Malaysia: Corruption Cripples Healthy SMEs
Education and law enforcement not working
By: Murray Hunter
Recently, Malaysia’s Ministry of Rural Development developed a center overlooking a scenic dam in the country’s north state of Perlis that was intended for the very poor to operate food stalls to lure tourists. But local authorities to whom the physical buildings were entrusted in turn handed them over to politicians from the United Malays National Organization who then sublet the stalls to those the project was intended to benefit in the first place – at unrealistically high rental rates. Within a few months, the project was abandoned.
That is a small example of what occurs almost every day in Malaysia. While for decades the big companies linked to political parties had come under fire for corruption such as UEM, which built the country’s roads while steering profits to UMNO, it is the bruising daily transactions that spur distrust of government, cripple the economy, and deaden the operations of small businesses.
A recent United Nations Development Program (UNDP) study highlighted that 80 percent of Malaysian small and medium enterprises (SMEs) complain that bribery and corruption are a key concern, affecting the quality of products and services or preventing them from gaining operating licenses. It excludes them from local and international value chains and increases the difficulty of getting finance.
The 2020 enactment of Section 17A of the Malaysian Anti-Corruption Commission (MACC) (Amendment) Act 2018, in June 2020, has done nothing to stem the corruption epidemic that is damaging fair trade in the SME sector. The MACC is way under-resourced to police corruption involving the private sector. Corruption and bribery are destroying their competitiveness, particularly dealings with the public sector. The manner in the way business is done with the government sector is destroying equal entrepreneurial opportunity for SMEs.
Too often, critics say, SMEs are forced to undertake business based on who they know, creating insurmountable barriers of entry for other SMEs. Business based on relationships prevents sustainable longevity, as they typically only survive as long as the buyer is in a position of power and authority to make purchase decisions. Many SMEs have grown on the back of relationships with public sector officers only to collapse when their contacts leave.
Many Bumiputera SMEs are dependent upon government contracts for income and survival. Ten percent of government procurement is reserved for Class F (or G1) contractors in parcels up to a maximum of RM200,000 per contract. The objective was to assist Bumiputera businesses to develop and grow. However, those with authority to award work may bundle small contracts into a parcel worth millions. This can then be awarded to a much larger concession company, which subcontracts the respective smaller parcels to Class F contractors. One reported example was a concession company that received a road repair contract that paid RM32 (US$7.63) per meter. The jobs were subcontracted to Class F contractors for RM19. The middleman profited by RM13 per meter just for parceling work out to those for whom it was intended in the first place.
Sometimes tenders intended for multiple bidders are manipulated to go to multiple companies owned or controlled by the same person or group. Tender criteria are often ad hoc to favor a chosen bidder. Pricing criteria may dominate one tender while service record and reliability may dominate another. The appointed head of tender boards has great influence over other board members. Due to the light scrutiny of tender award processes by the auditor-general, manipulation is rife.
State chief ministers have great discretion. There are many stories of commissions paid, use of proxy companies ultimately controlled by political figures, and favored companies receiving business over others. These are major issues that Class F contractors complain about, with the MACC often powerless as there are no paper or money trails. With whistleblower protection poor and political intimidation rife, few witnesses are willing to take the risk.
There are many cases where companies are set up by distant family members or friends of civil servants to supply products and services to ministries, departments, agencies, universities, local government, and schools. Very few are ever discovered, or action ever taken, should they be discovered. Such malpractices close off a substantial amount of business opportunities for SMEs to supply government agencies, universities, and even schools.
One variation is rent-seeking arrangements which benefit elite members of society over the poor.
Distortion of the government consulting process is another area of abuse. Major consulting jobs are given very specific terms of reference (A list of areas to be examined, and relevant expertise required), so that by design only a single consulting company will be able to fulfill the specifications. This occurs across all ministries, state governments, and government agencies. The development of the federal government's five-year plans, the biotechnology push, government transformation, and the implementation of the economic development corridors made many purpose-created consulting firms very wealthy.
The proliferation of these incestuous consulting firms has led to a decline in the standard of advice the government is receiving, with many reports nothing much more than cut-and-paste pieces. These firms also often subcontract government and agency workshops and training sessions to others even though the contract is in their name.
A much wider corruption culture
Collusion is not exclusive to the government sector. The private sector is also rife with favoritism and channeling business through specified parties. The MACC has arrested many bank employees for soliciting bribes to grant business and personal loans. The latest reported case involved six employees who accepted RM18 million in bribes from loan applicants. Between 15 and 35 percent of the loan, value was taken from 110 applicants to approve loans that bank officers claimed didn’t meet loan eligibility criteria. Similar scams exist when SMEs apply for government grants. Proprietors of SMEs are advised to utilize a specified consultant who will prepare the application for between 25 and 50 percent of the grant value.
Institutions are hesitant to investigate those involved in corrupt acts and bribery, tending to cover up and hide any misdemeanors. This institutional attitude creates a belief on the part of culprits, they will never be held accountable.
A survey by University Malaysia Kebangsaan (UKM) found that 30.5 percent of respondents were open to accepting bribes if they had the power and opportunity. Further research found that all civil service campaigns, policies introduced, and Islamization have not affected civil servants’ involvement in performing acts of bribery and corruption.
The major issue of contention is not the civil service bias towards doing business with Bumiputera-owned companies. If this were the case, there would be a fair competition for at least 70 percent of Malaysian SMEs. The problem is a select group of civil servants who have decided to take advantage of their positions to benefit themselves and favor others. These corrupt practices prevent SMEs from pivoting away from low-cost products and services to high value ones, as much of their profits leak away in bribes and kickbacks.
Although the MACC has opened an anti-corruption academy and partnered with public universities to deliver courses, these initiatives haven’t shown positive results. Education must relook at fundamental religious education. Instead of focusing on rote learning, there should be a re-alignment of religious education towards understanding ethics. More resources need to be allocated to the MACC to pursue its statutory responsibility in uncovering corruption within public-private sector dealings.
Corruption and bribery are financially crippling many SMEs. Greedy bureaucrats and politicians are demanding so much, firms are suffering from a lack of liquidity. A new approach to stemming corruption is needed today, as both current education and enforcement have failed to extinguish the dark side of Malaysian culture.