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December 20, 1999

BUDGET 1999-2000

The Rediff Business Interview/Dato’ Seri S Samy Vellu

'Privatisation does not imply a retreat by the government'

Vellu of Malaysia Dato’ Seri S Samy Vellu, Malaysia's minister for works, was in India recently to attend the international conference on infrastructure, organised by the Confederation of Indian Industrys in Delhi. Vellu pointed out a few lessons that India could learn from the Malaysian experience. In an interview with Neena Haridas, Vellu spoke about the crisis and the strategies that the Malaysian government adopted to bounce back from the East Asian crisis.

How badly did the East Asian crisis affect the Malaysian economy?

The Gross Net Income of Malaysia was at a comfortable $4280 before the crisis began. In fact, ever since we got independence in 1957, we had been growing at a fast pace, taking the GNI from $300 to $4280 in 1997.

Then, of course, the recession hit and the GNI regressed to $3,100 in 1998. Meanwhile, we were enjoying a GDP growth of 8 per cent per annum till the recession hit. What the high GDP growth did was strain the existing infrastructure, resulting in congestion, bottlenecks, delays and safety problems. This sparked a demand for additional capacity and improved efficiency of infrastructure services.

Email this interview to a friend These problems, coupled with the recession, really strained infrastructure development. The government had to rethink radically to bounce back.

What do you mean by 'rethink radically'?

I mean, we had to think of radical changes to the traditional approach. You see, infrastructure development of the country since Independence was spearheaded by the public sector, it being the engine of growth.

The developmental projects were funded mainly from government allocations or loans from multi-lateral agencies. But with the public sector resources under strain, the government embarked on an alternative policy instrument -- the private provision for infrastructure.

So, did you embark on privatisation only after you were faced with the economic crisis?

Yes. Malaysia’s economic crisis began in 1983, and we realised that the problem was spreading worldwide and that we needed to do something about it. And that is when we embraced privatisation as a solution. In Malaysia, privatisation programme was adopted to meet five main objectives:

  • To relieve the financial and administrative burden on the government by transferring to the private sector the management of a vast network of services.
  • To improve efficiency and productivity.
  • To facilitate economic growth by the provision of opportunities for the private sector to increase its role in development.
  • To reduce the size and presence of public sector in the economy.
  • To help meet national development targets.

What kind of infrastructure projects did private investors take up?

Since the introduction of privatisation, 425 projects have been privatised. Of these, 67 are projects for roads and highways, ports, light rail transit systems, telecommunications systems, power and water. Well, the private sector has shown interest in all kinds of infrastructure projects.

Since India is moving toward privatisation in a big way, is there a lesson that it could learn from the Malaysian experience?

Private sector involvement and investment have been seen as a better method in the implementation process. The privatisation process has seen a marked improvement in efficiency, in management of operations; it has facilitated access to commercial investments and latest technology, and enhanced the companies' ability to resolve shortages of personnel in managerial, technical and finance segments; it has also enabled internalisation of costs.

What kind of role will the government have in such a scenario?

Privatisation per se does not imply a retreat by the government but rather an increased role in its regulatory and monitoring roles. And I think India understands this. The need for good governance cannot be overemphasised, to ensure that a project is competitive and customer-focussed.

Why is it that the private sector is able to do what the government cannot?

You see, privatisation is a method used to take the pressure off the government. The enormous projected demand for infrastructure makes traditional public and donor sources of finances and managerial skills inadequate. Competing demands for scarce government funds, including health and education, poverty alleviation programmes, and the need to maintain fiscal balance, put the government under considerable fiscal pressure. That is the kind of situation India is facing today.

Now, increased private sector infrastructure participation can stimulate economic activity and promote recovery while meeting shortfalls in infrastructure services and increasing economic competitiveness.

India opened up the power sector for private investment seven years ago. But even today, only 33,000 mega-watts of power is generated in the private sector. What does it really take for the private sector to perform?

For privatisation to work, the legal and policy environment needs to be encouraging. In Malaysia, together with the necessary institutional and regulatory framework, we have the legislations that apply to privatisation projects. Thus we have laws relating to private property protection, land dealings, environmental standards and alternative dispute resolution mechanisms.

Today, international environmental law has become a very important feature of our domestic legal systems.

Reforms in several sectors such as the constitutional and state laws relating to land tenure, infrastructure, foreign equity participation, accounting and environmental standards, transparency and efficiency in implementing the laws, project-bidding, selection process, public consulting and tariffs are being considered in the light of current events.

Isn’t it better for the government to control major projects like railways?

It is not a matter of control. Major infrastructure areas are often natural monopolies. It is necessary for the government to have a high level of involvement to protect the public interest. The government may have to provide some form of financial support to a certain infrastructure area as it could be a ‘public good’ where all users, and non-revenue contributors too, stand to benefit from the provision of such a facility.

In a developing economy like India, which sectors need greater attention?

In a developing economy, the construction sector is always very important. For instance, road development is crucial to sustain and promote the economic and social development of the nation.

The other areas that Malaysia focussed on are railways, ports and airports. With seaports accounting for 90 per cent of international trade, our focus was on expanding capacity, upgrading and increasing equipment and facilities, and improving port and port-related services.

In 1998, the Malaysian economy contracted by 4.8 per cent, but with the various measures that have been introduced, I'm confident that we've weathered the storm.



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