Freight Forwarders Ownership Requirement – A Policy from the 70s?

The Finance Ministry has postponed the enforcement of a 51% Bumiputera ownership requirement for freight forwarding companies to next December. An association of freight forwarders has urged the government to clarify its position on Bumiputera equity in logistics companies. The Federation of Malaysian Freight Forwarders president Alvin Chua said the Finance Ministry had stated in January that all Customs brokerage licence holders must comply with Bumiputera equity requirements by Dec 31, but did not set any figure.

The expected 51% Bumiputera equity rule will see all such companies being taken over by Bumiputeras. Those without such licences are not allowed to carry out transactions with the Customs Department such as the clearance of goods. Under a 2018 review, companies whose licences were registered before 1976 did not have a Bumiputera equity requirement, while a 30% quota was imposed on those registered between 1976 and 1990.

A 51% Bumiputera requirement was required for licences registered after 1990 – the year the Bumiputera equity policy was first implemented. However, integrated international logistics service providers do not need to have any Bumiputera equity.

Another review was set to be held in 2020 but it never materialised, leading to uncertainty for freight forwarders – who Chua said were told by certain agencies that they had to comply with a 51% Bumiputera ownership requirement by Dec 31 (2021).

Although the ruling has been postponed, it comes to an industry that must be streamlined to be efficient, improve productivity, and maintain a low-cost base. In practice, this policy has been side-stepped by existing freight forwarding companies setting up proxy shell Bumiputera companies, or ‘leasing’ a licence from a rent seeking company.

 

The effect of both of these methods is to slow down procedures and increase the cost of clearing goods through Customs.

The government’s Bumiputera equity policy originates from the New Economic Policy set up back in 1971. The objective of this policy was to bring Bumiputra equity up to 30% by 1991. Some claim this has long been achieved, but the government and allied academics hotly dispute this. (Recently, the PM reported it was only 17%).

 

Instead of specifying that all companies have Bumiputera equity, the 30% mandate should be on an overall industry view. The key measure could be 30% of total companies, total equity, total profits, total employment, or total assets. This will allow individual companies, some of which are family companies, to maintain their management hierarchies and corporate cultures, along with other companies in the industry.

 

There are already a number of 100% Bumiputera companies within many industries. Governments in a mixed economy should not be ordering entrepreneurs on their company equity arrangements.

 

The current situation has put the management of many freight forwarding companies in a spot. Some are even considering exiting the industry and relocating to other ports in the region. Others are finding it difficult to find a new partner in a poor economic environment.

The short December 2022 timeframe has artificially depressed firm values, meaning that existing freight forwarding companies that admit a new partner may face equity losses that took decades to build.

 

No one within the industry wants to be a minority shareholder in a business their families have built up. The postponement until December 2022 doesn’t solve the problem, it just prolongs the agony.

 

Another perplexing aspect of the Finance Ministry’s directive is that non-bumiputera owned Malaysian freight forwarding companies are placed at a disadvantage to foreign-owned IILS, which are exempt from the Bumiputera equity requirements.

This Bumiputera equity issue is a symptom of a much bigger problem, an over-zealous bureaucracy pursuing the imposition of a philosophy set in the 1970s. It has little relevance in today’s markets and in the midst of Covid-19. In addition, no bureaucrat has considered the consequences of overhauling equity within an industry especially in a downward cycle!

There is a lack of policy empathy and sensitivity, with slogans on race and religion.

 

The consequences of not looking at the effects of enforcing regulations is disastrous. There are many inconsistent, unjust, and poorly thought out policies and corresponding regulations that require urgent reform. Politicians love the hype and bureaucrats follow the tune. Look at the MM2H policy, a revision that has left many with a distasteful flavour to invest in a once roaring “tiger” now turned “pussy”.

 

 

Source:https://www.freemalaysiatoday.com

 

References:

 

51% Bumiputera rule for freight forwarders put off to Dec 31 next year, FMT Reporters, September 23, 2021 (https://www.freemalaysiatoday.com)

 

Malaysia: Bumiputera equity rule highlights catastrophe in public policy – analysis, Murray Hunter, September 25, 2021 (https://www.eurasiareview.com)