Bumiputera equity rule highlights catastrophe in public policy

 

From Murray Hunter

A Federation of Malaysian Freight Forwarders (FMFF) letter to the minister of international trade and industry Azmin Ali has highlighted the 51% Bumiputera equity requirement in many types of businesses.

FMFF president Alvin Chua wrote to seek clarification of required bumiputera equity in freight companies when they seek a renewal of their Customs licences. Chua also requested an extension of time for freight forwarding companies to comply with the finance ministry ruling, due to the delay in receiving any clarification.

The bumiputera equity rules were set down in an old Customs regulation known as Perintah Tetap Kastam, or Customs Order 45, July 1, 2014, stating that companies undertaking Customs forwarding work must have 51% bumiputera equity to be eligible for a licence. This rule was written by a civil servant, and never scrutinised by Parliament.

Former prime minister Najib Razak, just before his defeat by Pakatan Harapan at the 2018 general election, announced a revision of the bumiputera equity requirements for freight forwarding companies.

Currently, as the requirements stand, the finance ministry requires companies to meet the criteria below in order to renew a customs licence:

1.  Where the original Customs licence was granted before 1976, no bumiputera equity is required.
2. Where the original Customs licence was granted between 1977 and 1990, 30% bumiputera equity is required.
3. Where the original Customs licence was granted after 1990, 51% bumiputra equity is required; and
4. Foreign-owned international integrated logistics services (IILS) companies are exempt from bumiputera equity requirements.

The finance ministry last January issued a notice stating that companies seeking the renewal of their customs licences must comply with the above bumiputera equity requirements by Dec 31, 2021. However, finance minister Tengku Zafrul Aziz has now postponed the enforcement of the 51% bumiputera ownership requirement until December 2022.

Although the ruling has been postponed, it comes to an industry that must be streamlined to be efficient, improve productivity, and maintain a low-cost base. In practice, this policy has been side-stepped by existing freight forwarding companies setting up proxy shell bumiputera companies, or ‘leasing’ a licence from a rent seeking company operation set up only for this purpose.

The effect of both of these methods is to slow down procedures and increase the cost of clearing goods through Customs.

Malaysia’s port systems are ranked the 13th most efficient in the world by the World Bank Port Performance Index. Increasing costs could threaten this tight ranking, just above Singapore, which is ranked 14th.

The government’s bumiputera equity policy originates from the New Economic Policy set up back in 1971. The objective of this policy was to bring bumiputra equity up to 30%. Some pundits claim this has long already been achieved, but the government and allied academics hotly dispute this.

The policy has long outlasted its initially intended phasing out. In public policy terms, it may be time to reinterpret the objective of raising bumiputera equity to something more workable and which will create a win-win business and economic environment.

Instead of specifying that all companies have bumiputera equity, the 30% mandate should take an overall industry view. The key measure could be 30% of total companies, total equity, total profits, total employment, or total assets. This will allow individual companies, some of which are family companies, to maintain their management hierarchies and corporate cultures, along with other companies in the industry.

There are already a number of 100% bumiputera companies within the industry that appeal to particular clientele, which the government should encourage to maximise diversity and competition. Governments in a mixed economy should not be ordering entrepreneurs on their company equity arrangements.

The current situation has put the management of many freight forwarding companies in a quandary. Some are even considering exiting the industry and relocating to other ports in the region. Others are finding it difficult to find a new partner in a poor economic environment.

The short December 2022 timeframe has artificially depressed firm values, meaning that existing freight forwarding companies that admit a new partner may face equity losses that took decades to build.

No one within the industry wants to be a minority shareholder in a business their families have built up. The postponement until December 2022 doesn’t solve the problem, it just prolongs the flux in the industry.

Another perplexing aspect of the finance ministry directive is that non-bumiputera owned Malaysian freight forwarding companies are placed at a disadvantage to foreign-owned IILS, which are exempt from the bumiputera equity requirements.

What has been very clear here is the failure of the finance ministry, the international trade and industry ministry and the Malaysian Industrial Development Authority (MIDA) to coordinate policy, turning the freight forwarding framework into something chaotic that may harm the well-being of the industry.

The higher-than-average freight forwarding costs at Kuah, Langkawi and Kuching, Sarawak are good case studies to see what happens when Customs licences are restricted.

Some pundits have jumped into this issue believing that this is a conscious attempt on the part of the government to ‘bumitise’ the freight forwarding industry.

Certainly, this is a policy consistent in the Mahathir Mohamed, Najib Razak, Abdullah Ahmad Badawi, Muhyiddin Yassin, and now Ismail Sabri administrations. What must also be noted here was that during Lim Guan Eng’s tenure as finance minister, nothing was done to rectify this, even though he condemned the regulation for being retrospective.

This bumiputera equity issue is a symptom of a much bigger problem, an over-zealous bureaucracy pursuing the imposition of a philosophy set back in the 1970s without being re-examined and made more relevant to industry structures in today’s markets. In addition, no bureaucrat has considered the consequences of overhauling equity within an industry overnight during an economic slump.

Unfortunately, Malaysia has a bureaucracy that has thrown away caution in its policy-making and implementation role. It seems indifferent to the undesirable effects of the regulation, on competitiveness, cost base, and efficiency. This is the major problem, lack of policy empathy and sensitivity.

It appears Malaysia has an indifferent bureaucracy towards the undesirable effects of policy. The postponement in activating the equity rule doesn’t solve the problem, it just defers the effects. However, on a positive side, the postponement indicates that the politicians have shown themselves to be sensitive to criticism on this occasion.

The consequences of not looking at the effects of enforcing regulations will be catastrophic in public administration and policy. There are many inconsistent, unjust, and poorly thought out policies and corresponding regulations that require urgent reform. In many cases, these injustices are not found until they are enforced. -FMT

Murray Hunter is an FMT Reader

The views expressed are those of the writer and do not necessarily reflect those of MMKtT.