Malaysia’s ‘Ali Baba’ system causes ethnic tension

By BBC News

In the sleepy village of Kampung Malaysia in Kuala Lumpur, a new Malay business class is making its mark.

Mohd Khalil, 45, is building three villas. A decade ago he didn’t have any skills in the construction industry. But as part of the government’s plan to help the Malay majority he received training and contracts.

“Without the government’s help, I would still be working in a low paying job at a small restaurant as a cook,” he says.

Today, Mr Khalil runs his own business with a staff of 40, and no longer relies on government jobs.

This is how affirmative action is meant to work, but not everyone has benefited.

The Malay majority have historically lagged behind other ethnic groups in commercial skills. Affirmative action is supposed to help them catch up – by giving Malays and indigenous groups priority in education and business opportunities.

But after four decades of privileges, they still lag behind the ethnic Chinese and Indians. According to the 10th Malaysia Plan the average Malay family earned 38% less than Chinese households in 2009. Although they represent about 60% of the population, Malay ownership of corporate equity is only about 22%.

Alternate system

Government officials blame the lack of advancement on abuses of the system.

The most common way is where a Malay company gets a government contract through affirmative action. But then the real work is sub-contracted to another company for a profit, usually a non-Malay firm which is more skilled. This practice is known as the “Ali Baba” system. Ali being the Malay, fronting a Baba or Chinese or Indian company.

We are not discouraging different races from doing business together, says Idris Jala, the minister overseeing the government’s economic reform programme.

“But when you get into a condition where the Ali and the Baba get together to manipulate the social and political system to gain an unfair advantage over others and don’t add value, that’s when it’s not OK,” he says.

Deals that get subcontracted multiple times may mean the government ends up paying twice as much for projects, says Paul Low from Transparency International.

He says the contractor which ends up doing the work may cut corners if the profit margin is not high enough, causing safety risks.

“We had a school roof falling down,” he says. “We had a stadium that collapsed.”

The government estimates that it loses $3.3bn (£2.1bn) a year on Ali Baba deals and other abuses of the system.

Social unrest?

The number is worrying at a time when the country is fighting to cut back its budget deficit, which ballooned to 7% of gross domestic product in 2009 – the highest level in two decades.

But it’s the smaller Malay companies that lose out the most, failing to pick up the skills needed to operate in an increasingly competitive market.

Legitimate Malay businesses could go bankrupt if the ‘Ali Baba’ practice goes unchecked, says the president of the Malay Contractors Association, Mokhtar Samad.

“That will cause more economic imbalance between the races, possibly leading to social problems within the country,” he says.

That fear is very real. The economic disparity between the Malays and Chinese led to violent clashes in 1969, leaving dozens dead and a state of emergency. Affirmative action was brought in shortly afterwards.

This policy of favouring the Malay majority has bred resentment among the Chinese and Indian community. But over the years, non-Malay companies have learned to work around the system using ‘Ali Baba’ deals.

“It’s a matter of survival,” says one ethnic Chinese contractor who did not want to be named because of racial sensitivities. He admits he has paid a Malay businessman to take over a government contract because the profit margins are higher.

Cracking down

The government has pledged to crack down on this practice. It is planning to bring in tougher laws and enforcement to make the system harder to manipulate.

All government contracts are now posted online to increase transparency. Authorities will also ban the use of support letters from influential people, which are often used to pressure civil servants to circumvent government policies in obtaining contracts.

But those who resent a policy based on race are pushing for more, asking the government to allow companies to compete on merit alone.

That is something many Malay companies say they are not ready for yet.

Affirmative action has given birth to a new class of Malay businessmen, especially in the construction industry, says the President of the Penang Malay Chamber of Commerce Rizal Faris Mohideen.

But many have trouble securing financial backing from banks to compete for contracts in the private sector that is dominated by non-Malays, he says. That also stems from a perception that Malay companies are incompetent or unskilled to do the job.

“It is not a level playing field,” says Mr Rizal.

The debate about affirmative action has often been racially polarized. But many Malay businesses know they cannot rely on the government forever.

Some who have prospered under affirmative action like Mr Khalil say decades of government assistance is enough.

“If we are given too much help then we will start getting pampered,” he says.

Mr Khalil now openly competes in the private sector with Chinese and Indian companies.

The government hopes more Malay businessmen like him will venture out on their own.