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Divestment Of Governments Holding In Pos Malaysia Economics Essay

The possible impact of government ownership on firm performance remains a highly debatable issue, especially in a developing country like Malaysia. Government ownership is typically viewed as potentially affecting firm performance. It does not matter whether the ownership is in the form of state ownership or legal person ownership, government ownership has a positive impact on partially privatized state-owned enterprises. Given the scenario of highly indebted, non-performing state-owned enterprises, we argue that too much government control is indeed bad for enterprises. But too little government ownership may not be good either. This could possibly mean a lack of the government’s political support and business connections, which are valuable and necessary to vitalize performance.
Introduction The Malaysian Government has recently announced their plan on The New Economic Model which from the NEAC report has outlined 3 key principles namely – 1. High Income 2. Sustainability and 3. Inclusiveness, for us to drive the country’s economic progress to become a fully developed nation, a competitive economy strategically positioned in the regional and global economy landscape, environmentally sustainable and a quality of life that is all inclusive and encompassing. The raison d’etre of the New Economic Model is for Malaysia to make a quantum leap from the current USD7000 per capita annual income to USD15000 in ten years time. Creating a high income nation is translated as higher wages throughout the economy since growth is derived not only from capital, but from greater productivity through the use of skills and innovation, improved coordination, stronger branding and compliance with international standards and Intellectual Property Rights. In a k-economy, investment in new technology, multi skills, innovation and creativity, and increased competency are the drivers of public and private sector performance. Malaysian Government expects investment and competition for the best talent through paying higher wages. Even wages for the blue collars will be based on them acquiring higher competencies, with their performance more readily benchmarked against international competitors. With more skills, come greater responsibility, and better, higher paying jobs. (Najib Razak, PM on NEM, 2010)
For this very reason, government as the key driver of the country’s economy must play an active role in transforming and reforming the economic model especially the current Malaysia’s Capital Market. The development of Malaysia’s capital markets will be further strengthened in the Second Capital Market Master Plan currently being formulated by the Securities Commission, also on the acceleration of capital market industries such as the fund management, venture capital and private equity sectors as a crucial part of the country’s drive to create the high wage, high skill economy of Malaysia’s future. Related to this issue, the EPF(KWSP) presently dominates local equity and bond markets with up to 50 percent of daily Bursa volume represented by EPF related trades, a situation that is not healthy for the market or for the EPF. Government has announced that the EPF will be allowed to invest more assets overseas, both diversifying its portfolio and creating more room domestically for new participants. EPF currently has about 6 percent of assets invested overseas and this will increase significantly. EPF will also increase its direct investments within the country’s real economy, as an alternative to market investments – taking positions in healthcare, commodities, property and other long-term investments that match EPF’s requirements to protect the real rate of return on its assets. They also outlined a strategy for GLCs to dispose of non-core assets; to catalyze and develop the eco-systems of their core sectors; and, to compete on a level playing field with the private sector. Building upon the third principle, Government Linked Investment Companies (GLICs) should be allowed to divest non-core and/or non-competitive assets. (NEAC on NEM, 2010)
GLCs and Government holding agencies will be encouraged to pursue strategic collaborations with private sources of capital in Malaysia in order to provide prospective investors with exposure to the government order book and build national competencies. Such partnerships will not only drive the regionalization strategy of Malaysian companies which is vital given the size of the domestic market, but also ensure ready pools of capital are in place and available for quick deployment. As such, the opportunity to form partnerships with a wider range of co-investors including retail investors, local and foreign mutual funds remains open. These plan if successfully implemented, the catalytic coalitions could become a unique form of Public Private Partnership. GLCs already have initiatives moving in this direction. Examples include the upcoming Astro (taking private) and Saudi Arabia utilities project partnership between Malakoff and Tenaga Nasional. GLCs have made progress in divesting its non-core assets and Khazanah alone has over the course of the last nine months divested significant stakes in Tenaga Nasional, Malaysia Airports and PLUS for the purpose of increasing the liquidity of these counters. GLCs will continue the divestments of non-core and non competitive assets that operate in areas where new strategic shareholders have the potential to enhance the creation of value, as compared to them being left within the government stable. There are plans outlined to divest the government’s stake in Petronas, Percetakan Nasional Malaysia Berhad, CTRM Aero Composites Sdn Bhd, Nine Bio Sdn Bhd, Innobio Sdn Bhd and others. However for the purpose of the subject of this paper, we will be zooming-in on the divestment of 32% shares of government in Pos Malaysia Berhad. (Khazanah Nasional on GLCs Divestment Plan, 2010)
This paper is divided into 5 sections. Section two is a review of relevant literature. Section 3. details our data and methodology. Section four, presents the results and analysis and the final section five concluded everything.
Problem Statement Based on the fundamentals in Corporate Finance, the business organization’s aim is to maximize its shareholders’ wealth by maximizing their returns. Pos Malaysia over the years has been generating steady but declining profit margins, maintaining healthy cash flows, continues paying dividends above 10% every year since the last 7 years, initiated share repurchase in the open market in 2007 by distributing RM800 Million of payout to its shareholders and experiencing reduction in its share price despite the basic fundamental in Corporate Finance where share repurchase will result in the increase of the firm’s share price. Despite the commendable performance over the years, Government under the New Economic Model has decided to divest its shares in Pos Malaysia Berhad. Therefore this paper is meant to study the influence of government’s holding on the companies’ performance in Malaysia.
A very important point to note here, as the research methodology is too high level and beyond my level of expertise, I will be using the recent research methodology and findings of more prominent scholars and researchers to avoid any misrepresentation on my concept paper.
Literature Review Suggestions from both the agency theory and the property rights theory indicated that privatization should impact the corporate performance of companies positively. First of all, the agency theory argues that the government, being the major shareholder of state-owned enterprises (SOEs), is not effective in monitoring the performance of these enterprises. The study by Graf et al. (1990) notices that the management mechanism for state enterprises in developed countries are very hierarchical, ranging from the State, the Federal-owned Assets Management Bureaucracy down to State-owned Assets Management Bureaucracy. Although they are responsible for the appointment of managers working in those enterprises, it has difficulties in monitoring the performance of thousands of SOEs. Such a top-down bureaucracy in fact is ineffective in recruiting capable managers. Managers in those SOEs may have limited expertise in modern finance as well as investment theories and practices. Moreover, with little or no equity incentives, those managers may have no incentive to maximize the value of these firms.
The argument for privatization by agency is that shares distributed to private investors would spur greater incentive for monitoring the performance on these agents, thus reduces agency costs by reducing the agent’s conflict in dealing with diverging state objectives for social welfare maximization versus firm objectives for profit maximization. The property rights theory (Alchian, 1961) on the other hand examines the relation between government and private ownership and their effect on firm performance. They suggest that firms with private ownership should perform better than those with government ownership. According to Aharoni (2000), owners of private firms, as holders of revenue rights and residual control rights, have an incentive to monitor the management behavior closely, thereby affecting a firm’s performance positively. Privatization aims at the decentralization of the state property rights, so that the resource allocation mechanism can be transformed from one focused on central planning to one focused on market orientation. This re-distribution of property rights increases both the control or income rights to private owners and managers, and is therefore likely to improve the corporate performance of SOEs.
Privatization in Malaysia The privatization in Malaysia started during the era of the 4th Prime Minister, Mahathir Mohamed in 1983. it was very much consistent with his personal ideological and policy preferences as well as the then new wave of conservative market reforms beginning in the West with the election of the Thatcher Government in the United Kingdom in 1979 and the Reagan administration in the United States the following year. Privatization has unevenly proceeded since its emergence in the 1980s. Of the 2,100 known cases of divestiture in developing countries between 1980 and 1991, over half (around 1,300) were in Mexico and Chile alone, leaving a low single digit average for the others (Kikeri, Nellis

New World Challenges Old And Global Wine Wars Economics Essay

In the mid 1850’s the producers in the wine industry welcomed increasing regulations, policies and classifications because it was a way to differentiate their product from competitors. However, it turned out to be a barrier for them a few decades later when producers from new regions, hereafter the New World, started to produce wine using some breakthrough technologies and innovations. Unconstrained by all the regulations and the traditions that was part of the Old World context, countries like Australia and the United States of America began to produce wine that was quickly acclaimed by the critics. At that time, New World producers started to gain some market shares over the traditionalists and their own population also started to make wine a part of their culture. Indeed, global demand and consumption shifted from countries like France and Italy to Argentina, Chile and Australia with a drop of 25 per cent in worldwide consumption from 1976 to 1990. [1] These were all due to the radical changes in consumer tastes and preferences. The reasons are namely the change in younger generation’s different drinking preferences, consumer’s growing demand for higher-quality wines, an emphasis on light foods resulted in an increase in demand for white wines and the publication of a medical report identifying red-wine consumption as a healthy choice.
Apart from the shift in demand, the availability of land and the structure of the value chain provided the New World countries a huge advantage. In fact, while the average vineyard in the Old World regions was less than one hectare, it was an astonishing 158 hectares for their counterparts. Moreover, the Old World wine process was divided into several phases of production like grape growing, wine making, distribution and marketing, whereas the emerging producers controlled the full value chain, extracting margins at every level and controlling quality throughout the chain.
Problem Situation Given the facts mentioned earlier, the main problem could be defined quite simply; the Old World wine industry has not been proactive and has waited too long to take the necessary steps to stay the leaders. Like the report on the French industry released in 2001 said, “the French wine industry has lived too long on its past good name” and it is now in a situation, as well as the other Old World producers, where it “has to adopt some of the technical and marketing advances that had allowed the Australians and Americans to succeed”. Still, the answer does not lie only on what strategic direction the Old World should take, but also on how to align the different stakeholders’ interests with the chosen direction.
Solutions Status quo One obvious solution for the traditional producers would be to not take any big actions in any direction, opting for status quo. By continuing to lose market share and to be less cost effective than the emerging producers, they would of course hope that the demand shifts by itself and that the Old World producers become once again the leaders and the best wine producers in the world. This, however, is very unlikely since the New World would not simply become less attractive to the customers without any apparent reason and it would neither solve the problem for the Old World wine producers. [2]
The single advantage of this decision is the savings that the Old World does by not requiring an outlay of capital. This is still outweighed by many negative aspects like decreasing market share, higher production costs and maybe bankruptcy for some traditional producers.
Accord less importance to tradition and use many technologies like the New World As a second alternative, the Old World could abandon some of the heavy regulations and policies and focus more on the R