Privatization in Malaysia: Regulation, Rent-seeking, and Policy Failure (review)

Malaysia took on one of the most extensive and ambitious privatization programmes in the world and wound up with a load of collapsed and renationalized projects. The debacles raise questions on why the country spectacularly failed in its mission to raise efficiency, attain self-sustainability, and foster entrepreneurial capacity through privatizing public entities. Jeff Tan's Privatization in Malaysia: Regulation, Rent-seeking and Policy Failure tackles the topic with an insightful and original combination of political economy perspective and detailed case studies. His framework and findings contribute richly to our understanding of Malaysia's privatization failures and challenge the continued propagation of such policies in developing countries.

The book poses three key questions to social science theory and to the Malaysian experience: Why privatize? Why may privatization fail? What is needed for privatization to work? In answering them, the author engages with conventional theory and critiques its inadequacies in predicting and explaining policy problems, and outlines alternate approaches to engage the subject with greater cogency and real-world relevance.

The conventional case for privatization revolves around three main contentions about the superiority of private ownership over public ownership. First, drawing on principal agent theory, private ownership provides incentives for the principal (owner) to monitor the agent (manager), because the owner controls and directly reaps profits. On the other hand, citizens are the ultimate principal of state-owned enterprises, and can only exercise indirect control through the government, and need to overcome a host of coordination problems to effectively monitor management. Second, public choice theory asserts that "the state is intrinsically inefficient and perpetually overburdened and underdisciplined", and public enterprises serve politicians' interests rather than maximizing efficiency (p. 11). Third, privatization alleviates the burden on public finance and mobilizes new sources of funding.

Following from the axiomatic efficient market basis of these rationales for privatization, failures are attributed to institutional shortfalls and political interference that vitiate otherwise sound policy. Corruption and cronyism compromise the integrity and transparency of contract allocation, while weak protection of property rights and poor governance permit business conduct to deviate from market norms. Such institutions are now considered preconditions for privatization.

The book's conceptualization of the processes and problems of privatization fundamentally differs from conventional theories. From the very start, Tan does not begin with dictums and preconditions, but with real-world situations, motivations, and constraints. The private sector, both in developed and developing countries, often finds projects with high capital costs too expensive and risky to finance, necessitating state intervention to share risks, even after privatization. Paucity of entrepreneurial capacity and experience limits competitive bidding; lack of information constrains the scope for devising contracts, which in any case can never complete, but in developing countries are more likely to need room for manoeuver and adaptation. Also, in the context of low income economies, transitioning away from publicly subsidized infrastructure and services to paying higher user fees encounters popular resistance.

In consequence, "privatization necessitates continued and often even greater state intervention in terms of maintaining some subsidies, perhaps creating new ones, devising new methods of regulation and coordinating certain sectors" (p. 3). Regulation is not restricted to instituting investor-friendly provisions and consumer protections, but also involves managing learning rents, or subsidies and conditionalities targeted towards acquiring technological and entrepreneurial expertise and attaining market competitiveness. In consequence, whether privatization leads to learning and efficiency gains hinges on the state's leveraging of subsidies to monitor and discipline the management of privatized companies.

Moreover, privatization programmes are embedded in political contexts and agendas, chiefly the cultivation of a domestic capitalist class and state patronage of political business elites. Expediency and vested interest will inescapably encroach on privatization of large public entities. However, conventional theory fails to adequately account for political motivations for privatization, preferring to assess, in retrospect, whether political conditions were up to the task of realizing the gains of privatization. This notion of preconditions, Tan argues, is profoundly ahistorical and exceedingly unrealistic to expect of...