It could shake up ownership of redistributive businesses

The Business Times, Singapore
24 January 2006


It could shake up ownership of redistributive businesses

By S JAYASANKARAN
Business Times

SWEEPING new proposals to increase bumiputra (indigenous Malaysians
but largely ethnic Malay) participation in the services sector have
sparked concern among the country's business community, including its
large foreign investor segment.

If implemented, the proposals, contained in a late October 2005
document prepared by Malaysia's Domestic Trade Ministry, could force
equity restructurings in all redistributive businesses - from fish
and meat wholesalers to restaurants and specialty shops - that have
at least a 15 per cent foreign interest.

In addition, the proposals could also affect foreign multinationals
that are wholly owned but which sell at least 20 per cent of their
output locally, a concession granted by Kuala Lumpur around four
years ago to persuade MNCs to not only re-invest in Malaysia but to
set up int ernational procurement centres and regional distribution
centres in the country.

It is unclear if all, or any, of the proposals will be implemented
because they face considerable resistance both within and outside
government. But the plans signal Kuala Lumpur's continuing commitment
to a three-decade-old affirmative action policy designed to help
poorer ethnic Malays play economic catch-up with their richer ethnic
Chinese countrymen.

The policy was first introduced in 1971, but many of its equity
elements were quietly abandoned in the late 1980s after the Malaysian
economy went into a tailspin in 1985. A subsequent boom in the 1990s
made it almost irrelevant as privatisation and initial public
offerings amid a booming stock market seemingly satisfied bumiputra
desire for a larger slice of the Malaysian economic pie.

Even so, the 1998 Asian financial crisis adversely affected a key aim
of the policy - that the bumiputra gained 30 per cent of nationa l
wealth. The figure is down to 18 per cent now which has renewed talk
of a reinvigorated policy.

Indeed, calls for a renewed emphasis on affirmative action were
boosted last year at the annual meeting of the United Malays National
Organisation (Umno), Malaysia's dominant political party. There,
Umno's Youth wing demanded what they called a new national agenda -
which many analysts took as an euphemism for affirmative action.

The new plans could be a result of Umno's calls. Meanwhile, the
redistributive trade - comprising retail and wholesale, hotels and
restaurants - is one sector with insignificant bumiputra
participation. Yet, it is robust, thanks to a domestic consumption
boom. It has grown by over 13 per cent for nine consecutive years
from 1996, according to a domestic trade ministry report. That is
tempting from a restructuring perspective.

Analysts worry that the proposals could damage foreign investor
sentiment. The plans call for MNCs sel ling products in Malaysia to
create a marketing subsidiary with at least 30 per cent bumiputra
participation. But, according to industry officials, it is opposed by
the International Trade Ministry which was the body that relaxed the
rules in the first place.

Foreign investors are appalled by the proposed shift. 'Policy
backtracking concerns us,' Stewart Forbes, the executive director of
the Malaysian International Chamber of Commerce, told the New Straits
Times recently. 'We're going from a situation of increasing
investment liberalisation to something that might cause confusion.'

Economists agree. 'The space for affirmative action is limited as the
world has changed,' said Mohamed Ariff, executive director of the
Malaysian Institute of Economic Research. 'You need high growth for
that, but now we're only going to see 6-6.5 per cent growth. There is
global competition for investment and capital unlike in the 1970s. We
cannot have our cake and eat it, too.'

Indeed, many economists think that while the proposals on MNCs will
be scrapped, the jury is out on the redistributive trade. Here, the
plans call for any such business with at least a 15 per cent foreign
interest to increase their capitalisation to RM1 million (S$432,000)
before selling at least 30 per cent to bumiputra investors.

Most of the trade in the retail and wholesale business is wholly
Malaysian owned but that is not so in the specialty shop - branded
items, for example - and the restaurant business. It will certainly
affect Malaysian businessman K Sugu. Together with two other
Malaysian partners and an Indian national, Mr Sugu is on the verge of
opening a Hyderabadi restaurant in downtown Kuala Lumpur that is
capitalised at RM500,000.

'I haven't heard anything about such a ruling,' he told BT. 'And we
certainly don't need a RM1 million restaurant.'

Meanwhile, private economists also point out that the plans to
restructure the r edistributive trade are inconsistent with the
guidelines of the World Trade Organization, to which Malaysia is a
signatory.

'Once they kick in starting in 2008, the rules say we cannot
discriminate between local and foreigners,' an economist told BT.
'Then, how do we continue restructuring the redistributive trade?'

Ultimately, foreign investors want policy consistency. 'You can't
arbitrarily redefine the rules,' said Eric Fishwick, a regional
economist with CLSA. 'It sends the wrong signal not only to
foreigners but to your own businessmen. It destroys entrepreneurship.'

Ends