NEP revived – 20 to 50 years

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Speech (3) on the Ninth Malaysia Plan
by Lim Kit Siang  
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(Parliament, Monday) : In reviving the New Economic Policy and extending it from a 20-year into a 50-year policy, the National Mission has also revived a subject of grave national dissension both between bumiputras and non-bumiputras as well as between the bumiputra haves and bumiputra have-nots.

The revival of the NEP was the rallying cry of the UMNO Youth leader, Dato Hishamuddin Husssein and his deputy, Khairy Jamaluddin at the UMNO Youth general assembly in July last year, who called for the Malay Agenda to be embedded in the Ninth Malaysia Plan and to  become the New National Agenda for a 15-year term ending with Vision 2020.

Khairy wanted the Malay Agenda – covering ownership of land, housing, business premises and intellectual property –to target 30 per cent bumiputra share ownership by 2020.

We see the translation of the Malay Agenda of UMNO Youth into the 15-year National Mission when the 9MP was presented on Friday.  It is an acknowledgement of the fact that despite 35 years of social engineering and economic restructuring the Malaysian dream of a just and equitable society remains a faint and hazy dream.  

When UMNO Youth called for the revival of the NEP in July 2005, MCA and Gerakan leaders, both at the national and youth levels, publicly expressed their criticism and opposition.  But such criticism and opposition were easily squashed when Khairy summoned a Barisan Nasional Youth special meeting a few days later. After a two-hour meeting, Khairy announced that all the youth movements of the Barisan Nasional component parties, including MCA and Gerakan, were  in full support of UMNO Youth’s call for the revival of the New Economic Policy as “a national agenda for all Malaysians”.

Up to now, not a single MCA  or  Gerakan leader, whether at national or youth level, had explained their sudden reversal of stand – fully reminiscent of their support of the “929 Declaration” on 29^th September  2001 by Tun Dr. Mahathir Mohamad that Malaysia was an Islamic State when they had all along until then asserted  that Malaysia was a secular state with Islam as the official religion but not an Islamic State!

The most significant aspect of the genesis of the  New Economic Policy (NEP) had been overlooked, ignored or forgotten – that while the NEP had a two-prong objective of eradicating poverty irrespective of race and the restructuring of Malaysian society to eliminate the identification of race with vocation or location, the  overriding objective of NEP from the very first day of its promulgation in 1970 was to achieve national unity.

This means that the most important measure in the evaluation of the NEP must be its success or failure to fulfill its overriding objective to achieve national unity – and this must also be the yardstick  in the discussion of  the pros and the cons  of the revival of  the NEP. 

When the New Economic Policy was introduced in 1970, it was envisaged as a 20-year programme.  With UMNO Youth’s  proposal for the  revival of the NEP for 15 years from 2006-2020 accepted in the Ninth Malaysia Plan and the 15-year Mission, the 20-year NEP is going to become a 50-year programme. 

The 20-year NEP had failed in its overriding objective to achieve national unity, or 46 years after Merdeka in  1957 there would be no need  to introduce the national training service and 49 years after Merdeka to revive the  NEP or NEP2.

In postulating  a 30% bumiputra share of corporate stock ownership, UMNO Youth, the 9^th Malaysia Plan and the National Mission have not addressed  two matters:

• the   target of 30% ownership of corporate shareholdings by Bumiputras was but one and not the “be-all and end-all”  target of the NEP, whose overriding and overarching objective was  the achievement of national unity; and
• the target of  30% equity share for bumiputras had  been achieved by the end of the 20-year NEP in 1990, if the Malays had not sold off their share ownerships from bumiputra quotas for quick capital gain and shares held by nominee companies which were  mainly bumiputra interests had been taken into consideration.

The contention that the 30% target for Bumiputra equity holding had not been achieved; and that  Bumiputra holdings are  only 18.9% of total corporate equity is highly dubious.

There is much misunderstanding of the NEP target concerning ownership of share capital.

In 1970, when the initial calculations of share ownership were done, the calculations were done on the basis of taking the par value of the shares of all limited companies, both public limited and private limited companies, distributed by ethnic origin. Thus, the total stock of share capital at that point in time was valued in nominal ringgit terms.

The calculations took  no account of the true asset or equity values which are a correct measure of wealth. Par valuations are notional and equate a single share in a small private family owned business with a single share in a large asset-rich public limited company listed on the stock exchange. The resulting aggregate values (at par values) understated the net worth of asset-rich companies whilst exaggerating the value of shares in private companies. The total par value of shares as measured is an under-estimate of the value of all corporate assets/equity or the net worth of corporate entities.

This same methodology has been applied consistently since 1970. According to the 9^th Plan (table 16.6), the total par value of share capital in 2004 amounted to RM 529.8 billion of which 18.9 percent was owned by Bumiputras, 40.6 percent by Non-Bumiputras, 32.5 percent by Foreigners and 8.0 by Nominee companies.

Many observers have argued that the holdings of Nominee companies should be aggregated with Bumiputra holdings to give an overall Bumiputra ownership of 26.9 percent, a figure close to the NEP target of 30 percent. These commentators have contended that Nominee companies are mainly Bumiputra owned.The figure of 18.9 percent is clearly  an under-estimate for other reasons beyond those cited above.

The total value of RM 529.8 billion represents the total par value of all shares in both public and private limited companies.  As of last Friday, the market capitalisation  of 1,025  listed companies with Bursa Malaysia stood at RM732.9 billion. - a figure that exceeded by RM 203.1 billion the total share capital of all companies (both listed and unlisted) in par value terms.

This is clearly an inconsistency. No published figures are available about the ethnic distribution of the capitalized value of RM 732.9 billion. It can however be reasonably argued that all listed companies on Bursa Malaysia  are companies that have been restructured, resulting in a minimum 30 percent Bumiputra ownership.

It must be recalled that restructuring is a pre-condition for listing on Bursa Malaysia. On this basis, it would not be erroneous to assume that 30 percent of the capitalized value of listed shares belongs to Bumiputras. To this extent then, Bumiputra ownership is close to or even exceeds the NEP target.

It should also be observed that ownership is but one dimension. Control matters. In terms of control, even through minority holdings, Bumiputras and Bumiputra controlled entities are likely to be in control of corporate wealth well in access of 30%. On this basis, the data presented in the 9^th Plan is moot and anomalous.

In terms of value of corporate equity attributable to Bumiputera, the amount increased from RM447 million or 2.4% in 1970 to RM100  billion or 18.9% in 2005, though a major portion of this stock remains in the hands of the GLCs.

So long as Malays can sell their shares to realize short-term profits, Malay equity ownership would never reach 30% even if the NEP was extended beyond 2020. If the Malays had held on and not sold the shares, the Malay equity would have reached 30% by its stated period of 1990.  An estimated 40% of the Malay preferential shares given were sold for profit gains.

Documented verification is provided by an academic working paper titled, "Privatisation of Ports: A Malaysian Case Study" by Associate Professor Malcolm Tull and Dr James Revely of Murdoch University in January 2001,

"... By 1995 the privatised companies accounted for 22.1 per cent of the total market capitalisation of the KLSE. Many shareholders took advantage of the opportunity to realise short-term capital gains and sold their shares. The sale of shares in Klang Container Terminal and other privatised companies has, however, led to a dilution of Bumiputra equity: between 1983 and 1990 it declined from 65 per cent to 38 per cent of total paid up capital on the KLSE."

This Australian study showed that almost 41% of the shares in privatized companies held by the rich Malays were sold. Applying this rough ratio would mean that the 19.3% of Malay shares in 1990 only represented 60% of the shares given by the government. In other words Malays  had sold 12.9% equity stake.  If Malays had held on to every share given, they would have a total 32.2% equity stake, far exceeding the 30% target in 1990.

It is clear that  the decline in private Bumiputera holding of corporate equity need not necessarily mean that the volume of wealth they hold is not on par or is smaller than that held by non-Bumiputera.

The government’s figures are also in dispute because a tabulation of the market capitalisation of equity owned by the GLCs, which are recognised as Bumiputera private sector investments, would indicate a substantial increase in this bumiputera  ownership of share capital than the reported 18.9%.

In fact, Ramon Navaratnam, a former senior bureaucrat in the Ministry of Finance, was quoted as saying that recent studies indicate that Bumiputera now own about 50% of the corporate sector (The Star, 6 November 2005). A study by Terence Gomez  published in 1990 of corporate equity owned by politicians and political parties, including UMNO, revealed that they have resorted to using nominee companies to conceal their ownership of corporate equity from public scrutiny

During the public balloting of newly listed stock, Bumiputera get a double bite, so to speak, of such equity. This would mean that Bumiputera would end up with more then 30% of a firm’s equity during its IPO. Most of this Bumiputera apportioned stock is immediately sold off for a quick profit and the management of these new quoted companies are required to top up their Bumiputera equity shareholding if they want to participate in a subsequent corporate exercises or a government-related projects.

The sale of equity by Bumiputera post-IPO, or after a rights or bonus issue, constantly leads to a dilution of this community’s ownership of equity. Has the government data on the magnitude of this “leakage”?

A study has pointed out to  the flaw in the system where Incentives and privileges have been provided to Bumiputera, regardless of their level of income or volume of assets owned, which is prone to abuse, with the educated and informed middle and upper class Bumiputera being the primary recipients of IPOs.

With the government’s wealth redistribution measures targeted at middle and upper class Bumiputera, the government has failed to use this delivery mechanism to address and alleviate the plight of the most disadvantaged Bumiputera, a factor that has now also contributed to serious intra-Bumiputera wealth disparities.

Economic policies based on race do not serve as an incentive to disadvantaged segments of society (middle to lower classes non-Bumiputera and Bumiputera) to participate in the economy.

Equitable wealth distribution can only be achieved if the recipients are subjected to income and assets tests, regardless of race, a mechanism employed in countries that have adopted affirmative action. Disadvantaged individuals should be given incentives to participate in the economy.

If the government hopes to get a more objective picture of wealth distribution among ethnic groups, a better measure than the distribution of publicly-traded share capital would be volume of assets owned or income.

The revival of the NEP has come at a time when studies have shown that the government had not been successful in creating  an economically sustainable, independent Bumiputera commercial  and industrial community through the NEP – whether from  selective patronage through the NEP or privatisation.

Thus when Khairy wrote that the revival of the NEP will not see the return of the gravy train, who  will believe him – when he will be regarded as the top candidate to benefit the most from  the new  gravy train as a result of the NEP revival!

This is why the question that must be posed about the Ninth Malaysia Plan  is whether it is a  RM220 billion “gravy train” for new  UMNOputras or a wake-up call that Vision 2020  is “off track” whether in achieving fully developed nation status or accomplishing its nine strategic objectives.

(03/04/2006)