Approaching 2020 – Major Trends that will Impact Malaysian Business

Although I am usually chary about cutting and pasting swatches of works by others, since it is boring (but not plagiarising - there is no plagiarism if you acknowledge the original author - but there will be copyright issues if you copy wholesale, meaning, the entire body of work), this being a Saturday, I thought a quickie would be in order!

Dr M's speech in the Perdana Leadership Foundation lecture entitled Approaching 2020 – Major Trends that will Impact Malaysian Business contains strategic thoughts that I want to highlight. These thoughts and observations are germane to the future development of Malaysia. Here are extracts from that speech. I have added captions to bunch specific issues together:

2. Trends are things that you can observe happening now but can be expected to progress into the future. By extrapolation one should be able to predict fairly accurately the changes that trends would have on things, on peace and war, on fashion, on morality, on politics and on business.

Workforce, training, skills and and English medium
10. Our workers must be highly qualified and be trained in higher skills. The workers we would need must be able to handle and service automatic machines, not just assemble things. We will learn to design and produce some of these machines.

11. Training of the workers must be done at specialised training centres. Computer programmes will be needed to do this.

12. What all these means is the business of specialised education and training would become big business. The training centres would also cater for foreign students if we use English as a teaching medium.

13. Malaysia cannot any longer offer itself as a cheap labour country. But the chances are our highly trained workers would still cost less than similarly trained workers in the developed countries. This may mean a shifting of some middle range hi-tech industries to Malaysia.

14. Our advantage today is still the ability to take instructions in simple English. But there will be a spread of English language capabilities in China, Vietnam and other competitors of ours.

15. Accordingly our advantages seem likely to be eroded not only because others are acquiring working knowledge of English but we ourselves would probably downgrade learning of English.

16. I hope that the teaching of science and mathematics in English would continue. But I am not sure. If the decision is made not to, then the hi-tech industries are going to bypass us.

Transport and infrastructure
18. When we decided to build KLIA, we looked at the demand in a hundred years’ time. Getting a piece of land near the city for a large enough airport capable of future expansion is not easy. When we built Subang we projected 400,000 passengers per annum. But by 1990 it was handling 11.0 million passengers. There was no way we could expand there. We started looking around but we were handling 18.0 million passengers before we found a suitable piece of land.

20. Malaysia has the best system of expressways and roads in south East Asia. But still they are clogged. We need to build more and more.

21. I think we need to change our approach. Instead of building roads we should improve mass public transportation. It is unfortunate that the government decided not to implement the project for double-tracking and electrification of the north-south railways. Had this been implemented we can take off much of the heavy traffic from the highways and there would be less cars clogging the roads as more people travel on medium speed express trains. Now the government may be forced to reconsider this railway project but the cost would be more than double. The longer we delay the higher the cost. Worse still the greater would be the need.

22. We are putting some half a million motor vehicles on the road every year. The decisions to reduce the price of cars lead to more vehicles clogging the roads, stuck in traffic jams and going nowhere.

23. Building more roads is not the answer. We should see more railway lines.

24. Business depends a lot on ground transportation. Road transport will become more and more costly as the price of oil will never go back to the old levels.

25. Look at it in whatever way, the answer would still be improved and more extensive network of railway lines. Presently our railway lines run north / south. We need to have more east / west lines also.

Tourism
29. Tourism. It is estimated that by 2020, 200.0 million Chinese will be going abroad.

30. India would be another source for tourists. Also in large numbers.

31. We have some problems with tourists from these two countries disappearing. But if the government will not be nasty, the tour operators, hoteliers and other service industries should see a great deal of prosperity.

32. Provided that we handle tourists well we would be welcoming 35 million foreign tourists in 2020, one per head of population. Those in the business should prepare for the influx.

33. So far I have talked about the domestic and relatively controllable side of business and the economy. The foreign side will be more difficult to manage as we have little control over it.

Regulating international trading
40. Trying to tackle the increases in price one by one will not work. We may be able to handle oil prices through greater fuel efficiency but what about the other raw materials; what about food?

41. We believe in a free market; in supply and demand determining prices. But markets can be manipulated and shortages can be created. In fact today huge quantities of goods can be traded without the goods really existing. This was what happened when currency trading was allowed. The total trade in currency was very many times more than the total value of world trade. Similarly the total volume of oil traded would be more than the total amount of oil produced or consumed. Seems that the trade in nothing is worth more than the trade in something.

42. We have forgotten why we promoted free markets and free trade.

43. The systems we created were for our own good but they have now become the systems we must sustain even if they destroy us. Something is wrong here.

44. All systems and ideologies were good until rogues see ways to abuse them for their own benefit or profit. This is what we are seeing happening to the free market. It is being abused simply because governments have abdicated their responsibility to prevent crimes in business and punish rogue businessmen. If we are going to benefit from the free market and free trade, governments will have to go back to regulating them.

45. Then people will say that the market and trade would no longer be free. But actually despite trade being free, it is not really free. We still cannot trade in certain goods, arms and dangerous chemicals for example. We still have to fill forms and submit to examinations by a host of officials. We still have to pay tax or if not we have to prove that our goods are not taxable.

Higher wage cost and competitiveness
56. In the meantime we should look into adjusting and managing a high-cost economic environment domestically.

57. There are in the world today high cost countries and low cost countries. Generally the developed countries are high cost countries. Still they are competitive and their standards of living are without exception higher than in low-cost countries.

62. ... despite there being more of us, despite our higher cost of living, our standard of living has actually improved.

63. There is something to be learnt here. Can we speed up the process of increasing income, increasing our cost of production and yet remain competitive? I think we can.

64. We talk of the wage price spiral and we are afraid that this might happen to us if we raise wages. We fear that cost of production would increase as wages increase and we would not be competitive. We would not be able to attract investments whether from domestic sources or foreign. But let us work out the percentage that wages constitute in the total cost.

66. Think. Malaysian costs are already higher than 30 years ago, higher than those in other ASEAN countries except Singapore. Still we are attractive. One of the greatest assets we had was political stability and consistency in government policies. There were other things which made Malaysia attractive. If we improve on these assets, the increase in costs (not just of labour but transport and materials) will not make us any less attractive or our products less competitive.

67. We must also remember that the pressure of increasing prices will be felt by our competing neighbours as well. They too will have to increase their cost of production. So our cost will not be, comparatively speaking, so high as to make us totally uncompetitive.

68. But consider the effect of increased income all round. There will be more money to purchase goods and services. However unions must not increase their demands when wages are already being increased. Instead they should cooperate in improving productivity. In the end they will gain more.

69. I never liked the low wages paid our wage-earners. It restricts their purchase of goods and services. If their purchasing power is increased then retail businesses especially, would enjoy greater sale. More would be spent on leisure. Other businesses such as transportation would prosper. And government would earn more income also.

70. I don’t often admire Singapore or what it does. But when Singapore gained independence it carried out a programme of steadily increasing wages every year. Some businesses and industries left Singapore but the efficiency of Singapore’s authoritarian government retained many of the investors and industries. We sometimes wonder why investors go to Singapore when they could come to low-cost Malaysia. I think you know why.

71. I think we should systematically raise wages. If we manage wage increases carefully enough, the wage price spiral would not be too damaging. In time it would settle and we would adjust to a high cost environment while our living standards also improve. Even our poor people will be less poor.

72. When people generally earn more money, they spend more money and somebody will make a profit and the government will collect more taxes. The so-called mega projects contributed much towards the growth of Malaysia’s economy and increased living standards all round.

73. There is a lot of talk today about the increasing cost of doing business but no talk about managing and adjusting to a high cost economy. Certainly there is no talk about deliberately increasing and managing cost. Yet unconsciously this was what we have been doing all these years. And we have been successful at it. Otherwise with our higher cost we would be poorer than our low-cost competitors. But we know we are more prosperous than them.

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Dr M's speech contains strategic thinking on how Malaysia's economy should be planned and, I think it warrants serious consideration.

The fall in oil prices

In recent days, the price of oil has fallen to USD120 per barrel. The Economist op-ed piece made the observation that, Those looking on the bright side will also hope that a fall in the oil price will untie the hands of central bankers, allowing them to postpone the rate rises they may be contemplating to fight inflation.

At first blush, this seems to validate Bank Negara's decision not to raise interest rates. But that op-ed piece also makes the crucial observation that, the problem with the optimists’ case is that these two arguments are in tension with each other. If speculation is to blame for the high oil price, then higher interest rates, not lower ones, may be warranted, at least in the medium term.

Not increasing interest rates means cheaper money which led the op-ed piece to note that, Cheap money, after all, results in expensive assets, as the bubble in stocks then houses showed. This refers to asset inflation which was a feature in almost all global economies at the beginning of 2008.

The point being made is that since the price of oil has fallen to USD120, monetary policies directed at increasing interest rates to control inflation will be shelved. This may mean that spending habits will remain. This is not a good thing because the fall in oil prices is seen by many to be a temporary thing against the longer term trend of rising oil prices.

More ominously, the op-ed piece makes the observation that, As a result, the return to pumping a barrel of oil, selling it and investing the proceeds is often less than can be gained by leaving the oil in the ground and waiting for its price to rise further.

Rather than paving the way for lower interest rates, the oil price may have dropped in anticipation of higher ones.

There is a lurking suspicion that oil producers may be going slow on oil extraction given the anticipation that the price of oil will increase again over time.

Perhaps, the true moral here is that the economic planners need to use this brief breathing space to put in place programmes that will alleviate the social and economic displacement that will take place when the oil prices begin to rise again. This means that public transportation has to be improved regardless of which direction oil prices may go.

Let us not forget that food prices have not come down. Cost-push inflation is still a phenomenon that has to be urgently addressed.

Penang 2nd bridge: A review of rent-seeking model?

The Malaysian Insider reported that the federal government has created a 100 percent-owned special purpose vehicle (SPV) to be the concession holder of the 2nd Penang Bridge. The SPV will, in turn, give out the contract to build the 2nd Bridge. 2nd Finance Minister Nor Mohamed Yakcop is quoted as saying that the government will decide later on who will collect the toll and how much.

Initially, the concession and privatisation of the 2nd Penang Bridge was given to the UEM Group and the project was to be undertaken on a build-transfer basis. Now the deal will involve a basic construction contract.

The government is now directly undertaking the 2nd Penang bridge project by establishing the SPV called Jambatan Kedua Pulau Pinang Sdn Bhd (JKPP), and slashed by almost 40 percent the contract sum that was initially supposed to be awarded to UEM Builders Bhd.

It is also reported that letters of award have been given to Chinese Harbour Engineering Company Ltd (CHEC) and UEM Builders, involving sums of about RM2.3 billion and RM1.3 billion respectively to build various parts of the bridge.

Read more here.

The good part

I have a qualified sense of happiness in analysing this new approach by the federal government. The happy part is that the federal government is adopting the stand urged by this blog (and many others, I'm sure) that infrastructure projects are public goods. The primary responsibility for providing public goods rest with the government.

In the earlier build-transfer model, UEM would have had the privilege of recouping the construction cost by setting up toll operations. Such arrangements have been criticised by this blog (and many others, I'm sure) as classic rent-seeking arrangements that have burdened the Malaysian public for the past 2 decades under the label of privatisation.

With the establishment of the SPV, the federal government is effectively the client who will pay the contractor as the work of constructing the 2nd Penang bridge progresses.

The dodgy part

Now I want to describe the qualified happiness part.

First, why is Nor Yakcop leaving the door open for a third party to collect the toll on the bridge? The government via the SPV should be the toll collector. Why is there a need for a third party to do toll collection? At most, the SPV can outsource the collection to established carpark operators who are efficient at this task. But it cannot go beyond this. It's a no-brainer task!

Second, how will the federal government finance the cost of construction of the bridge? It can draw from the Consolidated Revenue, of course. But, the federal budget is running at about 2.3% deficit. So, the government needs to borrow.

Financing issues

I have blogged about financing models that will help replace privatised public goods here and here. I am essentially advocating the issuance of Ringgit-denominated sovereign bonds by the federal government to partially finance the construction of the 2nd Penang bridge. The yields to bondholders have to be worked out based on the projected cashflow from nett revenues from toll collections after deducting operating expenses.

The other financing source is, of course, the USD800 million soft loan from the Chinese government. And, finally, the residual funding can be by way of direct fiscal policy by allocating a portion of the Consolidated Revenue to the construction costs.

Is this the first step towards de-privatising public goods?

Before we start celebrating the end of rent-seeking policies under the guise of privatisation, we should pause to consider the vast extent to which many public goods in Malaysia are supplied by privateers. Ranging from generating electricity to telecommunications to water and waste collection, the rent-seeking formula is deeply embedded in the Malaysian economy.

The detoxification (if you call privatisation a toxic activity, which I do!) will take some years. But, the billion Ringgit question is; Does the 2nd Penang bridge review signal a policy shift? Or, is it another ad hoc policy decision by an Administration that is euphemistically described as flip-flop.

Public Transportation: KL lags regional rivals in rail infrastructure

The Edge Financial Daily carried a report that, KL, as Malaysia's main commercial hub, lags its regional rivals in rail-based infrastructure investment and this could have a significant impact on the city’s competitiveness as workforce mobility is one of the key factors in a city’s attractiveness as a place to live and do business.

KL’s newest LRT line, the Kelana Jaya line (formerly known as the Putra line), was completed almost 10 years ago in 1999. In intervening years, Bangkok and Singapore have continued to make massive investments in public transport infrastructure.

Singapore announced earlier this year that it has set aside another S$20 billion (RM46 billion) for new lines for its mass rapid transport (MRT) system. This fresh allocation comes on top of the S$20 billion that the city has already invested on new extensions to the MRT system in the last five years. These new investments will altogether double the length of its MRT network from 138km to 278km.

Bangkok is spending 446 billion baht (RM43 billion) to add 248km of rail to its metro system, which started in 2004 with completion expected in 2010.

KL’s LRT network in contrast, is only 56km long. Years of under-investment in rail and too much emphasis on construction of new roads have left KL city dwellers chronically dependent on cars, with most of them having no viable alternative to turn to during the recent hike in fuel prices.

Read more here.

Clearly, the economic planners are falling asleep at the wheel. What does the Public Transport Commission headed by DPM Najib have to say about this? KL's lag in public transportation will affect Malaysia's economic competitiveness since it has a direct correlation with productive time lost in traffic congestion.

Malakoff, IPP and Privatisation: Learning from Fannie and Freddie

As we know, in a fit of anxiety over rising oil and food prices, the Malaysian government recently decided to partially remove oil subsidies to great public opprobrium. As part of the fitful reaction, the government also decided to impose windfall taxes for the oil palm plantation companies and the independent power producers (IPP).

In relation to the IPPs, the opprobrious reaction came from the stakeholders of the IPPs, particularly the bank and investment intermediaries who deal with bonds issued by the IPPs. Of these, the greatest outcry came from Malakoff and its stakeholders. See Malakoff bondholders in a bind.

The bind that Malakoff's stakeholders may find themselves in is due to the fact that the windfall tax will eat into Malakoff's cashflow and profit margins which, in turn, will affect Malakoff's ability to meet obligations to bondholders. Why is Malakoff worse off than other IPPs? The answer may be that Malakoff's numerous corporate exercises and restructuring has generated greater debt obligations when compared to other IPPs. This is one of the downside risks of privatisation; where privatised businesses can get into financial problems.

This leads to the basic issue that I want to raise about the nature of privatisation of utilities, roads and public transportation in Malaysia.

Privatisation was fashionable in the past 2 decades

Despite his Look East and Buy British Last policy in the early 1980s, Dr M was enthralled with Margaret Thatcher's privatisation policies. Starting from the privatisation of Sports Toto in 1985, the Malaysian government quickly became a major adherent of privatisation. Construction of highways were privatised. Utilities such as electricity and telecommunications were privatised. Public transportation was privatised. Waste disposal was privatised.

Privatisation means public goods are carried out by privateers

In essence, privatisation means the transfer of the government's basic obligations to the tax paying public for certain goods and services to private enterprises.

Originally, these public goods such as roads, electricity, telecommunications and water were obligations of the government and government agencies. The conventional wisdom that evolved in the 1980s was that privateers were able to deliver these public goods more efficiently and, more cost-effectively.

Has the Malaysian experience validated this conventional wisdom? I suspect that the answer would be in the negative and, I'll tell you why I suspect so.

Higher costs of living with privatisation

The privatisation of public goods has resulted in higher costs of living for Malaysians. In all privatisation concession agreements there are built-in pricing mechanisms which escalate over time.

The major road concessionaire, PLUS, has such in-built incremental pricing (subject to Cabinet approval, which is a dubious safeguard). The early IPPs have such mechanism in the Power Purchase Agreements (PPA).

By its very nature, public goods have inelastic demand meaning that the consumers of public goods have no choice but to continue the usage of privatised roads, electricity, water and so on. So, any increase in price will be passed on the the public users resulting in higher costs of living.

Where are the benefits to the public from privatisation?

There is a pervading sense that these public goods are mandatory obligations of the government anyway. The government is obliged to provide these public goods. And, by privatising these public goods a middleman has been created to derive a profit from the delivery of public goods.

These middlemen have a singular goal of making profits. These profits go into private pockets. In contrast, a government that delivers these public goods, even if profit was made, goes back into the Consolidated Revenue of the government.

The indebtedness of IPPs as an example of the downside of privatisation

In opposing the windfall tax, the IPPs have argued that an entire superstructure of bonds have been created. The windfall tax will affect the ability of the IPPs to meet payment obligations to bondholders, especially so in the case of Malakoff.

While many of us understand that the construction of electricity power generation plants require debt-financing, loans and capital-raising, we should also wonder why the government does not want to undertake this role? Or, at the very least allow Tenaga Nasional to undertake this role.

This same wonderment applies to all public goods that have been privatised.

Two decades of privatisation experience has shown that there is little public accountability in privatisation activities. There is a club system where tycoons that own privatised businesses are accountable to Cabinet ministers in an opaque structure that even Parliament cannot peer into!

The basic proposition: If any privatised entity experiences financial failure, where will the bailout come from?

This is the basic test of whether privatisation should be phased out: Who will bail out these privatised entities if they experience financial failure?

If the experience of Malaysian Airlines under Tajuddin Ramli is anything to go by, the answer is obviously, the Government of Malaysia.

This leads me to share with you one of the current thoughts about the US experience with Fannie Mae and Freddie Mac. Alice M. Rivlin of the Brookings Institution posed the question about whether Fannie Mae and Freddy Mac, as key players in the US housing market, both of which are adversely affected by the imploding US housing market - whether these entities that have a pervading impact on the socio-economic life of the US, should be placed under public hands, that is, government control? Here's an extract of what Rivlin wrote:

Recent history suggests that we want the mortgage giants to be private when they are making breathtaking profits for their investors and executives. But when the going gets tough, we need Fannie Mae and Freddie Mac to keep the credit flowing to homeowners even if it means putting taxpayer resources on the line. Willem Buiter at the London School of Economics has called this ambivalence “the most deceitful socialism I know.” And he may have a point.

Read the full article here.

Likewise, in the Malaysian context, the question is, Do we want privatised public goods to be public or private?

Infrastructure: Time to Compete to Win

I have borrowed the title caption from an article by a member of the US think tank, the Brookings Institution. It serves to underline the strategic vision of the federal government under Dr M which appears to be markedly absent in recent years. Here's an excerpt of Lael Brainard's article that urges the US to improve its transportation and logistics infrastructure:

When (U.S.) athletes land in Beijing, they’ll find that the new terminal at Beijing Airport is larger than all of Heathrow Airport, the world’s third busiest. China’s investment in rail infrastructure – almost $200 billion from 2006 to 2010 – is the beginning of the largest expansion of railway capacity undertaken anywhere since the 19th century. And in just the last 15 years, China has built a highway network that rivals what it took America 40 years to build.

These investments reflect an unprecedented shift in the balance of global economic power that is fundamentally altering the contours of how we compete in a global economy. For two generations, the world economy was defined by only seven countries -- Canada, France, Germany, Italy, Japan, the UK and the United States -- which produced two-thirds of world output.

But the last five years have seen the beginning of a dramatic change as major emerging economies, from China to Brazil and India, grow rapidly, aided by governments that make investments for the long-run, like in infrastructure. From 2002 to 2007, the G-7 share of world output fell from 65% to 57% and, according to Brookings scholar Homi Kharas, will likely decline to 37% of world output by 2030. Meanwhile, the major emerging economies’ share of global output jumped from 7% to 11% and is set to hit 32% by 2030, almost catching-up to the G-7.

To remain globally competitive, the U.S. needs to invest for the long-term in infrastructure, among other efforts, as we did under President Roosevelt with rural electrification and under President Eisenhower with the creation of the Interstate Highway System.

One of the focus of my blog is to try and contribute to strategic issues and goals that will make Malaysia more competitive. It's not easy to do so without any research grants. It's a labour of love, love for the country and fellow Malaysians. It's also an effort drawn from the indignance that I feel when political developments in Malaysia is seen in a bad light at the international level. It also stems from the fear that the future generations of Malaysians will be more lazy and stupid due to an education system that pulls good students down to a level and average that is below international standards (prompting almost all BN leaders to send their own children to private schools, including the children of the Minister of Education himself).

Forgive me the digression above. I sometimes suffer from what I call intellectual incontinence caused by indignance!!!

Back to the issue of infrastructure. Dr M wanted a double-rail tracking project. He wanted a crooked bridge. And, several more mega projects. Most, if not all, were shelved by the current Administration.

In the aftermath of GE2008, the Penang Outer Ring Road (PORR) and Penang monorail project was shelved. The Penang 2nd Bridge was almost shelved.

These events tell me only one thing; the federal government is overly political in matters of economic development; the politicians in federal power today are short-term tacticians (rather inept ones, if I may say so). These characteristics are dogging the current Administration. But, worst of all, these characteristics come at a high price in the context of Malaysia's flip-flop approach to economic management and economic development.

Public transport campaign group formed in KL

This is an interesting development. For more, please go to http://www.penangwatch.net/node/2831.

Such a group will have a better voice and contribute ideas for the improvement of the public transportation system in the Klang Valley and other parts of Malaysia.

Penang's public transportation: A radical solution

I like radical solutions. They push the envelope of conventional thinking. I want to propose a radical funding solution for the Penangites for Trams Campaign. I very much believe that this Campaign makes absolute sense in the context of Penang Island which is compact, densely populated and, a magnet for tourists. The general merits of the Campaign are very well set out in the URL link above. It is unnecessary for me to go into it.

Instead, I want to address only a few key issues that, in my humble view, will advance the cause of the Campaign. I hope the Campaign members will take this up and, I will be happy to embellish and develop the propositions, if called upon.

1. Set up a Penang Tram Foundation

The Campaign needs to go beyond the ranting and platitudes and step up the process. This can be done by incorporating a company limited by guarantee. I'm suggesting the name Penang Tram Foundation.

The basic charter of the Foundation is simply to promote and establish a public tram system for Penang.

2. Sidestepping the thicket of legalities

The Foundation, being a private entity (as opposed to the Penang State Government) has a just cause in the public interest to propose the establishment of a comprehensive tram system for Penang. The Foundation can meet the constitutional issues on infrastructure development being under the federal government by sending a formal proposal in the public interest.

3. Funding methodology: Public lottery

This is where I get radical. The Foundation should establish a public lottery to partially fund and finance the initial studies and surveys on the tram routes, the construction issues and tram technology to be deployed. The Penang Tram Lottery (a working name) will also be used to fund and finance the construction of the tram route, pay for any land acquisition required to create the route, the acquisition of the trams and, the subsequent tram operations.

4. Rationale for public lottery as a public finance device

The Campaign is clearly promoting the tram idea because it ameliorates the public transportation woes of Penang. It is a public-interest proposition since public transportation is a Public Good. And, if the federal government is reticent about solving the obvious public transportation woes of Penang, then the Foundation is a good vehicle to formalise the Campaign.

A public lottery is a form of public finance. It's economic merits are manifold if the goal is to create a public good. For a more technical economic analysis of the merits of lotteries as a means of financing public goods, please read John Morgan (of Princeton University) in an article entitled Financing Public Goods by Means of Lotteries.

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As I said, I like radical solutions. I very much believe that the issue of public transportation in Penang is a very serious matter that is already affecting the economic competitiveness of the state. The poor public transportation infrastructure is also having a deleterious effect on Penang's tourism.

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See also a related blog entry made earlier that provides a wider context to the public finance via public lottery proposition contained above at The Malaysian problem with privatisation of public goods.