Transforming state-owned enterprises: What other countries can learn from Malaysia

As Tunisia embarks on an ambitious reform agenda to strengthen corporate governance and modernize its state-owned enterprises, senior representatives from the Ministry of Finance visited Malaysia in December last year to learn about the country’s best practices on restructuring and managing government-linked companies (GLCs).
 
These companies, where the Malaysian government has a controlling stake, underwent major transformations since 2004 to turn weak operational and financial performances into high performing entities critical for the country’s future prosperity. The program was successfully executed and has enabled these companies to become profitable, dynamic, performance-oriented, and well-governed institutions.
 
This visit is one of the first activities of the new World Bank Group Research and Knowledge Hub in Kuala Lumpur, which is helping Malaysia share its successful development experience globally. Here are a few lessons that Tunisia, and other countries, can learn from Malaysia’s experience on reforming government-linked companies.
 
Lesson 1: Establish an accountable body. In order to guide and execute the transformation of government-linked companies, Malaysia established the Putrajaya Committee on GLC High Performance (PCG). The main focus of this committee was to design and implement comprehensive policies and guidelines that can help companies become high performers.
 
The committee analyzed extensively the root causes of underperformance, examined best international practices, benchmarked performance against their international peers, upgraded policies and legal framework governing the companies, corporatized them, and brought a new management team from private and public sectors to transform individual companies. Being held accountable for the transformation, they were required to extensively communicate their strategy to all stakeholders and keep the public informed on their progress.
 
Lesson 2: Introduce clear performance indicators. Within a sound accountability framework, the adoption of key performance indicators (KPI) covering both financial and non-financial metrics contributed to the creation of a performance-based culture in GLCs. This translated into improved management practices, more efficient use of capital, and higher profitability. Between 2004 and 2014, companies tripled their market capitalization. Furthermore, companies achieved a return on equity similar to the one recorded by listed companies. During this period, companies grew by 11% annually.
 
Lesson 3: Align your transformation program with the national economic development agenda. The New Economic Model (NEM) launched in 2010 by the Malaysian government provided the pillars and strategic directions for the country to become a developed and competitive economy by the year 2020. The NEM provided specific actions for executing the GLC Transformation Program, requiring GLCs to increase their presence at both regional and global markets. As a result, these companies started operations in 42 countries and in 2014 overseas revenue of the largest 20 companies tripled to reach $22 billion.

To create more economic value, the companies invested in new knowledge-based and service-oriented industries and sectors in line with NEM. Collaboration and co-investments with the private sector have been essential to support Malaysia’s economic growth and ensure that the companies do not crowd out the private sector from the strategic sectors in which they operate.
 
Lesson 4: Invest on human talent. Malaysia has made major investments to build a new generation of senior managers and board members for government-linked companies. As part of these efforts, it established the Malaysian Director’s Academy (MINDA) with the primary objective of providing Directors of GLCs world-class knowledge and management skills.
 
In summary, several factors contributed to the success of government-linked companies’ transformation in Malaysia: The establishment of a government body with a clear mandate and objectives, formulation and tracking of key performance indicators, a sound accountability framework for delivering results, and a strong focus on profitability. Aligning the Transformation Program with the national development agenda enabled the Government of Malaysia to support strategic sectors of the economy. Finally, a targeted human capital development program helped to enhance the skills of senior managers and GLCs board members. All these lessons are relevant for transforming state-owned enterprises in Tunisia, as well as other countries.
 
Malaysia is eager to share its valuable knowledge, expertise, and insights on economic development with other economies around the world. Building on the new partnership between Malaysia and the World Bank Group, more countries will have access to experts from Malaysia and will be able to discuss with them what has worked, why, and how to address policy challenges in a practical and effective manner.