Shocking growth in deficit of Non-Financial Public Enterprises (NFPEs) is a ticking fiscal time bomb for Malaysia

Media Statement by Dr. Ong Kian Ming, MP for Serdang, on the 25th of October, 2013 in Kuala Lumpur

The Barisan Nasional government will surely play up the fact that it is a prudent government that is managing its finances well resulting as demonstrated by the reduction in the projected budget deficit to RM37billion or 3.5% of GDP in 2014. But this ignores an extremely worrying problem of a huge increase in the deficit position of the companies which are owned or controlled by the government and statutory bodies – or Non-Financial Public Enterprises (NFPEs). For 2013, the projected deficit is RM93 billion or a massive 9.4% of the GDP. This represents a six-fold increase from the R15.6 billion deficit recorded in 2012.

The NFPEs refer to thirty “government-owned and / or government controlled companies and agencies owned by the government” whereby “ownership and control refer to Government or a public sector agency controlling more than 50 percent of total equity”. They would include companies such as Petronas, Tenaga, Telekom, Axiata, Malaysia Airlines, UEM Group as well as more recent additions such as 1MDB, Prasarana and MRT Co. The financial position of these companies affect the fiscal position of the government directly and indirectly. These companies contributes directly to government coffers by paying corporate taxes (and the Petroleum tax for Petronas) as well as dividends. They (or via special purpose vehicles related to them) also issue bonds which carry an explicit as well as an implicit government guarantee i.e. the government has to pay for these bonds if these companies run into financial trouble (think PKFZ).

Table 1: Financial Position of the Non-Financial Public Enterprises (NFPEs)

RM Million 2009 2010 2011 2012 2013
Revenue 323,393 368,233 351,196 420,109 404,488
Current Expenditure 275,232 302,676 298,461 351,623 371,205
Current Surplus 48,161 65,557 52,735 68,486 33,282
Development Expenditure 55,706 49,348 49,472 84,042 126,234
Overall Balance -7,545 16,209 3,263 -15,556 -92,952
% of GDP -1.1 2.3 0.4 -1.7 -9.4

Source: Economic Report 2013/2014, Economic Report 2012/2013, Economic Report 2011/2012

What is shocking about the figures in Table 1 is that the deficit position of the NFPEs, which had been in surplus for 2010 and 2011, is projected to reach RM93 billion in 2013! This huge growth in the deficit has been driven by a massive spending spree in development expenditure which increased by 70% from RM49.5 billion in 2011 to RM84.0 billion in 2012 and is projected to increase by another 50% to RM126.2 billion in 2013. The NFPEs, in 2013, spent three times as much on development expenditure compared to the federal government.

It will be many years before some of this development expenditure that is being spent can start generating revenue e.g. the MRT project. Some projects may never generate enough revenue to cover operating costs – Prasarana which runs the LRT as well as the RAPID bus systems in KL, Penang and Kuantan is still making losses. Some projects may very well turn out to be very expensive white elephants e.g. 1MDB’s Tun Razak Exchange.

The massive increase in the deficit position of these NFPEs also means that the government’s exposure to these development expenditures have increased. If some of these projects do no bear fruit, the corporate taxes and dividends paid to the government by these NFPEs will decreased. In some cases, the government may be forced to step in to bail out these companies.

What is even more worrying is that the statistics and information pertaining to the development expenditure and financial standing of some of these NFPEs are not publicly available. In a paper presented at the MyStats 2012 forum, the Chief Economist of Maybank Investment Bank, Suhaimi Illias highlighted the ‘black box’ nature of development expenditure in NFPEs and GLCs:

“Despite the significance of NFPEs and GLCs/GLICs in the Malaysian economy, end-users in the private sector has somewhat limited access to their capital expenditure data, other than the information available from major entities like PETRONAS and the large public-listed NFPEs/GLCs (e.g. Telekom Malaysia, Tenaga, Malaysia Airlines) that are used as proxies to impute public sector investment, in addition to the Federal Government’s development spending.

Even then, this NFPEs’ development spending number reflects only the biggest 30 NFPEs with minimum annual sales of MYR100m.”[1]

The government cannot continue to ignore the potential impact of the deficit position of the NFPEs. What is needed now is for the disclosure of the full accounts of all the NFPEs which are not publicly listed including Petronas, 1MDB, Prasarana and MRT Co so that there is full transparency on the development expenditure of these companies. What is needed now is for a full evaluation on the government’s ability to absorb potential losses arising from their exposure to these NFPEs, perhaps in the form of a Stress Test that has been conducted by organizations such as the IMF for the banking system in the country.[2] Without concrete actions taken, the continued growth of the deficit position of the NFPEs is a ticking time bomb that may explode unexpectedly with disastrous consequences for the government’s fiscal position and the country’s economy.

%d bloggers like this: