Wednesday, October 20, 2010

Pee Pee Pee Budget Issues

I found Budget 2011 to be a strange document. It is strange at many levels.

For one, there was really only one big expenditure item. That was the allocation for Operating Expenditure. No austerity measures there. There was, in fact, a marginal increase in allocation.

Another, is the great store put on the so-called Public-Private Partnership (PPP) formula. At a cursory level, PPP seems to mean that the private sector will foot most of the developmental bill. At another level, PPP seems to mean projects for private sector parties with access to the political masters.

The third feature is that this is a largely a budget for large scale (some say "mega", others say "grandiose") construction and property development.

The fourth matter that struck me, going back to the concept of PPP, is that the Government recognises that it is cash-strapped. The "innovative idea" is to take developmental matters to, what I will term, "off-balance sheet" transactions.

What do I mean by "off-balance sheet"? Well, I have deliberately put the expression in inverted commas (just like the way Dr. Evil did with his fingers in Austin Powers) because I don't mean it in the way that accounting standards mean it.

The "off-balance sheet" that I allude to is that PPP arrangements has less transparency than a basic, garden variety budgetary allocation that is open to Parliamentary and public scrutiny.

Take the case of the 100-storey Warisan Merdeka Tower. I was puzzled that the matter was even included in a Budget speech. Essentially, the RM5 billion outlay will be borne by Permodalan Nasional Berhad (PNB), not the Government. I imagine that the only involvement of the Government would be at the Economic Planning Unit level - to approve the project for its perceived salutary economic "high-impact".

In a sense, the Warisan Merdeka Tower project is more akin to the proposed Sungei Besi Airport project the land ownership of which is in the process of being transferred from the Government to 1MDB. That is "off-balance sheet". Not open to direct Parliamentary and public scrutiny.

In this sense also, there is a precedent in the KLCC Project. It was also "off-balance sheet". It was not open to Parliamentary and public scrutiny.

But, this is where the similarity starts and ends.

The KLCC Project was destined never to fail. It could never have failed because it had the financial clout of Petronas behind it. That the KLCC District has become the success that it has is due, in my humble opinion, to the benefit of a central location in the heart of Kuala Lumpur. It also had the benefit of Petronas, which is a Fortune International 500 company, occupying one whole tower block effortlessly. By the way, Petronas was also instrumental in keeping Dayabumi alive in terns of occupancy during Dayabumi's first decade of existence.

In contrast, new-fangled PPP projects such as Warisan Merdeka Tower will rely on PNB's finite resources. What is PNB? Unlike Petronas, which is a commercial going concern in the substantial oil and gas industry that generates significant revenue streams, PNB is at best a fund management entity and a passive asset owner.

How will PNB be able to acquire the skill sets and the commercial gravitas to fill up the floor spaces in the 100-storey Warisan Merdeka Tower? RM5 billion is a substantial outlay. And, lest we forget, PNB is the trustee of Malaysia's institutional wealth - especially for Bumiputras. Failure is not an option.

As for the Sungei Besi Airport project, I have touched on it previously. But, the analysis is substantially similar with one worse addendum - 1MDB is based on an RM5 billion bond issue. 1MDB is in the process of raising yet another RM5 billion bond issue.

A bond is a debenture instrument. It is a hypothecation. A debenture is a debt. A debt must be repaid.

Therefore, it is obvious even to the untrained mind that 1MDB's financial feasibility relies in large measure in its hoped-for ability to parlay the Sungei Besi Airport land into a valuable piece of real estate. This is something real estate developers do. Any member of REHDA could have done the job. Why is there a need for 1MDB? I'm just asking....

Finally, I just want to make an observation that, in recent decades, we have placed great store on Corporate Governance.

The International Financial Reporting Standards (IFRS) on mark-to-market valuations, property development sales revenue accounting treatment and, recently, leasing arrangements demonstrate a great concern for off-balance sheet transactions.

The IFRS Exposure Drafts on these and many other business practises are intended to ensure transparency so that investors and stakeholders that have dealings with corporations have a clear idea of the financial health of corporations as going concerns.

In this context, PPPs may not be a march forwards. History may see it as a troglodytic concept.

So, I leave you with this question: Should governments have a different accounting standard from corporations?


semuanya OK kot said...

Britain has a big deficit and implements massive austerity measures. Malaysia has an equally big deficit and goes on its wildest spending spree. If this does not prove our superiority, what does? If only Britain would ask for our advice!

walla said...

Both post and comment are brilliant.

The rakyat need to address what is going to happen if those mega-projects bleed.

Will Putrajaya have to bail them out with money it doesn't have which means it has to issue bonds at a time when sovereign reputation may be patchy and recourse to rakyat savings will be unlikely because they have parked them in private pension funds?

Btw, notice how most of the bank notes in circulation are crispy new these days?

The printing presses have been working overtime?