NEM hot potatoes to test Najib’s resolve

By Lee Wei Lian
The Malaysian Insider
December 04, 2010

KUALA LUMPUR, Dec 4 — The final filtered New Economic Model (NEM) report released yesterday spoke out strongly against many issues plaguing the economy including rent-seeking, and abuse of affirmative action but will be meaningful only if acted upon.

The distinct lack of excitement that greeted the report however reflected general public fatigue due to previous government attempts at reform which eventually fizzles out.

While the National Economic Advisory Council (NEAC) running the NEM is supposedly independent, the need for Cabinet approval prior to public disclosure of its recommendations casts doubts on it independence.

The Malaysian Insider understands that the Cabinet had crossed out the more controversial parts of the report including those touching on political funding and timelines for affirmative action.

Nevertheless what has survived in the final report could still turn out to be meaningful if acted upon and given full backing by the Najib administration.

Among the more interesting recommendations are right-sizing of the public sector to lower wage expenditure, ensuring government contracts reserved for bumiputeras are awarded to small and medium size enterprises only and a re-engineering of GLCs so they support and not compete with the private sector.

The government has in the past resisted calls to reduce the size of the public sector which is seen as among the largest in the world on a per capita basis and the civil service is also often perceived as a vote bank for the ruling Barisan Nasional (BN) coalition.

Previous administrations had also awarded government contracts to large Malay companies in the hope of building up Malay “champions” and no longer affording preferential access to large Malay companies could signal a shift that the government is serious about fostering performance and merit.

The report also said that government reservations for bumiputeras will be reduced gradually as expenditure decreases due to the need for tighter fiscal control.

“The eligibility criteria, processes, procedures and monitoring mechanisms should be strictly transparent, market friendly and based on needs and merit,” said the report.

The NEM also said that programmes to assist the bottom 40 per cent of households shall be “ethnically blind” and without any market distorting elements such as quotas or preferences or entitlements to access to financial resources, jobs, contracts and licences.

The NEM also recommended that the government end preferential access to contracts for GLCs which means they will no longer be able to rely on public largess and also means increased opportunities for the private sector.
“The Government should refrain from providing automatic guarantees for GLC liabilities,” said the report.

“Barriers, both formal and informal, in government procurement processes which accord GLCs preferential access should be removed. To ensure operational independence, political and ministerial interference in the day-to-day management of GLCs should be met with stiff sanctions.”
The NEM also recommended that GLCs that own infrastructure adopt the service competition model which effectively means that companies like

Telekom Malaysia will be split into two — one that owns and rents out the physical cable network and another that provides services and competes with other service providers, a move that was previously considered unpalatable by previous administrations although proponents of such a move said that it would boost quality of service.

Then there is the recommendation for tax and revenue reforms including the implementation of the Goods and Services Tax (GST) which was delayed again this year ostensibly due to concerns over public understanding of the issue but widely perceived to be due to a need to preserve popularity ahead of general elections.

The NEAC also recommended setting aside all petroleum related revenues as designated revenue into a special account/fund.

It said that the draw down from this account will be at a strictly rule-based, sustainable rate and starting from the 11th Malaysia Plan, the funds from this account should not be used to finance current expenditure.

“This mechanism will impose fiscal discipline,” said NEAC.

Currently more than 40 per cent of the government revenue comes from petroleum derived revenues, mostly dividends and taxes paid by national oil company Petronas which has said that the high dividend payout ratio of 74 per cent of profits is hurting its ability to reinvest for the future.

It is unclear how far the recommendations will be carried out but the outcome will decide whether the Malaysian public becomes even more jaded and cynical due to failure in implementation or whether the prime minister emerges triumphant due to the success of his brainchild.

On his part, Datuk Seri Najib Razak appeared to lend his full backing to the NEM saying in his remarks at the NEM report launch yesterday that “implementation (of the NEM) will follow and must be executed effectively if this nation is to progress.”