Time for IPPs to help the rakyat

Kudos are due to Business Times for this op-ed piece. This blog has hammered the IPPs for the lop-sided Power Purchase Agreements (PPA). The BT's op-ed reminder is timely. I implore the government to pay heed to this perspective that come the time to renegotiate the PPAs, the government must support Tenaga Nasional's position and pay heed to the massive burden that the Malaysian consumer has to endure with this example of dodgy privatisation model.

Here's the BT op-ed piece:

Sweetheart deals that the first-generation independent power producers (IPPs) secured in the early 1990s will expire in stages from end-2014 or 2015.

It is often highlighted that these IPPs have collected billions of ringgit from lopsided power purchase agreements (PPAs) that put them in very minimal or an almost zero-risk environment.

The IPPs are YTL Power Generation Sdn Bhd, Genting Sanyen Power Sdn Bhd, Segari Energy Ventures Sdn Bhd, Powertek Bhd and Port Dickson Power Sdn Bhd. They are controlled by some of the country's richest families and individuals.

A continuing toll on BN strategy

It looks as though the piece entitled A toll on BN strategy fell on deaf ears judging by the unfortunate decision to raise toll rates again. 

It does not matter that there are concession agreements. BN is the government and BN is expected to be dealing with public interest first and foremost. Instead, BN are now perceived as favouring rent-seeking behaviour over the public interest.

It would appear that some of the nationalisation of toll roads strategies, especially the funding model, posted in this blog under The Malaysian problem with the privatisation of public goods and An economic agenda to consider appears to have gained traction but, unfortunately, not with the government.

IPPs don't want to review PPAs

Should anyone be surprised by Penjanabebas' stand that the IPPs are against TNB's proposal to the government for review of the Power Purchase Agreements (PPAs)?

Even the surrogate parent for the birth of the IPPs, Dr M has come out to call for a review of the PPAs because the huge power reserves, which means unutilised power, posed a heavy burden to TNB. Needless to say, what's bad for TNB is bad for consumers and the country.

This is the downside to rent-seeking arrangements endemic during the 1980s and 1990s privatisation drive.

My criticism of the IPPs is set out here. In particular, see my arguments here, if you care to.

In the mean time, the news is that with effect from March 1, electricity tariffs for households will be reduced by 2.54%. Commercial rates will be reduced by 2.7% while industrial rates will fall by 5%. I guess beggars can't be choosers in this economic climate.

Be that as it may, I still maintain that the IPPs should be nationalised. 

A toll on BN strategy

I am quite bewildered by BN's tactical nous. My bewilderment arises in the matter of the declassification of the privatisation agreements for roads for public scrutiny albeit in a limited manner. Apparently you have to present yourself, pay a small fee and, you are given 2 hours to pore over each agreement.

This has led to an amusing (as opposed to amazing) race between DAP-PR and MCA-BN to produce their respective party's positions on the nature of the financial and operational arrangements between the government and the toll concessionaires. In both cases, to no one's surprise, the prognosis was a negative one.

The inference, quite correctly, is that the toll agreements are lop-sided in favour of the toll concessionaire. The agreements are said to minimise major financial and operational risks to the toll concessionaire while leaving the government to underwrite significant downside risks.

As it were, the monopolistic nature of the toll roads have proven to be a major financial coup for the toll concessionaires which proves that the traffic flows and urban planning studies were entirely correct. So, the toll operators are making tonnes of money. Both the DAP and MCA representatives are saying that the profits are excessive. Again, no surprises there.

.

Roads are public goods
I have examined the issue of privatisation in a post entitled The Malaysian problem with the privatisation of public goods. Suffice to say here that roads fall squarely into the category of public goods.

Nationalisation of toll roads
I have also advocated the nationalisation of toll roads as one of several key economic issues in another post entitled An economic agenda to consider.

But, that was in June, 2008.

Two points
Having given a prolix preamble I have two points to present for your consideration. The first will deal with the economics and timing for any proposal to nationalise toll roads.

The second point is a humble observation on BN's tactical nous in declassifying the toll agreements at this time.

Economics and timing for nationalising toll roads
Upon examining the toll agreements, the DAP has called for the nationalisation of toll roads. Such a move will alleviate the financial burden on the public users of the toll roads in two ways. First, toll rates will be better regulated and, presumably lowered with each passing period of time. Second, any surplus or profits will be paid into the Consolidated Revenue as public funds.

These are sound propositions and, frankly, it warms the cockles of my heart since I have advocated the nationalisation of toll roads as a Malaysian economic strategy. But, there is a slight chill running down my spine at the same time. Why?

Funding the nationalisation process
The issue is funding. The toll concessionaires need to be bought out in order to amicably terminate the toll agreements. Without even having had the chance to read the toll agreements it can safely be assumed that there are sufficient provisions that require the unexpired portion of the toll concession period to be compensated. So, funding is required.

The federal government is cash-strapped. The fiscal policy is in deficit mode. Any funds scraped from the bottom of the barrel is likely to go to economic stimulus packages.

However, one clear source of funding is the issuance of sovereign bonds by the government. That should not be too difficult. It is easy to calculate the yields since there is a financial track record of the revenues received from the toll operations.

The problem will be to find investors at a time of global economic recession.

BN's tactical nous (or, the lack thereof)
If I were to wear the BN hat (something I literally did as a boy but, no longer ... because BN caps are not cool or properly designed, unlike the Nike Tiger Woods caps. But, I digress) I would be wondering about the political advantage for the toll agreements to be declassified at this time.

Perhaps the Works Minister can explain this.

As a citizen, a taxpayer and toll road user, I am happy with the declassification and the hard work done by the DAP and MCA to examine the contents of the toll agreements.

But, if I were a BN hack I would be wondering what the gameplan was?

You are exposing yourself to public opprobrium because the privatisation process, the toll agreements and negotiations were all conducted by the BN government.

The only mileage (pun intended) BN will receive from the declassification is that it has become more transparent. That is an abstract positive.

But wouldn't any BN strategists (if there are any) have given pause to consider that revelations such as these would only invite a real negative backlash? Didn't they realise that the toll agreements are rent-seeking arrangements that have upset Malaysian taxpayers and road users for the past two decades? Didn't they consider that there will be an outpouring of latent negative emotions when the rakyat finally discover that the bloody toll concessionaires have been profiting so obscenely while the rakyat suffered a higher cost of living as result of the toll roads?

And, for good measure, let it also be noted that if the declassification was an attempt to embarass past BN leaders that have become gadflies, the tactic fails for the simple reason demonstrated by a scene in Star Wars when Obi-wan Kenobi permitted his physical self to be slayed by Darth Vader after Obi-wan was certain that Luke Skywalker was safe. Thereafter, Obi-wan had become an ethereal and, yet ominous, presence as part of the Force. You cannot punch a shadow. 

Given these concerns, wouldn't it be more prudent to prepare a set of solutions in anticipation of the negative public response to the toll agreements before declassifying them? At least, BN could then say, Oh, yes! We knew that. That is why we have this plan in place and, ready for implementation to deal with the matter.

What were these guys thinking? In football parlance, this is clearly an own goal by the BN.

Cabinet shelves IJN sale proposal

I just read in Malaysiakini that the Cabinet has decided to shelf Sime Darby's proposal to acquire IJN. Let me be the first to congratulate the Cabinet for having the wisdom to listen to the views of the general Malaysian public.

The whole principle of privatisation needs to be reviewed. It has deteriorated to the point that we are all hard put to determine where privatisation (and, by logical extension, greater economic efficiency) ends and, where rent-seeking behaviour starts.

It is, therefore, heartening to read about the Cabinet's decision. But, like all good thrillers, I cannot fail to note that the proposal is only shelved NOT rejected. This issue may revive itself when Malaysians are not vigilant.

Leave IJN alone, please!

I am with Gunasegaran of The Star, Rocky and Sime Darby Watch on this one. The proposal by Sime Darby to privatise Institut Jantung Negara (National Heart Institute) is driven by pure profiteering. There's no other way to look at it.

IJN has a public purpose. It provides a fair price for all Malaysians who need cardiac attention.

What can privatisation do that is BETTER than the solid service already being provided by IJN?

Malaysians must surely have learnt by now that privatisation is a code word for profits to a select few and higher costs for the ikan bilis of Malaysia.

I am normally quite circumspect about most matters. But any issue of privatisation just riles me because the costs almost always outweighs the benefits to Malaysians.

To the federal government ministries and agencies looking at this proposal, just stop this and put a TOLAK rubber stamp in RED ink on the proposal, please. 

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.

Sarawak to build 12 dams to meet future power needs

I'll be the first person to declare that I'm all for progress and economic development. But, at the same time, I'll be the first person to declare that progress cannot come at too high a price.

Malaysiakini has reported that Sarawak's plan to build 12 hydroelectric dams, including one that is near the Mulu Caves may threaten the World Heritage status of the Mulu National Park, environmentalists have warned. See http://www.malaysiakini.com/news/86613

SCORE and the strategy for Sarawak's economic development

The Sarawak Corridor of Renewable Energy carries the acronym SCORE. The SCORE programme is targeted at harnessing the hydroelectric generation potential of the great rivers of Sarawak and, to use the vast amount of electrical power for the heavy industries that consume gigawatts of electricity. That explains the master plan for constructing 12 dams.

Certainly, the direct investment of the likes of China’s Luneng Group, Smelter Asia Sdn Bhd, Alcoa Inc, Mitsubishi Corp, BHP Billiton Ltd and Australia’s Rio Tinto in addition to Press Metal Bhd will create jobs for Sarawakians. The billions of Ringgit in foreign direct investment will be staggering.

Some spots of bother to be considered by the Sarawak state government and the Environment Ministry

There are, however, some spots of bother that need some ventilation. One has been highlighted by the venerable M'sian environmental warrior, Gurmit Singh whose views have been quoted in the Star Online report entitled, Sarawak to build 12 dams to meet future power needs.

I wish to add to Gurmit Singh's point about potential environment hazards by referring to the travails of BHP Billiton Ltd (one of the "interested parties" named in the Star Online report) in respect of their OK Tedi Copper Mine in Papua New Guinea. 13,000 villagers have filed a class-action suit for USD4 billion against BHP as reported in the Sydney Morning Herald in January 2007; PNG villagers sue BHP, Ok Tedi miners. Their complaint was for the destruction of their traditional lands along 38km of their river and, their suffering from tonnes and tonnes of arsenic, copper, zinc and other heavy metals dumped into this once pristine habitat where they had lived since time immemorial. This is a familiar complaint. Sadly, it is a very real complaint.

The aluminium smelting industry

The industrial process to convert bauxite to aluminium requires an incredible amount of electrical energy. This makes the SCORE proposition especially inviting to the aluminium smelters throughout the world. In particular, another "interested party" named in the Star Online report, Alcoa Inc is ranked 9th in the Political Economy Research Institute's (PERI) Toxic 100 of 2002.

The company is reported to have released 9.88 million pounds of toxic air in 2002. In April 2003, Alcoa Inc in the US, agreed to spend an estimated $330 million to install a new coal-fired power plant with state-of-the-art pollution controls to eliminate the vast majority of sulfur dioxide and nitrogen dioxide emissions from the power plant at Alcoa's aluminum production facility in Rockdale, Texas.

The out-of-court settlement was the ninth case the US Bush Administration pursued to bring the coal-fired power plant industry into full compliance with the US Clean Air Act.

Alcoa was found to have unlawfully operated the Rockdale facility since it overhauled the Rockdale power plant without installing necessary pollution controls and without first obtaining proper permits required by "New Source Review" program of the Clean Air Act.

In February 1999, Alcoa cleaned soils and sediment contaminated with polychlorinated biphenyls (PCB) and lead at the York Oil federal Superfund site in Moira, New York in accordance with the dictates of the US Environmental Protection Agency. Read more HERE.

Another spot of bother: NCR Land and the displacement of native communities

The construction of hydroelectric dams in Sarawak always result in a head-on collision with native communities. I have written about the displacement of Sarawak native communities due to logging and oil palm plantations on numerous occasions under the label of NCR ad nauseum. But, the issue is very real. I firmly predict that the issue of NCR land may well be the tipping point for the toppling of the Sarawak BN government.

Rent-seeking possibilities galore

I don't really have to spell out the rent-seeking possibilities arising from these projects, do I?

Is this form of progress worth paying the price for?

This is the question that I want to pose for anyone who cares to read this blog; Is this form of progress worth paying the price for?

MALAYSIAKINI: MPs query 'extreme profits' for IPPs

UPDATE (July 20, 2008): There is an excellent study on the M'sian IPP experience done in 2005 by Jeff Rector at Stanford University.The study is very complete and it is nuanced by including the Great Blackout of 1992 that created the impetus for the privatisation of electricity supply and, some political subtext to the IPP saga. Read The IPP Investment Experience in Malaysia.

The unfair Power Purchase Agreement (PPA) between the Independent Power Producers (IPP) and Tenaga is finally getting Parliamentary scrutiny.

-

In the report MALAYSIAKINI: MPs query 'extreme profits' for IPPs MPs have started to call for a review of the PPAs. I had blogged about this in An economic agenda to consider.

-

The Mkini report by Fauwaz Abdul Aziz states, "I want to ask now whether we will review the extreme revenues going to IPPs or whether, if there are other reasons for this, the government would take over the IPPs that are operating presently," said Ahmad Hamzah (BN-Jasin).

-
In his reply to Lim Guan Eng (DAP-Bagan), Deputy Minister in the Prime Minister’s Department SK Devamany revealed that for the financial year 2006/2007, IPPs Segari Energy Ventures Sdn Bhd and YTL Power Generation Sdn Bhd pulled in pre-tax profits of RM614.883 billion and RM252.033 billion respectively.

-
TNB Janamanjung Sdn Bhd and Tanjung Bin Power Sdn Bhd, meanwhile, earned pre-tax profits of RM860.498 billion and RM332.892 billion, respectively. Among the other big earning IPPs, Powertek Bhd and Genting Sanyen Power Sdn Bhd earned RM372.6 billion and RM312.275, respectively.

-
Devamany also disclosed that 10 IPPs, from May 1997 to March 2008, received RM35.695 billion in gas subsidies from national petroleum firm Petronas. "

-

In my earlier blog entry I had taken a harder stand. I extract below my earlier blog entry:

-

Tenaga to acquire all IPPs
IPPs are protected by the unfair Power Purchase Agreements ("PPA") which forces Tenaga Nasional to purchase all power generated by the IPPs. We are told that Petronas is also subsidising the fuel consumed by these IPPs. Consumers are being forced to absorb the increased costs via higher electricity tariffs. This is classic rent-seeking behaviour.
-
The government must do a work-out for Tenaga to acquire the IPPs. Tenaga can do a massive bond-raising exercise to acquire the IPPs with the government to stand as a sovereign guarantor. The consolidated cashflow from the IPPs and Tenaga's own operations combined with the sovereign guarantee should make these bonds attractive and be given a triple-A rating.
-
I know there are brickbats thrown at Tenaga. But it is still a better vehicle that can be audited as opposed to the opaque structure that currently exists. Furthermore, the PPAs are under the Official Secrets Act, apparently. That is a sham!

MALAYSIAKINI: It's the economy, stupid!

Like many M'sians I have been agog and repulsed (at the same time) at the gutter politics that has engulfed our beloved country. Many M'sians have begun to pine for the relatively serendipitous era of benevolent dictatorship under Dr M. Despite the absence of democratic space there was, at least - so these M'sians reason - certainty.

-

Witness the Malaysiakini reports Rakyat 'sodomised' by government or Headlines online and so on and it will be apparent why many fair-minded M'sians feel the fatigue and fear of uncertainty. Add to it the economic realities of inflationary pressure from the fuel price hikes and rising food prices - add to it the dismal indication from Bursa Malaysia - add to it the indignation from feedback such as 'Politicians greedy for power' in Malaysiakini - you will, no doubt, get the bleak picture of a hotchpot of meandering emotions, mostly negative.

-

But I honestly don't think we should be nostalgic for the previous era under Dr M. To consider a reversion would be like an ostrich sticking its head in the sand to avoid processing this new amount of data. We would be like a caged bird that fears the uncertainty that comes with flying out of an open cage. We would be like toddlers who feel the pain of a bad fall and want to crawl back into the dark and warm and cosy womb of the mother.

-

On March 8, whether by design or by accident, the M'sian electorate voted for the possibility of change. My humble take on the sentiment exhibited on March 8 is, that the electorate wanted a change from a system that favoured the few over the many; a system that pampered the few while marginalising the many; a system that rewarded psychophantic behaviour over truth-telling behaviour; a system that favoured rent-seeking behaviour and ignored the inconvenience of greater economic competitiveness and, the list goes on.

-

Sure, we were enthralled by the oratory of Anwar, Hadi, Kit Siang, Guan Eng and Husam. Sure we found the likes of Hannah and Nie Ching fresh and cute. But to say that such phenomena was the tipping point belies the real truth.

-

The truth may be (please take note BN think-tanks and strategists) the genuine feeling that the system is rotting. The system is rotting if the Prime Minister announces a policy, say, on Police reform but fails to see it through; the system is rotting if a 5-year plan, say, the 9MP creates corridors/ verandahs/ canopies/ pegolas that favours an elite group of construction companies but leaves the ordinary M'sians wondering "where's the beef?"; the system is rotting if the Election Commission commits a flip-flop on indelible ink and, yet, no one is fired; and, the list goes on.

-

It is not the personalities that matter. M'sians crave for a system that does NOT depend on personalities like Dr M, or Najib, or Anwar. We crave for a system that is meritocratic; that draws the best and brightest minds; a system that is able to create economic plans far ahead of the curve; a system that creates a fund that will preserve the country's wealth for future generations; a system where disputes are adjudicated in our courts with fairness and intelligence; a system where the best young M'sian minds (regardless of ethnicity) is harnessed and nurtured in local universities that rank in the Global Top 10; and the list goes on.

-

Although I understand that we, as a nation, are undergoing a transition from the era of benevolent despotism to an era where the democratic space is more open, I refuse to be drawn into political shenanigans and gutter politics. Frankly, all fair-minded M'sians are fully aware that for every sodomy-like allegation cast against Anwar by BN there is a countervailing sodomy/murder allegation cast against Najib. And, let us not even start with the nepotism and somnambulist allegations against Pak Lah.

-

If we take a holistic view of M'sia as a developing economy and a developing multiracial and multifaith sovereign nation - if we take into account that it has been half a century since we achieved Merdeka - the likes of Pak Lah, Najib and Anwar must be measured by whether they made M'sia a better place for all M'sians or, whether they made us worse off.

-

So, whoever wins or loses, I am reminded of Carville's scribble on the whiteboard in the basement of the Arkansas Governor's Mansion in 1991, when Bill Clinton first ran for the US Presidency, "IT'S THE ECONOMY, STUPID!"

An economic agenda to consider

I suspect that the amount of RM380 billion lost in corrupt activities over 20 years (see http://www.malaysiakini.com/news/84954) is only a fraction of the actual amount lost to corruption.

-

Be that as it may, the Malaysian government's approach, whether BN or PR, to economic development and wealth management must be drastically revamped. Here are some possible policy approaches.

-

Petronas funds to be moved from Consolidated Revenue to a Malaysian sovereign wealth fund

Borrowing the Norwegian example (see http://ctchoolaw.blogspot.com/2008/06/managing-malaysias-common-wealth-2.html) a M'sian sovereign wealth fund ("MSWF") must be created to receive at least 80% of the annual profits of Petronas. We have to define Petronas' oil revenues as the common wealth of all Malaysians.

-

Key directors of the MSWF should be Tengku Razaleigh Hamzah, Tan Sri Robert Kuok, Ananda Krishnan, Tan Sri Quek Leng Chan and Tan Sri Teh Hong Piow. These are M'sians who have a proven track record of financial astuteness. These M'sians can be entrusted to have M'sia's best interests at heart.

-

The MSWF will be value-neutral investing only in assets and funds worldwide that will provide the best financial yields. The MWSF is to be preserved for future generations of M'sians. We can work out the details in due course.

-

No longer can Petronas funds be used for subsidies of consumption goods which are short-term and renders the M'sian economy inefficient and uncompetitive.

-

Nationalise toll roads

The M'sian govt must take over the toll operations. This can be done through raising sovereign debt which will have a triple-A rating based on the cashflow from toll collections. By sovereign debt, I mean Treasury Bonds aka Malaysian Government Securities.

-

This move will remove the rent-seeking formula endemic in toll collections. It will ensure that surplus and profits go straight into the Consolidated Revenue. It will help to offset the removal of Petronas funds from the Consolidated Revenue.

-

Reduce the income tax top bracket to 18%

This will stimulate greater private sector-led economic activity and attract more foreign direct investments ("FDI"). The influx of capital will generate economic activity that will offset the lower income tax rates.

-

Tenaga to acquire all IPPs

IPPs are protected by the unfair Power Purchase Agreements ("PPA") which forces Tenaga Nasional to purchase all power generated by the IPPs. We are told that Petronas is also subsidising the fuel consumed by these IPPs. Consumers are being forced to absorb the increased costs via higher electricity tariffs. This is classic rent-seeking behaviour.

-

The government must do a work-out for Tenaga to acquire the IPPs. Tenaga can do a massive bond-raising exercise to acquire the IPPs with the government to stand as a sovereign guarantor. The consolidated cashflow from the IPPs and Tenaga's own operations combined with the sovereign guarantee should make these bonds attractive and be given a triple-A rating.

-

I know there are brickbats thrown at Tenaga. But it is still a better vehicle that can be audited as opposed to the opaque structure that currently exists. Furthermore, the PPAs are under the Official Secrets Act, apparently. That is a sham!

-

Reduce importation of foreign workers

This will force M'sian companies to increase their efficiencies and shift from labour-intensive activities to more capital-intensive ones. It will also force M'sian businesses to move further up the value chain of goods and services.

-

Increase vocational training institutions

To meet the shift up the value chain, M'sian workers must acquire new skill sets. Greater fiscal resources must be directed towards the establishment of more vocational institutions.

-

Reduction of the defence budget

No more hardware acquisitions such as submarines. The reduced defence budget should give priority to the standing Army, smaller surface coastal vessels for the Navy and, only towards replacement of Air Force hardware (no more net increases).

-

Removal of tariffs for automotive industry

This protectionist measure has only benefited an inefficient local automotive industry and the rent-seekers that own it. It has made M'sians pay exhorbitant prices for imported motor vehicles. Worse still, this policy has cost M'sia FDIs from the automotive industry and allowed Thailand to create an automotive hub. A major loss of FDI. And, M'sian automotive workers has the correct skill sets for such FDIs! A wasted opportunity.

-

Increase efficiency of public transportation

Sack most members of the newly-formed Public Transportation Commission. Include more NGO representatives. Most importantly, pinch and entice the key managers of Hong Kong's incredible Transport Department to lead and manage the change. (see http://www.td.gov.hk/home/index.htm and http://en.wikipedia.org/wiki/Transport_in_Hong_Kong)

-

No more rent-seekers to operate public transportation i.e. buses and light-rails. A government-owned Public Transport Authority must be formed to nationalise public transportation. Private-sector rent-seekers are prone to making decisions that are sub-optimal to the public but are super-beneficial to the rent-seekers who don't even use public transportation.

-

Maintain English as a medium of instruction for Science and Maths

No reverting to Bahasa Malaysia for Science and Maths. I am hearing ridiculous pronouncements from Hishamuddin's Ministry of Education about a reversion to BM. If the rural constituents are suffering then create a full BM curriculum for the rural areas. It does not have to be a "one-size-fits-all" education policy.

-

Prior to the 1970s, before the odious Rahman Yaakub became Education Minister, M'sia's education addressed this type of education product differentiation. Hisham should read the history of his own Ministry. He shouldn't have to wait for bloggers to remind him!

-

This is not a full list, of course

There's a lot here to digest and discuss. What I have outlined is not complete. But it is a start. Solutions are available if we all apply our minds to it. But we need a real federal government that is responsive and genuinely concerned about moving Malaysia forward. The rakyat has been sanguine in the past in accepting a paternalistic form of governance.

-

But, the trust is lost. More so because of the present (and past) government's inability to forward-plan. The federal government's obssession is clearly directed at creating rent-seeking opportunities for their cronies. Change is necessary.

-

The economic storm is coming. We are witnessing a phenomenon that was forgotten since the 1970s. It is called STAGFLATION; a stagnating economy with inflationary pressure (see http://en.wikipedia.org/wiki/Stagflation). No more time to lose, people!

Fuel prices, inflation & the M'sian economy

The government motion as tabled by Datuk Shahrir yesterday (see Malaysiakini http://www.malaysiakini.com/news/84874) is platitudinous and short on substance. I have great respect for Datuk Shahrir and I sympathise with his ministerial portfolio. But, it's too bad that he is now the BN mouthpiece.
-

We are now confronting a 41% increase in fuel prices. My courier guy just told me that they are imposing a 25% "fuel surcharge". At RM3.00 per document, the courier charge will now be RM3.75. This is inflation at the micro-economic level arising from the fuel price hike.

-

Bank Negara has forecast a 5% inflation growth. I suspect it will be closer to 8%.

-

Fuel subsidies distort the pricing mechanism

My concern is not so much with the fuel price hike because fundamentally the removal of subsidies from all consumption goods in the Malaysian economy will remove pricing distortions. It will remove the "make-believe" world originally created by Dr M. It is like Neo in The Matrix. Having taken the coloured pill he is woken up and unplugged from the make-believe world of the Matrix. That's what will happen to us when subsidies are removed.

-

The worst part, as I have blogged about earlier, is that subsidies makes the Malaysian economy inefficient. It artificially lowers the cost of production and, therefore, create an artificially low price for specific goods such as petrol, rice, flour and sugar.

-

The challenge for the government, whether BN or PR, is to have the political will or cojones to dish out the bitter pill. BN will claim that the removal of fuel subsidies does exactly that. True! But that is only one part of the story.

-

Foreign labour as a perverse form of subsidy

Through the irresponsible policy of issuing permits for importation of foreign workers Malaysian employers have been able to keep labour costs lower than normal. I submit that this is also a form of subsidy.

-

Worse than that, it is a subsidy to consumers of goods and services but it has a deleterious effect on the Malaysian workers and employees who have to face low wages and salaries.

-

Worst still, the foreign workers create a leakage of wealth from the local economy by repatriating their wages back to their homeland. Does the government have the political will to drastically reduce the 2 million or millions more of foreign workers?

-

Rent-seeking behaviour as a contributor to inflation

Let's not pretend anymore. Toll operators are rent-seekers. IPPs are rent-seekers. Government contractors who sub-contract 100% of the work are rent-seekers. They are parasitic creatures that draws an income from having inside access to the government contract-givers.

-

Since they add nothing of real value to the process of creating goods and services, the percentages that these rent-seekers impose are passed on to the consumers in the form of added-on prices. Hence contributing to inflation.

-

Tip of the iceberg

What I have described is only the tip of the iceberg. Of course, economic issues are complex. Of course, every facet of the economy is connected to another. Of course, dealing with one feature will be to the detriment of another economic feature. But not everything has to be Pareto optimal in the sense that an economic benefit need not be at the expense of another (see http://en.wikipedia.org/wiki/Pareto_optimum) e.g. lowering income tax need not mean that value-added taxes must be introduced simultaneously. Most things can be Kaldor-Hicks efficient in that economic policies can be designed to benefit more Malaysians and, yet doesn't make too many Malaysians worse-off (see http://en.wikipedia.org/wiki/Kaldor-Hicks).

Managing Malaysia's Common Wealth 2: Learning from Norway's experience

Letters displayed by Malaysiakini under the title caption High time Petronas answer to Parliament  (see http://www.malaysiakini.com/news/84416) rekindles the need to examine Malaysia's economic and natural resource management weaknesses. That is, of course to put things mildly.

-

One kind commentator of my earlier entry on this subject, Nilesh, has given me an excellent reference to Professor Thorvaldur Gylfason's explanation of the Norwegian economic and natural resource wealth management experience. It is a recommended read for all interested persons. I invite you to read this.

Selangor's welfare plan for its citizens: Part 2

The Selangor welfare plan will be unveiled when Pakatan celebrates their first 100 days between June 18-20. But since YB Lau Weng San has called for feedback, let's do an anticipatory feedback.

-

There is talk of the establishment of trust funds for the poor, underprivileged and elderly in Selangor.

-

Possible sources of funds

-

Selangor has a projected state revenue of RM1.34 billion (Edge March 17,2008). With a projected administrative expenditure of RM670 million, the state has a 50% revenue surplus. So, clearly Selangor is sitting pretty from a financial standpoint.

-

The state government is likely to use the budgetary mechanism of assigning specific revenue sources to specific trusts. It is also likely to use professional fund managers to manage these trust funds in order to grow the wealth using prudential investment criteria.

-

Apart from the financial advantage, what also sets Selangor apart from the other states is Tan Sri Khalid who had an excellent track record in running Permodalan Nasional Berhad (PNB). There is no doubt that Khalid is parlaying his PNB management experience for the benefit of harnessing the Common Wealth of Selangor for the long-term benefit of, initially, the poor, underprivileged and elderly in Selangor.

-

The end of rent-seeking policies?

-

Although it is not unique by any measure this social welfare plank of Selangor is significant in that it signals an intention to move away from the rent-seeking policies that has dogged Malaysia's economic policies. Whether other features of Selangor's economic policies will escape rent-seeking tendencies remain to be seen. But the signalled intent is already a refreshing start.

-

Non-discriminatory approach

-

Another key feature of the nascent welfare policy is the absence of any ethnic discriminatory themes. The criteria appears to be objective. For the poor, there is likely to be a means test-approach. What constitutes "underprivileged" needs to be articulated in due course. As for the "elderly" it is a clear demographic cut-off and eligibility will literally be based on the date of birth.

-

Can other states learn from this?

-

States like Kelantan actually have very enlightened social and welfare programmes. Kelantan has done so via statutorily enacted bodies. It has created scarce revenue sources for these statutory bodies via alienation of land and natural resources in favour of specific statutory bodies.

-

But a resource-starved and deficit state like Kelantan can learn from the professionalism that will feature in Selangor's state apparatus. The one thing Khalid has is a long list of names of professionals that he has personally dealt with during his time in PNB and Guthrie. We can be certain that he will be generous in sharing the contact list!

-

This augurs well for the Pakatan-led states. It is a positive and concerted beginning.

-

But I should hasten to add that this is also something that BN-led states can learn from. In this respect politics must take a backseat in favour of proper economic management. This, of course, assumes the absence of vested interests, cronyism and vestiges of rent-seeking behaviour.