WIKILEAKS: GOVERNMENT-LINKED COMPANIES: UNRAVELING THE TANGLED WEB

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.

THE CORRIDORS OF POWER

Raja Petra Kamarudin

1. (SBU) 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.

Big Players, Thin Skins

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, 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.)

One Hand Washes the Other

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.

Through a Glass Darkly

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.

You Can't Know the Players without a Score Card

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 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 indirect 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 Independent or Non-Independent as well as Executive or Non-Executive. Again, knowing the local players is essential to determining who has real decision making authority.

Islamic Banks behind the Veil

11. (U) Fundamental concepts underlying Islamic finance preclude Islamic banks from publishing lists of their shareholders. All depositors are considered shareholders 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.

Non-Traded Companies Face Some Disclosure

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.

Two Golden Shares

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 Share 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.

Untangling the Web

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.

SHEAR (October 2006)