• Investment Initiatives Announced in the Budget should be treated with caution

    Media Statement by Dr. Ong Kian Ming, MP for Serdang, on the 25th of October, 2015

    Investment Initiatives Announced in the Budget should be treated with caution

    In Prime Minister Najib’s budget speech on Friday, he announced a large number of investment initiatives under the “First Priority: Strengthening Economic Resilience” section. These investments total up to Rm137 billion. Those who are hearing these initiatives for the first time may be impressed by the investment which the government is putting into infrastructure and development expenditure. But in actual fact, only 3.1% or RM4.2 billion of what was announced actually appears in the 2016 budget. The rest of the RM132.9 billion or 96.9% are actually off budget items which are financed by Special Purpose Vehicles (SPVs), GLCs, Public Private Partnerships (PPPs) and the private sector.

    Table 1 below lists all the investment related expenditures under Najib’s “First Priority” section of the budget.

    Investment spending under SPVs accounts for RM82.5 billion or 60.2%. This would include the MRT Lines 1 and 2, the LRT Extension and LRT3 as well as the BRT projects along the Federal Highway and in Kota Kinabalu. The GLC investment spending accounts for RM44.5 billion or 32.4%. This would include Khazanah’s RM6.7 billion in investments in 9 impact areas and Petronas’ investment in the RAPID complex in Pengerang, Johor, valued at RM18 billion in the budget speech. The RM5 billion Malaysia Vision Valley project, as far as I know, will be a largely private sector driven project.[1] And the Jalan Tun Razak Traffic Dispersal Project of RM900 million was announced as a Public Private Partnership (PPP) project. Of the remaining RM4.2 billion in government projects, not much of it are actually brand new initiatives. For example, the allocation for the rural electrification projects and the rural water supply projects worth Rm1.5 billion have been in existence as part of the Rural Basic Infrastructure National Key Results Area (NKRA) under the Government Transformation Program’s (GTP).

    Why should the fact that almost 97% of the announced investment initiatives are off-budget items be of concern?

    Firstly, some of these projects may never take off or attract the amount of investment announced by PM Najib. For example, the RM11 billion Cyberjaya City Center project comes under Cyberview Sdn Bhd which is a government owned company.[2] According to the 2013 Attorney General report (3rd series), Cyberview also has unpaid arrears to the government totalling RM571 million at the end of 2013. If it is not able to service the interest payments due to the government, it is hard to see how it can finance even some of the RM11 billion required for this project to take off. One can point to the Nexus Karambunai integrated eco-resort initiative that was announced by Najib in the 2011 that was supposed to cost RM3 billion but still has not taken off four years later in 2015. The same healthy scepticism can apply to projects such as the RM7 billion KL Aeropolis which comes under Malaysian Airports as well as the RM5 billion Malaysia Vision Valley project.

    Secondly, some of the investment initiatives may not have direct benefits for the rakyat. For example, Khazanah, through its listed entity IHH Healthcare Berhad, will invest approximately RM670 million between 2015 and 2017 in building new hospitals and expanding existing hospitals in Media Iskandar, KL, Klang, Melaka and Kota Kinabalu.[3] But since all of these hospitals are private fee paying institutions, the only beneficiaries will be those who can afford private health care and IHH’s own bottom line. Whether this will translate into more dividends paid by Khazanah to the government still remains to be seen.

    Thirdly, any Public Private Partnership (PPP) project which is announced by the federal government should be greeted with great caution. PPPs in Malaysia have a record of being totally not transparent and lopsided in favour of the private sector. The toll concessionaires and the first generation Independent Power Producer (IPP) contracts are notable examples. So when PM Najib announces a traffic dispersal project for Jalan Tun Razak, which is very necessary given the serious congestion which occurs during peak hours along this main thoroughfare in KL, and that it will be funded via a PPP, one should immediately ask which concessionaire would get this project and how much toll motorists would have to pay.

    In addition, because these PPPs are negotiated by EPU without any of their details made public, it is very likely that they would end up costing the government (and sometimes the end user) more in the long run than if the government paid for these projects by issuing bonds. For example, a private sector contractor, Zecon Bhd, was given the contract to build and lease the new Children’s Hospital next to UKM for 30 years. The government would have to pay a yearly rental to the operator for the hospital and since the private sector is asking for internal rate of returns (IRRs) in excess of 10%, the government may very well end up paying more in the 30 years than if it were to have built the hospital itself.[4] (Of course, since the terms of the PPP are not publicly disclosed, we don’t know if this is indeed the case).

    Fourthly, future generations will ultimately have to pay for the cost of these mega infrastructure projects. The LRT and MRT projects are being funded by bonds which are issued by Special Purpose Vehicles (SPVs) such as DanaInfra which are 100% Ministry of Finance owned companies. It is almost certain that the LRT and MRT operators will not be able to generate enough cashflow to services these multi-billion ringgit loans. When this happens, the government has to step in to pay for the interest on these loans. Our future generations have to pay for this debt although this is something which is not acknowledged by the government.

    Fifthly and lastly, the government has not announced any new measures to ensure that its own development expenditure will be spent optimally with minimum leakages. For example, the Malaysian Communications and Multimedia Commission (MCMC) collects more than Rm1 billion every year from the telco companies to improve internet and mobile telephony services to underserved communities. This is the fund from which the Rm1.2 billion to increase rural broadband penetration will be tapped. But this is also the fund which was used to purchase more than 1 million netbooks for teachers and students since 2010. The usage and distribution of these netbooks have been full of shortcomings and criticized by many parties.[5] There is little assurance that this RM1.2 billion set aside to achieve its intended target of increasing rural broadband penetration if the government proceeds with business as usual practices.

    In short, before you celebrate the more than Rm100 billion investment initiatives announced by PM Najib, think of whether these investments will be realized, how much leakages will there be and who will have to pay for them eventually.

    Dr. Ong Kian Ming
    Member of Parliament for Serdang

    [1] http://www.ptlm.com.my/index.php/component/k2/11-insider/malaysian-vision-valley-mvv-400ha-central-park-green-lung-planned-to-be-like-the-ones-in-london-new-

    [2] http://cyberview.com.my/property/property-development-property/upcoming/cyberjaya-city-centre-project/

    [3] http://www.thestar.com.my/Business/Business-News/2015/09/14/Khazanah-to-invest-in-projects-to-boost-economy/?style=biz

    [4] http://www.thesundaily.my/news/1268430

    [5] http://www.themalaysianinsider.com/malaysia/article/mcmc-denies-handing-out-busted-netbooks-blames-students-for-faults

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