The high cost of private monopolies

Mageswari Sangaralingam; Meenakshi Raman
Consumers’ Association of Penang

Privatisation policies have been limited to a small elite who took over profitable public utilities and turned them into private monopolies. On several occasions, the objective of reduced fiscal burden backfired, as the government had to pay higher costs to bail out failed privatisations. For consumers, price increases have not brought about benefits. There is a serious need to review the entire privatisation policies to make the process more accountable and transparent.

Lackof transparency in an oligarchic economy

Thegovernment first announced the policy of privatisation in 1983. It represented anew approach to national development, complementing other policies such asMalaysia Incorporated, which was designed to increase the role of the privatesector in economic development. Among the objectives were to reduce thefinancial and administrative burden on the government, to improve efficiency andproductivity, and to facilitate economic growth.

Themechanisms used for privatisation have been diverse and include the sale ofequity or assets, lease of assets, management contracts, build-operate-transferor build-own-operate, build-transfer, and management buy out.[1] Sale of equity predominates in agriculture,manufacturing, finance, real estate and business, while build-own-operate ismore dominant in infrastructure, such as electricity, gas and water.

Fromthe outset, privatisation has been non-transparent. At the beginning, it wasmainly done on a "first come first serve" basis. Projects that hadbeen identified for privatisation, including those that were highly profitableunder public ownership, were often awarded to individuals or companies withpolitical connections, including United Engineers Malaysia, Fleet Group, Renong,Vincent Tan Chee Yioun and Ananda Krishnan, without payment. The entireprivatisation process continues behind closed doors and beyond publicaccountability.

Initially,the public understood that only unprofitable enterprises would be privatised.However, ultimately even the most profitable state-owned enterprises likeTelekom Malaysia (telecommunication services), Tenaga Nasional (electricityprovider) and Pos Malaysia (postal services) have been privatised. Nationalinfrastructure assets, such as toll roads and key services of governmenthospitals, were awarded to Malaysian business groups, which were given long-termconcessions to operate the ventures. In many cases, privatisation hastransformed public monopolies into private ones, which too often have become theproperty of a select group of politically well-connected business tycoons,rendering the Malaysian economy more oligarchic.

Theprivatisation plan appeared to work well from the late 1980s to the mid-1990s.Boasting bullish cash-flow forecasts, companies involved in privatisationprojects easily tapped capital markets and banks to finance their long-term,capital-intensive ventures. However, when the economic crisis hit in 1997, manyof these companies were exposed as cash-poor and debt-heavy. Now the governmentis confronted with the awkward prospect of having to re-nationalise some of thecountry's privatised ventures.

Privatisationhas caused fiscal problems because the government has had to bail out failedprivatisation projects. In 2000, it paid more than MYR 192 million (USD 51million) to re-nationalise sewage services. At that time, Bernard Dompok, aminister in the Prime Minister's Department, called sewage services a"special case" as the government had to "safeguard publicinterest and to avoid service disruptions". However, since then thegovernment has also reacquired Malaysia Airlines and is in the process of takingover the Renong conglomerate and two urban light-rail transit systems for almostMYR 9 billion (USD 2.4 billion).

Moreworrisome are recent moves to privatise basic services like water, education andhealth care, which have all been widely accessible at a very low cost,especially for lower income people.

Water:the unfulfilled promise of governmental tariff control

InMarch 2002, the Malaysian Works Minister, Datuk Seri S. Samy Vellu, said thatthe Government may have to privatise water management to reduce the financialburden on state governments.[2]According to the Minister, the privatisation proposal followed the AsianDevelopment Bank’s recommendation to open up and privatise water management.He gave the assurance that water tariffs would always be subject to governmentcontrol. Nevertheless, the Minister’s proposal came under fire from consumergroups, such as the Consumers' Association of Penang, who argued that water is an essential public resource that must becontrolled and managed by the government in the public interest.

Waterauthorities in several states (such as Johor, Penang and Kelantan) have alreadybeen privatised, and those in Selangor and Terengganu have been corporatised(run as companies but owned by the government). In the state of Penang, theWater Board has been privatised despite being one of the best managed and mostprofitable water authorities in the country. Five other states are expected tocomplete the privatization or corporatisation of their water supply during theEighth Malaysia plan period of 2001-2005.

Privatisationof the country’s water supplies is likely to involve a review of the existingtariff structure. Despite assurance to consumers that water rates would alwaysremain under the government’s purview, in April 2001, the price for domesticusers in Selangor was increased to MYR 0.57 (USD 0.15) per cubic meter from MYR0.42 (USD 0.11) for consumption of 20 cubic meters or less. Consumers protested,claiming that the increase was not justified because of the poor quality ofpiped water. Although rate increases are currently under government control,they are still open to lobbying by the water companies. The imposition offull-cost water pricing as a result of privatisation will only deprive morepeople of access to safe water by forcing poor communities to seek alternativesources. Uniform price increases for water use will also result in greaterinequities between rich and poor.

Healthcare: increased costs without improvement in quality

Theexisting government health care delivery system has placed 90% of Malaysiancitizens within an hour or 5km of a health centre and has been lauded by theWorld Health Organization as one of the most equitable health services in thePacific region. However, the welfare system is threatened by privatisation.

Inthe Seventh Malaysia Plan (1996-2000), the government alluded to its intentionto privatise medical services. This policy came under severe attack fromconsumer and other public interest groups and was not pursued by the government.Significantly, the subsequent Eighth Malaysia Plan, which chartsthe strategies and programmes to be undertaken by the federal government during2001-2005, does not refer to the privatisation of medical services.However, the government  has movedto corporatise public hospitals.

Manygovernment hospital services, including pharmaceuticals and medical supply, aswell as support services, had already been privatised in 1994 and 1996respectively. These measures increased costs to the government, including higherdrug prices, without a commensurate improvement in the services provided. Theprivatisation of the five hospital support services in 1996 (laundry, hospitalequipment, facilities maintenance, cleaning services, and clinical wastedisposal) increased operational costs four to five times.

In1994, Malaysia's drug distribution system, which was run by the government'sGeneral Medical Store (GMS) was privatised, and state hospitals were required toprocure their supplies from a new company, Southern Task Sdn. Bhd. (STSB), asubsidiary of Renong. An indication of the overall dismal performance of STSBwas the move to change to another entity called Remedi Pharmaceuticals Sdn. Bhd.(PPSB) in 1996. A 1996/97 study carried out by the School of PharmaceuticalSciences, University Sains Malaysia, found that privatisation of GMS has notresulted in any significant improvement in the overall drug distribution system.[3]On the contrary, the weighted price of drugs supplied in 1997 increased 3.2fold.

Presently,patients are increasingly being asked  topurchase their own medical supplies, such as drugs and surgical equipment,before being treated. Malaysians are rightly concerned as to whether theproposed corporatisation of government hospitals will similarly lead to sharplyincreased health care costs, particularly for the poor, elderly and chronicallyill, as well as compromise the quality of publicly-funded medical care for allMalaysians.

Privatisationof education

Privatisationor corporatisation of institutions of higher education creates disparities inaccess. In anticipation of university corporatisation as well as theestablishment of private universities, Parliament passed two new Acts in 1996,namely the National Higher Education Council Act and Private Higher EducationInstitutions Act. The University and University Colleges Act was also amended tocontain provisions that allow the universities to initiate or participate in allforms of business.

Infact, two systems have emerged: higher quality private education for those whocan afford it and poorer quality public education for those with low incomes.Universities have also undergone corporatisation since 1998. Consequently, feeshave already gone up. Once again, such increases will adversely affect the lowerincome group. Despite promises that there will be more grants and scholarships,the government shifted the burden of educational costs on to students and theirfamilies.

Privatisationof sewage treatment and solid waste disposal

Theprivatisation of sewage treatment in 1993 in Malaysia was a major financialfailure, as the company which was awarded the contract made huge losses and hadto be bought back by the government in June 2000. Indah Water Konsortium (IWK),a company formed in 1993, was given a 28-year contract and assigned theresponsibility of operating public sewage treatment facilities. 

Thecompany did not do well partly because a significant proportion of the publicrefused to pay their sewage bills, which had been previously paid undermunicipal charges. The treatment of sewage and wastewater remains in adeplorable state. Moreover, the company failed to treat water effectively. In1999, less than 17% of the 5,409 treatment plants run by IWK complied withgovernment discharge standards.[4]

Theprivatisation of solid waste disposal services in 1995 experienced severaldelays and was not fully implemented. Fourregional consortiums were chosen to manage solid waste. Before privatisationitself is implemented, a Municipal Solid Waste Act has to be formulated. Thegovernment agreed that the consortiums could take over in stages by means of aninterim service contract before the bill is passed. The local authorities willpay for the services rendered by the consortium. Our concern is that uponprivatisation, the companies will charge consumers directly and increase fees.

Meanwhile,solid waste management continues to be a serious problem for many urban centres.Sanitary and waste problems are magnified significantly in high density, lowerincome urban areas with low cost apartments, squatters and other settlementsoccupied by low-income groups.

GATSand privatisation

Negotiationsunder the General Agreement on Trade in Services to liberalise the servicessector are currently underway in the WTO. 

Ina confidential document leaked in April 2002, the EU requested Malaysia to openup, inter alia, its postal and courierservices, telecommunications, energy and environmental services, including watersupply and solid waste management. Civil groups fear that the EU is pressuringMalaysia behind the scenes to accept its requests. While the Malaysian public isbeing burdened by more privatisation of key public sector goods and services,pressures to hand over these areas to foreign companies add to concerns.However, NGOs within the country, such as the Third World Network and theConsumers Association of Penang, continue to pressure the government to ensurethat these sectors are not subject to liberalisation.


Thepromised benefits of the government’s privatisation policy have not beenrealised. The benefits have been limited to a small elite who took overprofitable public utilities and turned them into private monopolies. On severaloccasions, the objective of reduced fiscal burden backfired, as the governmenthas had to pay higher costs for supplies and bail out failed privatisation. Forordinary consumers, price increases have not brought about commensurate benefitsor improved services. Hence, there is a serious need to review the entireprivatisation policies of the government and to make the process moreaccountable and transparent.


EconomicPlanning Unit. “Eighth Malaysia Plan”. Malaysia, 2001.

EconomicPlanning Unit. “Privatisation Master Plan”. Malaysia, 1991.

HanimAdnan. “Pos Malaysia Privatisation Complete, Says Government”. TheStar, 24 August 2001.

S.Jayasankaran. “Raising a Stink”. TheFar Eastern Economic Review, 27 September 2001.

LeslieLopez. “Malaysia Prepares to Take Control of Ailing Sewer System”.Asian Wall Street Journal, 21 Febuary 2000.

V.Raina, A. Chowdury and S. Chowdury, Editors. The Dispossessed--Victims of Development in Asia. p. 222.

SyedHusin Ali. “Privatisation andCorporatisation in Malaysia: Meaning, Policy, Practise”. Presented at the NationalConference on Privatisation and Health Care Financing,1997 in Malaysia, USM, Penang.


[1] The "Build-Operate-Transfer" (BOT) method involves the private sector constructing a facility using its own funds, operating it for a period known as a concession period and transferring it to the government at the end of that period. During the concession period, the private sector is allowed to collect revenue directly from the users of the facility or indirectly through an intermediary, usually a government institution. "Build-Operate" (BO) method is very similar to the "BOT" method except that the former does not involve the transfer of the facility to the government. Both these methods are normally accompanied by a grant of a licence and/or concession.

[2] Foo Eu Jin. “Sell-off of Water Utility Inevitable to Douse Rising Expenses”. New Straits Times, 29 March 2002.

[3] Mohd Izham Mohd Ibrahim, et. al. “Drug Distribution Systems in Malaysia: The Privatisation of the General Medical Store”. Presented at the National Conference on Privatisation and Health Care Financing, 1997 in Malaysia, USM, Penang.

[4] The Star, 23 December 1999.