Red tape a major factor in failing to attract FDIs

February 1, 2021

It has been reported over and over again that Malaysia is no longer on the radar of foreign investors. Although the international trade and industry minister (Miti) denied this, figures on foreign direct investment (FDI) are shown to have declined tremendously.

In fact, many multinationals operating here are also moving out to Indonesia, Thailand and Vietnam, where the overall production costs are said to be much lower.

This dynamic production environment has and will displace Malaysia as one of the preferred investment countries even further.

Where and how did we go so wrong?

Red tape or bureaucratic process

For a long period of time, Malaysia has not looked at business reforms. Within this reform framework, deregulation is one of the key components.

What it means is that we have not studied deregulation and looked at ways on how to set the market free from regulations or governmental control. This form of approvals or licensing or “permits” as we call it locally, are many and too common to ignore.

The government tends to think that with their regulatory agencies set up and running, they would better assist investors or businesses. So it seems but actually, no. Most of these old licensing models have made it tougher for the private sector to invest and operate.

Many agencies were set up with regulatory control via some Acts and business licensing or approval placed at its core. Often they are padded with business promotions or marketing in a superficial way, followed by project grants, financing or funding, added for good measure but not easy to obtain.

For some of the agencies, irrespective of whether they are placed under the Prime Minister’s Office, finance ministry (MoF), Malaysian Communications and Multimedia Commission (MCMC), science, technology and innovation ministry (MoSTI), Miti or entrepreneur development and cooperatives ministry (Medac), their roles are somewhat dictated by the respective Acts passed through Parliament. This is where the red tape nightmare starts and seldom ends.

Their current state of stagnancy and failure to react to market forces begins here, at the very core of each responsible agency.

Amending or repealing any of the Acts, in order to update or to make it in line with the current market changes, is not an easy task. It would require a parliamentary process which is very time consuming and often becomes political.

From the market sector perspective, some of these agencies are very inefficient and not effective in combating current and potential problems.

But why would Malaysia need so many agencies to regulate or create a good investment climate, or business environment? As a job provider?

These agencies are often headed and manned by none other than the civil servants themselves, who are then governed by their traditional scheme of service, rules and regulations, procedures and general orders.

This is another nightmare area which is not easy for the private sector companies to comprehend and navigate.

Too many agencies

The past governments wanted to be business friendly, so they created and set up many agencies to look after the variety of businesses in many different sectors.

They were quick in setting up new agencies with the objectives of assisting Malaysians as well as foreigners involved in all sorts of investment; manufacturing, ICT, agro-based and all sorts of business ventures.

In almost every sector of the industry, ranging from handicrafts to digital, nanotech to heavy industry, there is always a government agency that looks after each and every one.

We have the Handicraft Development Corporation, Digital Economy Corp, Pepper Board, Pineapple Industry Board, Global Innovation and Creativity Centre (MAGIC), Industry-Government Group for High Technology, SME Corp, Teraju and Nano running in parallel.

There are even nuclear and Antarctica research agencies, believe it or not.

Annually, the government spends a large chunk of its budget to support 70 agencies under MoF Inc, about 20 under MoSTI, another 12 under the plantation industries and commodities ministry and 11 agencies under Medac.

As an example, the agriculture and food industries ministry has nine agencies, each set up to look after the Malaysian Agricultural Research and Development Institute (Mardi), Federal Agricultural Marketing Authority (Fama), Farmers’ Organisation Authority, Fisheries Development Authority (LKIM), specific agricultural areas like MUDA (Kedah), Kemubu (Kelantan) and Quarantine Inspection Services (Maqis), a veterinary authority and an Agro Bank.

Together with the plantation industries and commodities ministry, they overlap another 10 agencies for each commercial crop that includes cocoa, palm oil, pineapple, pepper, rubber, kenaf and tobacco, furniture promotion and timber.

Will there be an agency for durian soon?

Market failure

I think we all know that we have failed miserably. Just take a quick look at Fama, Tekun, Malaysia Debt Ventures Bhd, Malaysia Venture Capital Management Bhd (Mavcap) and many others. Is it justified that we need to spend so much on them?

Despite having so many agencies, with very specific roles, targets and objectives, we are still nowhere near becoming a market leader in any of these crops, commodities, industry or investment.

Actually, there are more agencies such as those under the rural development ministry (like Mara), MCMC, energy and natural resources ministry, environment and water ministry, human resources ministry, transport ministry and Miti, that have not been singled out in this narrative.

Do we need to mention Khazanah Nasional Bhd and its stable of companies?

Under Najib Razak’s administration, from April 2009 up to May 2018, he was responsible for setting up even more agencies. Among them were: Pemandu, Suruhanjaya Pengangkutan Awam Darat, Malaysian Aviation Commission, MAGIC, Teraju, Mavcap, space agency, bioeconomy corporation and Antarctica Research.

It appears that Najib failed to understand the impact of regulations or regulatory controls on the market. What we needed then was to ease governmental control by relaxing the legislation and to introduce deregulation.

Instead, he injected more control, more regulations, more layers of people and more red tape.

The current government is not helping this grave situation or trying to make it any better either.

A lack of understanding is clearly shown when every agency is being used as a special purpose vehicle for a supporting MP or appointing a politician as its chairman. This is simply worse than Najib’s administration and more outrageous.

This lack of economic understanding means nobody will be there to examine the effectiveness of our government agencies and to provide the much needed support for the economy to grow.

Obviously, a major revamp is needed; and our economy needed it yesterday.