The Pivotal Role of the Private Sector
Much was made in the ETP presentation about reinvigorating private investment, with 92% of the total projected investment of US$444 being investment by the private sector. These expressions are repeated in the Budget Speech. However no details have been provided as to how this target is to be achieved.
The speech tantalizingly offers the suggestion that the Government will intensify the Public-Private Partnership to “… enhance private sector involvement in economic activities” To this end the Government proposes to invest RM 1 billion from the Facilitation Fund in support of several infrastructure projects.
On the one hand the formulation is built upon the notion that the private sector will be unleashed; and yet the ETP is in reality a top down creation. PEMANDU is seemingly picking “winners” and it would imply that Malaysia is about to embark upon a new form of central planning to get to highly untenable targets.
The approach contradicts the very notion that the private sector will be freed to make investment decisions without interference from the Government. A grave omission in the ETP is the singular lack of an articulation of changes in the policy regime to arrest corruption, increase competitiveness and transparency in procurements, introduce meaningful safety net programs, rationalize labor market policies including the adoption of a minimum wage policy and the abolition of anti-competitive measures e.g. APs.
The PPP modality appears to be a thinly-disguised mechanism to overcome certain obstacles. The mechanism will enable GLCs and crony corporations to gain approval of mega projects. These entities will then receive government guarantees (as in the case of the PKFZ project) to borrow from the government controlled commercial banks and other financial institutions such as the EPF and Khazanah Nasional . It is patently clear that even the largest private sector firms are not in a position to go ahead with the projected mega projects on their own.
The private sector investment program has been woefully inadequate. Private investment grew only 2 per cent on average between 2006 and 2010 but is projected to be 10.8 per cent of GDP this year and 11.3 per cent of GDP next year The so-called private sector driven investment remains a mirage; it is the GLCs and crony corporations that will be the main players acting on behalf of the Government. This is akin to a ponzi scheme and the end result will be the Government assuming large off budget contingent liabilities. These hidden liabilities will permit the Government to claim that the budget deficit is under control.
It is becoming increasingly apparent that there is no intent to adopt a true New Economic Model. The path being taken, to put it simply, is one that represents a return to the era of mega infrastructure and “feel good” projects undertaken by the Government in an indirect manner via GLCs and crony corporations.
Much has been made of several mega projects. The MRT project, projected to cost RM 40 billion, will if the past is any guide, cost considerably more with massive cost overruns. This will indeed be the case in respect of all of the other construction and infrastructure projects.
Again based on history, the operators of the system will receive firm government guarantees or be subsidized from public funds. Much the same can be said about the Hi-Speed Rail link to Singapore. It is highly questionable that there is an established economic viability for the project. The Sungei Buloh project represents yet another construction project that will utilize public funds and contribute to further congestion in the Klang Valley.
The Warisan Merdeka development scheme has been much derided by the public. It represents a gross misuse of much needed capital. This together with other commercial development of real estate in the Klang Valley will inevitably create a huge glut in real estate space. Asset bubbles of these kinds inevitably lead to crisises.
Revitalization of the financial sector will demand more than what the Prime Minister outlined. It is time for privatization of banks. The sector is dominated by government owned banks thus permitting directed lending to GLCs and friends of the BN. Small and medium sized enterprises are disadvantaged. If the private sector is to prosper, finance for these SMEs is critical and yet the Budget makes little or no provision.
True divesting by GLCs is unlikely as the existing GLC holdings are shuffled around. A case in point is the deal associated with PLUS wherein EPF and Khazanah acquire the former.
The Prime Minister’s announcement that GLICs will increase investment in overseas markets is at odds with national objectives. The intent to increase the EPF’s overseas investments from 7% to 20% is a strong endorsement and official support for capital flight. It is illogical to send capital abroad at a time when resources are needed to upgrade the capacity of the domestic economy and improve its competitiveness.
The intent to enhance and upgrade the Electronics industry is laudable and long overdue. However, the approach taken is merely throwing money at the activity. This approach is unlikely to yield the desired outcome. What the industry needs is a strong injection of skilled workers.
As the domestic educational system is incapable of churning out a sufficient number of workers, and Malaysians acquiring such skills overseas are unwilling to return, the only option is to liberalize the hiring of high skilled foreign workers at internationally competitive wage rates.
It is time we emulate and learn from the practice of Silicon Valley firms who attracted skilled professionals from East and South Asia. It does appear that the Government has an overall and integrated policy. The much hyped Cyberjaya project continues to languish after more than a decade in part because of shortages of skills.
The Prime Minister announced a slew of tax concessions and incentives to advance the adoption of Green Technology. The practice of including tax and other incentives in the Budget has become an annual ritual.
If the past is any guide, there is hardly any assurance that investors are attracted into investing on the basis of such inducements. The overall investment climate, government policies, the creation of a competitive environment free of corruption constitute important factors that enter into investment decisions.
The failure to act upon these aspects is a negative factor that plays a major role in investment decisions. Furthermore, the fiscal cost of these incentives and tax breaks weighs heavily on fiscal stability. It is time that the Government reviews the entire strategy of giving generous incentives which do not have the requisite outcomes.
For invigorating the agricultural sector, vast sums are to be allocated. Here again, it is pertinent to ask why the public sector needs to intervene. This is inconsistent with the notion of letting the private sector taking a lead.
The multiplicity of expenditure proposals announced by the Prime Minister in sector after sector is indicative of the overwhelming role Government proposes to play. For instance the proposal to construct hotels and resorts in remote areas is clearly something the Government does not need to undertake. Such projects are best left to the private sector. An approach that leads to government interventions of this kind will stifle private sector initiatives and lead to the creation of a command economy overseen and managed by bureaucrats. These actions are clearly in contradiction to the highly trumpeted goals encompassed by the NEM that envisage the private sector leading the growth effort.
The intent to provide funding for replanting oil palm plantations and to support oleo derivatives is a highly questionable use of public financial resources. These allocations are tantamount to the provision of subsidies to producers or the granting of corporate welfare payments. By acting in this manner, the Government is placing Malaysia in danger of attracting WTO sanctions.
Among the other proposals that the Prime Minister unveiled, mention must be made of the intent to amend the Bankruptcy Act of 1967 by introducing “ … provision relating to relief mechanism for companies and individuals with financial problems.” This would appear to be an opening of the door for future bail outs for cronies of the BN.
Among the few tax measures announced in the Budget was the raising of the service tax from 5% to 6% and its application to television broadcasts. This sly tax effort is nothing but a meek effort to introduce the much debated GST by stealth. The Government appears to want its cake and eating it at the same time.
The announcement that toll charges on the PLUS operated highways shall be frozen appears generous to consumers on the face of it. In reality PLUS will continue to be compensated by the Government at the tax payers’ expense. The appropriate step that the Government needs to take is to renegotiate all existing toll concession agreements with the respective operators.