East Asia Forum: How to prevent another 1MDB saga

KUALA LUMPUR - The 1Malaysia Development Berhad (1MDB) saga highlights the problems with state-ownership in the Malaysian economy.

According to a report in the East Asia Forum, to prevent such scandals from recurring, Malaysia should first curb the excessive role of the state in business .

Then, it has to put in place institutional mechanisms that subject politicians to proper checks and balances.

Also, there is a need for wider democratic reforms and a clear separation of powers of the executive, legislative and judicial branches of government.

“Malaysia has a long history of high-level financial scandals, some of them involving the country’s government-linked companies (GLCs). Yet, the recent case of 1MDB is particularly shocking. This is the first time that a sitting prime minister is directly implicated,” it notes.

In Malaysia, according to the article by Teck Chi Wong, a Masters student at the Australian National University, GLCs have been used as a tool for politicians to direct benefits to their political supporters or even themselves.

The case of 1MDB, it says, illustrates this problem.

The failure of institutional safeguards to prevent or take action against irregularities that have resulted in the scandal point to major deficiencies within Malaysia’s governance of GLCs.

It says six decades of rule by the United Malays National Organisation, the main ruling party in Malaysia, have undermined Malaysia’s democratic institutions.

“There are now no effective institutional checks and balances on the handling of GLCs by the state and politicians.”

It estimates that GLCs account for approximately 36 per cent of the market capitalisation of Bursa Malaysia and 54 per cent of the benchmark Kuala Lumpur Composite Index. GLCs do not only participate in natural monopolies or strategic industries, but compete with the private sector in highly lucrative businesses such as retail, construction and property development.

In the case of 1MDB, the state-owned investment company also has a huge involvement in property development, through the projects, Tun Razak Exchange (TRX) and Bandar 1Malaysia, it notes.
These projects are particularly controversial, it says, because the land was sold to 1MDB at a very low price by the government.

It says Malaysia should consider adopting the OECD guidelines on corporate governance of state-owned enterprises to benchmark itself against the world’s best practices.

“The guidelines recommend a clear separation between the state’s ownership function and regulatory function, which is currently lacking, particularly in the 1MDB case where the prime minister is the ultimate decision-maker.”

Both the state and GLCs must also observe a higher standard of transparency. A clear and consistent ownership policy should be established to define the overall objective of state ownership and the state’s role in corporate governance, according to the article.

This move, it adds, must be complemented by wider reform in Malaysia’s democratic system.

“The problem goes beyond the current prime minister. Lasting reform will require ensuring free and fair elections and a true separation of powers between executive, legislative and judiciary branches as well as strengthening the independence of key institutions, including the central bank and the attorney-general’s office.”