By Stuart Grudgings
GEORGETOWN, Malaysia (Reuters) - Lim Guan Eng, the hyperactive chief minister of Malaysia's Penang state, is not the type to miss a good photo-opportunity, so there were plenty of witnesses when he handed over the keys to his government Mercedes ahead of a May 5 general election.
Integrity is a central battle cry for Malaysia's disparate three-party opposition as it pursues its best chance of ending 56 years of rule by the Barisan Nasional (BN) coalition.
"The official cars should not be misused for our own personal use," Lim, a 52-year-old ethnic Chinese, told reporters as his administration shifted to caretaker status this month. "This is the integrity held by the state administration."
Five years after the opposition took control of four state governments, northwestern Penang will be Exhibit A in its case that it can make Southeast Asia's third-largest economy cleaner and more competitive.
Malaysia's second-smallest state topped the state investment league for the first time in 2010 and again in 2011, bolstering its position as a hub for high-tech manufacturers such as Intel and Honeywell.
Overall investment doubled in 2008-12 compared with the previous four years, a powerful rejoinder to the BN's claims that the opposition cannot be trusted to run the economy.
The BN, or National Front, led by Prime Minister Najib Razak, points to a 73 percent slump in Penang's investment last year and mounting traffic congestion in the state, which also draws tourists to its beaches and the colonial elegance of its capital Georgetown, as evidence Lim's touch is wearing thin.
But the opposition hopes Lim's reforms to tackle corruption linked to laws favoring majority ethnic Malays will resonate with a bulging younger generation of voters angry at graft and less attached to race-based politics.
Polls suggest a narrow win for the BN, which lost the two-thirds parliamentary majority that allowed it to change the constitution for the first time in 2008.
The "Penang model" also highlights risks to investors from an opposition victory, which promises to unravel five decades of cozy relations between the government and business in what would be the biggest shake-up since independence from Britain.
Led by former Deputy Prime Minister Anwar Ibrahim, it says it will review suspicious contracts and cancel some, including a controversial $800 million rare-earths plant built by Australia's Lynas Corp. Its manifesto also pledges to break up "monopolies" in certain sectors.
"We wouldn't want to take any action that would destabilize the market, but at the same time it doesn't mean they can get off scot-free, no," Lim, who will campaign nationwide, told Reuters in an interview. "The imperative should be there are no crony-driven contracts."
Major firms and tycoons seen as having close ties with the United Malays National Organization (UMNO), the dominant party in the ruling coalition, could suffer.
"On individual stocks, (it would be) disastrous, I should think," said Gerald Ambrose, managing director at Aberdeen Asset Management in Kuala Lumpur, adding that the overall stock market had likely priced in some risk of an opposition win.
REFORM, NOT REVOLUTION
When Lim, who was imprisoned for 18 months under draconian security laws in the 1980s, took over Penang, he began a social and economic experiment that outraged UMNO traditionalists. From now on, state public works contracts would be awarded through open, computerized tenders rather than direct negotiations.
Some portrayed it as a dangerous move to tear down the New Economic Policy (NEP), a system of affirmative action introduced following race riots in 1969 between Malays and economically dominant Chinese. Lim says he was targeting distortions in the policy that have enriched an elite few.
"It was pure pork-barreling," Lim says of the old system.
The NEP is credited for nurturing a Malay middle-class, but "bumiputras" (Malays and indigenous people) still make up the majority of low-income Malaysians. Economists say the policy has deterred investment and driven a brain drain, especially of ethnic Chinese, entrenching Malaysia's "middle-income" trap.
The reforms leveled the playing field for small Malay businesses, Lim says, enabling them to win contracts based on merit rather than connections. Smaller firms still have special protection because all contractors for "class F" jobs up to 200,000 ringgit ($64,500) must be bumiputra by federal law.
Even for higher value contracts, Lim says Malay firms now win more than 70 percent of open tenders in Penang. State figures show the value of contracts won by bumiputra firms doubled from 2008 to 2011.
As he oversaw workers renovating a small Muslim prayer centre in Georgetown -- a job won through open tender -- 28-year-old Ahmud Kairul Arif scorned the idea that as an ethnic Malay his business would need special help.
"There has been a shift which means we can compete against the Chinese," said the graduate in project management. "I'm willing to go out from my comfort zone to compete."
TAKING "PENANG MODEL" NATIONAL
Prime Minister Najib has said the opposition's generous and sometimes vague campaign pledges, which include free university education and the abolition of road tolls, would explode the national budget deficit.
Lim says he has saved about 25 percent of state spending compared with the previous administration through cutting graft. Penang's budget surplus grew 57 percent between 2008 and 2011, even as a chronic federal budget deficit pushed the national debt to 53 percent of the economy from 41 percent in 2008.
"It would be a model to say that if we are financially prudent, with a little money we can do a lot of things," said Tony Pua, a leading opposition parliament member. "There's a lot more we can do with the federal budget."
Transferring Penang's policies to the national level would not be straightforward. The three other states run by the opposition, including two by the Islamist PAS party, have had more mixed records on governance and transparency.
The state's 1.6 million population is evenly balance between Chinese and Malay, whereas Malays outnumber Chinese nationally by 60 percent to around 25 percent, making reforms to race laws more sensitive.
But Penang's influence has already been felt at the national level as the government comes under pressure to award more contracts through open tender and end what critics say are sweetheart deals with favored businessmen.
Rolling back privileges enjoyed by bumiputras -- literally "sons of the soil" -- is political dynamite for Najib, who faces heavy resistance to reform from within UMNO.
In an interview with Reuters in March, Najib said that the "vast majority" of federal government contracts were now awarded through open tender, adding he made "no apologies" for some that are negotiated directly.
"There are certain tenders that we carve out for bumiputra, but we would allocate that to the deserving bumiputra," he said.
Malaysia's Finance Ministry and the government's Performance Management Delivery Unit declined interview requests.
A leaked U.S. diplomatic cable from 2006 identified opaque government procurement practices as a major stumbling block in talks on U.S.-Malaysia free-trade deal, which remains stalled.
"Malaysia's procurement process falls short in three key areas: lack of transparency, outright corruption, and bumiputra requirements and preferences," it said.
As they hit the campaign trail, opposition politicians are reminding Malaysians of what they say are a litany of major projects and concessions handed out in cozy deals.
Its prime target is Syed Mokhtar, the country's richest ethnic Malay with a net worth estimated at $3.3 billion. The opposition says he has built up his business empire, which encompasses power, telecoms, cars and ports, through close ties with former Prime Minister Mahathir Mohamad and now with Najib.
"What is so special about Syed Mokhtar that he has to have a finger in every pie in Malaysia?" said opposition MP Pua.
Among others, it has highlighted the $100 million sale announced in February of aerospace firm CTRM Sdn Bhd, a profitable subsidiary of the Ministry of Finance, to a unit of Mokhtar's DRB-Hicom, which was not bid publicly.
Mokhtar rarely speaks to media and did not respond to Reuters' request for an interview. In an authorized biography published late last year, he said he was the victim of media bias and denied receiving special favors.
(Editing by Alex Richardson)