Thursday, April 23, 2009

Services Sector Liberalisation - An Improvement?

We would like to welcome the new Prime Minister's announcement on the selective liberalisation of 27 sub-services sector in Computer & Related, Health & Social, Tourism, Transport, Sport & Recreational and Business Services.

It is a commendable baby step forward to demonstrate Datuk Seri Najib Abdul Razak's commitment to unwind some of the suffocating policies and regulations imposed and expanded under the pretext of the New Economic Policy (NEP). These policies have certainly resulted in a slower pace of foreign and local investment growth compared to our regional peers since the 1980s as they reduced the attractiveness of Malaysia as an investment destination.

However, we would like to emphasize the fact that this is only a baby step forward and will achieve little impact if they are not followed by further concrete actions.
  1. Firstly, the list comprises only of very selected sub-service sectors, even those selected such as “Beverage Serving Services” comes with conditions such as “for services provided in 4 and 5 star hotels” only. They also cover the Computer & Related services industry (6 sub-services sector) where many of the multinationals have already circumvented equity conditions by acquiring the Multimedia Super Corridor status.

    There are hundreds of sub-service sectors classified and we certainly look forward to further liberalisation of ownership constraints, especially those imposed on Malaysians themselves.

  2. Secondly, will the liberalisation of ownership mean that these companies will be exempted from bumiputera equity requirements imposed by Bursa Malaysia as a condition for listing on the local stock exchange? By liberalising ownership but not their ability to raise funds locally will only serve as a handicap for these companies.

    Furthermore, the liberalisation of bumiputera ownership conditions on the local stock exchange will certainly go a long way towards reviving our financial services sector from its current doldrums, making ourselves relevant in the region again.

  3. Thirdly and more importantly, the above “liberalisation” only deals with the ownership or supply aspect of the relevant sectors. It does not however deal with the more critical demand aspect of the industry which are still very protected directly and indirectly.

    Government agencies and government-linked companies (GLCs) are severely constrained by the Finance Ministry guidelines on procurement. They are only allowed to procure goods and services from companies which are registered with and possess approved classifications from the Finance Ministry based on strictly bumiputera ownership controls.

    In GLCs such as the banking sectors, there is even the written and unwritten rule that legal firms engaged by these banks must have at least 50% bumiputera partnership, despite the professional nature of such services. Hence the so called liberalisation of legal services to foreign firms in the Islamic banking industry will not make major headways to the sector.

    These persisting barriers to entry will continue to discourage investments in these sectors. Why would these investors consider setting up operations when they have no opportunity to offer the services to the Government and the GLCs, which combined, is the single largest consumer of services in Malaysia.
Hence, the liberalisation of supply-side constraints without the corresponding reforms on the demand-side is akin to clapping with a single hand. We look forward to the Prime Minister announcing further measures in the shortest possible time to ensure substantial success of the above liberalisation exercise.
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