Education (MOE), the government does not plan to encourage more students to get a higher education. The university enrollment rate will continue to be maintained at 20-25 percent because the Singaporean labor market does not need everyone to get a four-year degree, she asserted.

10. (SBU) Singapore’s education system has been criticized for being heavy on memorization and light on critical thinking and creativity. Based on the British model, the system is highly test-focused and separates students (a process referred to as “streaming”) at an early age between high, middle, and low achievers. The GOS has slowly begun to introduce greater flexibility into the system by allowing ”streaming” in subjects (rather than based on total average scores) and has created new magnet schools focused on mathematics, the arts, and sports. But there are only three such schools, and the overall education system has changed little.

Some “Strategic” Sectors Suffer
11. (SBU) Growth in the “strategic” media sector may be hampered by limits the government sets on freedom of speech and expression. Filmmakers such as Martyn See (reftels) or productions that touch on sensitive issues often find their distribution and broadcasting rights disapproved by the Media Development Board (MDA), a governmental agency responsible for regulating and promoting media industries. Cheah Sin Liang, Deputy Director of International Relations at MDA, admitted to us that the GOS’s tight control over controversial political, religious, or social topics does limit growth in the media sector, but argued that such controls are necessary to prevent negative social consequences.

12. (SBU) Singapore’s approach to promoting R&D development in the biomedical field, another government-identified ”strategic” sector, has also been criticized by foreign education specialists as too focused on quick economic gains rather than fostering the “holistic approach” necessary for sustained innovation in science and technology. Dr. William Broady, President of Johns Hopkins University, told the local press in January that in order to be a leading center for R&D, Singapore had to get away from “trying to measure short-term economic returns. There has to be a mindset change… in tolerating and being comfortable with failure and ideas that don’t seem to be going anywhere.” (Note: Johns Hopkins stopped development of a $53 million (SGD82 million) Biomedical Sciences research unit after its Singapore Government partner, A*Star, accused Johns Hopkins of not meeting performance benchmarks. End Note.)

Casinos, Kumar and the Crazy Horse
13. (SBU) The GOS appears to recognize the need to give citizens freer rein in order to foster creativity and entrepreneurship. Unwilling to loosen political controls, it has focused so far on easing social restrictions. The government made a highly controversial decision to allow casinos, and has awarded contracts to open two integrated resorts in 2009. Kumar, a popular transvestite nightclub comedian whose material focuses on taboo subjects including race, sex and the foibles of government personalities, has been allowed to perform on television and in public venues. Singaporeans returning from long stays overseas have told us of being shocked at the mushrooming of racy billboard advertising. MDA’s Cheah pointed to the opening of the Crazy Horse French Burlesque in December 2005 (which subsequently closed in January 2007 due to poor attendance), and to the ”success” of the Singapore Biennale (an arts festival) as further signs of greater social openness.

Comment
14. (C) Ever thinking strategically, Singapore’s leadership will keep pushing innovation in order to stay competitive in a rapidly changing Asia. To its credit, the government appears to recognize that its own penchant for control – however enlightened its policy choices or soft its authoritarian touch — may be at odds with the kind of free-wheeling atmosphere it needs to achieve its economic objectives. Time will tell whether it can promote creativity, critical-thinking, and innovation in society by loosening up on social issues and tinkering with the education system while keeping politics in quarantine. One way or another, Singapore’s flirtation with openness will provide another interesting chapter in its unique history as a social-engineering petri dish."