Malaysia's newfangled privatization fudge
By Anil Netto
PENANG - Malaysia is poised to experiment with the next phase of its
privatization process through the initiation of so-called private finance
initiatives (PFIs). But the Malaysian version of the internationally recognized
investment vehicles will be unique in that it will be the public rather than
the private sector that takes the risks.
This year, Prime Minister Abdullah Badawi announced some 220 billion ringgit
(US$60 billion) worth of new spending projects, including huge construction
contracts budgeted under the
government's 2006-2010 Ninth Malaysia Plan. Out of that amount, 20 billion
ringgit will for the first time be financed using PFIs, including projects
related to transport, housing, health care and education.
Most of the successful bidders, however, are widely expected to be ethnic
Malay-owned business consortiums, which are given preferential treatment under
Malaysia's controversial race-based affirmative action policies. Former premier
Mahathir Mohamad first embarked on privatization in the 1980s, not long after
then British premier Margaret Thatcher created a global stir with her state
enterprise divestment program.
In the Malaysian context, however, privatization has often been plagued by
complaints of patronage, cronyism, unfair monopolistic advantages and lack of
competitive bidding - particularly during Mahathir's tenure. At the same time,
the process has often maintained rather than improved poor services, and
lopsided fixed contracts have sometimes allowed new private owners to pass on
excessive rates and tariffs to the government and general public.
Needless to say, that record has given privatization a bad name with many
Malaysians. Now, Abdullah has embraced PFIs as part of his government's bid to
reduce its budget deficit and tap a new source of off-balance sheet financing.
PFIs, often criticized as unregulated back-door privatization, were first
introduced globally in 1992 under the United Kingdom's Tory-led government of
John Major and have since been continued. Through March 2006, a total of 749
projects worth over US$89 billion had been assigned under PFIs in the UK, where
the government locates a private sector partner to carry out
government-initiated projects, transferring detailed control - and the risk -
to the private partner.
PFIs are usually funded through the sale of corporate bonds or directly by
banks. Although PFI borrowing costs may be higher than government borrowing
costs, the investment vehicle's advocates argue that the transfer of risk to
the private sector, along with the supposed greater efficiencies from private
management skills, in the end outweigh the extra funding costs. Moreover, they
say that PFIs create a structure to enhance value for money through superior
private-sector innovation and management skills.
Because many PFI projects are ultimately more expensive than if they were
government-initiated, public-sector budgets could be burdened in the medium
term. Under a typical PFI, the private-sector partner will be paid for work
over the period of the contract and if it fails to meet certain specifications,
it will lose out on payments until standards are improved. PFI projects in the
UK have generally been delivered within budget and on schedule.
Attractive proposition
From Kuala Lumpur's perspective, this all makes PFIs an exceptionally
attractive investment proposition. Government-initiated construction projects
in Malaysia have long been plagued by delays, cost-overruns and shoddy work,
including well-reported recent cases of cracks on a newly built highway
overpass and substandard construction work on a number of public school
computer laboratories.
But there will be a new twist to Malaysia's version of PFIs. A special-purpose
firm called PFI Sdn Bhd will soon be established by the Finance Ministry and
will be tasked with implementing the new investment vehicles. On the plus side,
officials argue that PFI Sdn Bhd will use the benchmarks of a "public-sector
comparator" (PSC) - that is, cost estimates if the government undertook the
project. Moreover, the capital expenditure and the maintenance costs of the
project must be less than the PSC benchmark before a PFI project is awarded to
a private partner.
So who will actually finance the PFIs? Enter the Employers Provident Fund
(EPF), the opaquely-managed, state-run pension scheme, to which both
private-sector employees and their employers are required to make regular
contributions from their salaries. The EPF is tipped to provide the funding for
the initial 20 billion ringgit worth of projects through PFI Sdn Bhd. In short,
the financing will come from the EBF's public coffers - rather than from
private financing - channeled via PFI Sdn Bhd to the builders and construction
contractors. The EPF, however, is covered from lending exposure as it will deal
directly with the government-owned firm, PFI Sdn Bhd.
PFI Sdn Bhd, in turn, will use the money to provide financing to successful
project bidders, which are expected to be privately-held ethnic Malay
consortiums, which will manage all aspects of the project. That means
Malaysia's version of PFIs will differ greatly from those initiated elsewhere
in that the construction and investment risk will remain with the government
via PFI Sdn Bhd and not the private contractors.
''This is not really a true PFI,'' says Subramaniam Pillay, a Kuala
Lumpur-based economist and senior lecturer specializing in international
finance. "Under a true PFI, private investors will provide the financing and
take the risks of the project. And if anything goes wrong with the project,
they have to take a 'haircut'." As for the Malaysian version, he asked, "What
is so private about this?"
The government's PFIs could face serious problems if they are overtly designed
to help contractors who would otherwise likely not get access to commercial
funding, said P Gunasegaram, group executive editor of the business weekly, The
Edge, in a commentary.
"The [ethnic Malay] contracting community is a strong lobby group within UMNO
[United Malays National Organization, the dominant party in the ruling
coalition] but that does not mean the government has to cater to them by
putting together a scheme that will benefit them and give them access to funds
when many of them may not deserve it," he said
Anil Netto is a freelance writer based in Penang, Malaysia.
