Tuesday, October 5, 2010

It's the tax incentives, stupid!

Malaysians have been witnessing rollout after rollout of programmes that are designed to catapult the nation into stratospheric heights of economic advancement and competitiveness. These programmes are strategic visions that signals another round of good intentions.

Some of the things that gnaw at me and, I believe, many other Malaysians are:

Where's the buy-in?

If you bother to review successful economic or social programmes that have high impact on nations you will find two versions.

One, is where there is a crisis, a serious crisis of such a large magnitude that fear and foreboding pervades the psyche of the general population. In such a backdrop, bold visions and action are widely received by the populace. The Roosevelt initiatives in the wake of the Great Depression comes to mind. The Marshall Plan to rebuild a devastated Europe in the aftermath of the Second World War is another example. Our own New Economic Policy is another. Yet another example is the more recent Obama Stimulus Plan.

Second, are initiatives that meander painfully through due process of consultation and exhortation to encourage the general population to understand, appreciate and accept the initiatives. The Reid Commission and Cobbold Commission hearings come to mind. The Malaysia Referendum in Singapore during 1962 (I think) is another example. The Japanese economic achievements of the 1980s was credited to bottom-up consultative processes.

The Pemandu-led initiatives to transform the Malaysian economy is said to be based on a template created by consultants. That template was then tested against a sampling of Malaysian stakeholders in various Labs. After that there was a write-up of the broad goals of the respective programmes. Only after that were the general Malaysian public invited to specific venues to listen. That listening process was largely passive. It was done in a compressed time-frame.

Is it any wonder that Malaysians are slow to "buy-in"? It feels like a fait accompli.

Big vision means big business only?

One of the most striking features of the Pemandu initiatives is that there is a pungent odour that deals have been done prior to the public airing of the programmes. These deals on infrastructure and grand property development are said to be based on proposals submitted by large Malaysian corporates.

Pemandu cannot absolve itself of the responsibility to implement the programmes. Will there be public tenders to invite all and sundry to bid for involvement in each of the matters?

One example of the fait accompli approach that springs to mind is the Sungei Besi Airport real estate. It is said to be a done deal between the Malaysian Government and 1Malaysia Development Berhad because 1MDB is wholly-owned by the Minister of Finance Inc. Two questions arise here.

First, by interposing a corporation, a corporate curtain has been drawn over how the Sungei Besi Airport land is going to be broken up. Second, when 1MDB starts divvying that piece of real estate, who gets the plum pieces and, on what basis will they get it?

It is not good enough to say that there is going to be "world class buildings" coming up in Sungei Besi, Sungai Buloh, Matrade or even, some say, certain Government-owned land in Bangsar.

It may all be innocuous, of course. But my message is on the need to be transparent and, to ventilate, so that that pungent odour is removed.

Talent Corp to leapfrog poor education?

The move to recall the Malaysian diaspora back to the Motherland is to be applauded. The move to reach out to foreign skilled workers is also worthy of many claps.

The absence of any clear moves to improve the quality of education is a concern.

In fact, this is one of the mysteries that is wrapped in an enigma that is the Pemandu programmes. There has hardly been any serious thought given to how to improve Malaysian education at all levels.

And here we thought that all the transformation is also to transform human capital, MALAYSIAN HUMAN CAPITAL. What gives, man?

From this standpoint Talent Corp's initiatives will be seen as another FDI-type initiative where human capital is imported to fill a void left by a paltry local human talent bank. Forget about creating skilled Malaysian human capital, just parachute the Malaysian diaspora and skilled foreign workers into Malaysia.

Tax incentives are the key

If you care to visit MIDA's website, you will find an environment that is reasonably exciting...if you are a foreign investor. If you are a Malaysian SME or SMI, then, you feel exasperated and marginalised.

In a previous blogpost I have mentioned a client's bad experience with trying to obtain a grant and soft loans during the Stimulus Package period in 2009. I know the news reports extol how great the SME programmes have been. Trust me, I know many SMEs who do not even have a whiff of any Government-initiated support programmes.

So, based on that bitter experience I wish to join some of the SME associations to make a call during this Budget season for a corporate tax reduction for SMEs to 18%.

From an economics standpoint such a tax break for SMEs is non-discriminatory in substance and effect. It rewards the outstanding SMEs. It creates a virtuous cycle where the good SMEs will thrive and the bad ones, well, the bad ones need to go into the financial and corporate rubbish heap. This is as things should be. Reward the good and leave the bad to rot and wither away.

I have been making tax reduction to 18% calls in this blog for two years now.

My reason is simple. Free up additional disposable incomes for SMEs to re-invest in business expansion and business development. Re-tooling is expensive. Expanding is expensive. It sounds like an oxymoron, I know. But, if you are involved in business you will understand.

When a business receives more orders than ever before, it is what I call a "happy problem" because more orders means that the business is creating products and services that the market wants. That is the "happy" part.

The "problem" part is where the business is operating at full capacity. But, usually, the business has insufficient ploughed-back capital to re-invest.

Then, we're back to the along loan-versus-bank borrowing-versus extended family and friends-versus government grant matrix of fundraising-borrowing decision-making dilemma.

This is why I am saying that the biggest policy initiative that the Malaysian Government can make - over and above all Pemandu transformations - is to reduce the corporate tax rate for SMEs to 18%.

That, in my humble opinion, will go a long way to initiate the process of transformation of the Malaysian economy at its most fundamental level.


semuanya OK kot said...

If these people are to be believed,
- More construction, especially real estate, is the way to the promised land.
- Food security is unnecessary as we can trust the global community and international financial system.
- Climate change is an evil plot thought up by those who would deny us "progress".
- Ketuanan Neptune is paramount and assured.
- Malaysians are too stupid to see the real purpose of business as usual.

Anonymous said...

The name of the game is to buy time for 1 last hurrah! Then it's off to Argentina we go.


Raison D'etre said...

Well written, DM. Not sure though if the message will EVER reach those meant to read and listen to them.

Sad fact, DM.

TalentWatch said...

Dear DM,

The portion of your article on Talent Corp is reproduced here:


We hope you wouldn't mind.

Thank you.

Anonymous said...

We have been promoting the tax incentives for offshore vessels in th eoil and gas industry for the last few years and I believe my predecessors have done it as well. Malaysia has been lauding itself as a maritime nation for donkey years and yet every time a new budget is announce , nothing is seen. The Shipping Merchant Ordinance was enacted almost 50 years ago where minor changes were made. I think it is high time the Minitry of Transport should take a look at it. The oil and gas industry in Malaysia has been in existence since 1974 and there are a few owner-operators with vessels and yet they are not getting the incentives. The spin-off activities are huge and yet the government is doing nothing. Not everybody can own offshore vessels. Currently, the vessels are largely owned by foreigners and the balance of payment is out of the country. WHERE ARE TAX INCENTIVES?