THERE are at least three very good reasons why the Government should do away with the equity target for bumiputra ownership of companies under the New Economic Policy or NEP. At the top of the list is that the measurement itself is fatally flawed.
Second, as it is structured now, it involves too low a proportion of bumiputra population and leads to the well-known Ali Baba syndrome where the bumiputra participation is in name only while non-bumiputras run virtually the whole show.
Three, it puts far too much emphasis on an ephemeral, badly measured target at the expense of other, far more encompassing and important aims of the noble NEP, which include the eradication of poverty irrespective of race and the restructuring of society to eliminate the identification of race with economic function.
For good measure, let’s put forward one other reason, one that would appeal to corporate players and entrepreneurs. It would make it easier for companies, especially smaller ones, and entrepreneurs to expand their business without having to constantly find a bumiputra partner to take a 30% stake, which is the equity target. It is important to remember that the NEP is a document formulated in the early seventies with broad reference and achievement targets following the racial riots of 1969.
The twin aims were poverty eradication and restructuring to reduce racial discrepancies. The 30% target for bumiputra ownership in the corporate sector, originally to be achieved by 1990, was an administrative one and not part of the policy document itself.
The measurement criteria were not properly laid out. It was for ownership of limited companies based on the par value of the shares of the companies. Par value represents the original paid-up and nominal value of the capital and does not represent the increase (or decrease) in value of the original investments over the years.
Under this measurement, it was estimated that bumiputra ownership of the corporate sector is about 19%, still short of the 30% target.
But the measurement most likely understates bumiputra corporate ownership because many of the companies held by trusts such as Permodalan Nasional Bhd (PNB) have appreciated much in value, way beyond their par values.
Another problem of this kind of measurement is that state-owned companies and ownership by the Employees Provident Fund or EPF are not taken into account in calculating the percentage ownership. It is possible for instance, to split up state-owned companies according to the population. If this was done, it will increase bumiputra equity ownership substantially.
Earlier this week Deputy Prime Minister Datuk Seri Najib Tun Razak announced a possible gradual relaxation of bumiputra equity targets for the corporate sector.
Trade and Industry Minister Tan Sri Muhyiddin Yassin however poured some cold water over the suggestion when he said it was likely to be maintained for the time being because the target had not been achieved yet.
But if the equity target is to be maintained, the measurement of achievement must be considerably revamped and refined so that it is a proper tool for the accurate measurement of bumiputra ownership in the corporate sector.
That must mean taking the market value, if that is available, of the companies. This is no problem for listed companies which are traded on the market. For unlisted companies, the Government should take the total shareholders’ funds. That represents the net book value of the assets of the company instead of paid-up capital which represents only the par value. That would make the measurements much more accurate than they are now.
The other niggling problem is that of how to account for companies in which the Government has a large stake. This is very important because the Government, and the EPF probably control more than 50% of corporate wealth in the country, if we were to include the national oil corporation, Petronas, too.
The best way to do this is to apportion stakes in government companies among the races according to proportion of population. If this were done, it will take all factors into account in the measurement of the equity stakes by races and reduce considerable error and misconception.
According to one academic, who attempted such an exercise, the bumiputra stake in the corporate sector is much higher than 19%. Dr Lim Teck Ghee, then director of Asli’s Centre for Public Policy Studies said in October 2006, that bumiputra corporate equity ownership could be as high as 45%.
If indeed it is that high under new criteria for measurement, then it is high time that the Government dropped the equity target for all administrative procedures because the 30% target was long ago achieved.
That would also eliminate one of the major sources of inefficiency and patronage in the system. Many non-bumiputra companies routinely seek eligible bumiputras as “sleeping partners” to take a 30% stake in their companies so that they satisfy licensing and other requirements and become eligible for government contracts.
Often, bumiputra partners cannot come up with enough money to buy those stakes. That means they may have to be provided financing on generous terms, given the stakes or become owners in name only through another agreement – all of which makes it a pretty inefficient way for companies to operate.
For some lucky bumiputras with influence and contacts in the right places, but not the vast majority, those arrangements often lead them to riches that they have never dreamt of basically for doing nothing but lending their names to ownership.
For those in government, politics and bureaucracy, that 30% requirement is a powerful tool for the distribution of power and patronage. That explains why that 30% target, meaningless to most Malays, has become such a sticking point in any debate about the NEP. If one excludes the national unit trust scheme administered by PNB, the foundation entrusted with increasing bumiputra participation in the corporate sector, most bumiputras – perhaps over 90% – do not own shares.
Ridding the country of that 30% target, which may already have been achieved, will put the focus back on improving the general lot of Malays and all who are similarly poor, which is the original, noble aim of the NEP when it was conceived.
That it will simultaneously considerably reduce patronage, stop individuals becoming fabulously rich without having to work for it, and increase efficiency in the corporate sector is just an added bonus.
Government should remove 30% equity target