Tuesday, February 28, 2006

Government Investing Agencies - Less Is More
There Are Valid Reasons For Their Existence

Rohan888 wrote the following: "Should a country actually hold shares in companies? You mention Temasek as an example, but I think there are dozens of countries who do not own any shares in any (local or foreign) companies or only limited (for instance only the natural resources industries like oil and gas exploration). I think that the Singaporean example is both positive and negative. Most initiatives seem to come from the government holdings, not from private investors/inventors etc., not sure if that is so healthy for the future." Thank you Rohan888 for helping me to clarify my opinion.

As a rule of thumb, governments should NOT own shares in companies (local or foreign) unless the industry or sector needs to be protected or controlled (to some extent) - e.g. utilities, telecommunications, media are good examples. So, the first exception is where national interest is at stake. Some countries will also pull in the media as a political mouthpiece. Then there are natural resources within the country that needs "protection" to save it from being controlled by foreign parties - such as oil & gas reserves, ports, timber concessions, etc...

One can argue that a government can already control investment flows into and out of the respective sectors by laws/approval and review committees, hence you do not actually need to own them. Yes and no, when the assets are huge, no one company can even think of swallowing such an asset, least of all try and control it.

The second reason why governments have to get involved is size. Assets can be too big for a company. For Malaysia & Singapore's case, certain ventures may require too high a capital base, thus a government linked venture has to step in. Things like the MSC, Putrajaya, the two casinos in Singapore, national car project, industrial parks ... require government intervention.

The third reason is diversification. Malaysia and Singapore are small countries and the industrial base is tiny. Neither do we have critical mass of population to support our economic production, hence we need to trade and export - which means we have to be reliant on other countries. We need to diversify our "accumulated earnings" into industries that we are not strong in to solidify and secure our economic competitiveness. Say, a country like Sri Lanka and 90% of export earnings is from exporting tea leaves. Plus they do not reinvest the earnings into other foreign industries. The country would be so vulnerable to the vagaries of price movements in the tea market. Even if they can produce and export 10% more tea each year, it will ruin the nation if the price of tea falls by 15% every year or crops get wiped out every now and then.

A state investment vehicle is usually vibrant when a country has managed to record good trade surpluses for an extended period. In Singapore, I agree that the government linked arms are very strong and their decisions are heavy handed. It could mean that nothing big will be accomplished or undertaken by private enterprises if they keep inviting government linked arms to take the lead in significant projects. These state units should be there to "support" local companies, allow entrepreneurship to bubble among the masses - once the public get the feeling that the big stuff are left for the big fish, no one will bother to venture out from their pond to the big sea. No one should feel that nothing ever moves unless the government moves! In Malaysia, control in certain companies should be reduced by the government gradually - intervention by the government should be minimised, hands-off policy... less is more.

1 comment:

zentrader said...

Look at Russia and China (last 50yrs), I think a State Planned Economy should be a minus sign. A lot of misallocation of resources.

No good at economics so please don't laugh. :(

Dali, any report card for vision2020? You think is a fantacy or reality? Tq

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