• ETP Part 3 (ii) — The hothouse labs probably killed innovation

    The ETP resulted from 12 “labs”. Each lab comprised 30-50 experts who had eight weeks to research best practices and innovations, distil them in intense brainstorming sessions and support them with detailed analysis. The result was 131 Entry-Point Projects (EPPs) across 12 National Key Economic Areas (NKEAs) that would maximise gross national income with minimal public-funding support. Such is the PEMANDU narration.

    Truly transformative ideas may have had no chance. Much was made of the private sector participation. But large companies would naturally dominate. Start-up companies, even if invited, cannot afford to release staff for eight weeks. Consider this example: 10 years ago, Microsoft, IBM and HP would have dominated any lab to transform the IT industry. Google was a cash-strapped start-up, Apple was in disarray and Facebook did not even exist. The incumbents would have been free to promote pet projects and stifle their competition.

    Hothouse environment favoured incumbents with existing business plans.The tight time frame incentivised lab participants to select EPPs for which research was ready, rather than pursue alternatives. In addition, private sector participants would be expected to lobby heavily for their pet projects. Their duty is to maximise profits, not embark on public service ventures. Unless properly steered, the labs would be inclined to select heavily-promoted projects rather than the most transformative.

    We see at least two “dud” multi-billion ringgit projects. Their viability is questionable, their developers financially weak and taxpayer funding is required. Their selection as EPPs suggests serious weaknesses at the labs.

    Much is made of the private sector participation in the labs that selected the Entry-Point Projects (EPPs).

    ● But the “hothouse” environment was inhospitable to genuinely transformative ideas.

    ● The intense pressure would have incentivised lab participants to select projects for which groundwork was already laid, rather than explore alternatives.

    ● Also, the private sector experts would be oriented towards profit rather than national transformation. Note the glaring absence of autos as a National Key Economic Area (NKEA).

    Fundamental defects in the lab process

    PEMANDU  makes much of the 12 NKEA “labs” that brought together 500 experts from the private and pubic sectors to define and detail the ETP. These labs, in eight short weeks, detailed and defined the 131 EPPs (Entry-Point Projects) across the 12 NKEAs (National Key Economic areas) that make up the ETP.

    In Part (ii) of our focus on Execution — the “E” in the DEEDS framework with which we are evaluating the ETP — we highlight two core defects of the lab process:

    ● Unless properly guided by an independent, experienced and knowledgeable chairman, each lab would end up promoting the interests of the most vocal of the private sector participants, which might not necessarily be the most transformative projects.

    Private sector participants in the lab would be expected to lobby intensively for their pet projects. In fact, they would be guilty of mismanagement if they did not. Private sector managers are expected to maximise profits for their shareholders, not embark on social service ventures;

    ● The projects ultimately selected as EPPs and promoted by PEMANDU may kill genuinely transformative ideas being pursued by small companies outside.

    The labs would favour the status quo and existing large companies rather than start-ups. Cash-strapped start-ups cannot afford to release staff for two months to attend labs. Large companies can send widely experienced lobbyists.

    Consider this: three of the biggest new developments in IT are Google, Facebook and Apple’s renewed success. Yet, they would have been poorly represented in any lab set up 10 years ago to transform the IT industry. That lab would have been dominated by experts from the likes of IBM, Microsoft and HP (Hewlett-Packard) doing their best to cement their respective companies leadership. They certainly would not be nurturing potential competitors or transformative ideas.

    Hothouse environment would have stifled innovation

    The problem is exacerbated by the tight time frame in which the labs operated. Each lab had just eight weeks to deliver transformative projects. In this short period, 30 to 50 experts in each lab had to:

    ● Fact-find and research best practices, success stories and innovations;

    ● Distil these through “intense collaborative sessions of brainstorming”; and

    ● Syndicate them in more than 640 meetings with major stakeholders such as ministers and key government agencies.

    In this type of hothouse environment, it is the loudest and most persuasive voice that tends to be heard, which is not necessarily the most rational one.

    Also, good ideas which require more intensive research and analysis are likely to be jettisoned in favour of projects for which groundwork is already in place. For example, let us consider the lab for the Tourism NKEA which yielded the Karamabunai Integrated Resort (Karambunai IR) as one of its EPPs.

    ● Participants from Karambunai Corp Bhd would have a clear interest in promoting the idea of an integrated resort, since they already had plans drawn up prior to the ETP lab;

    ● The time constraints and pressure to deliver would incentivise the PEMANDU staff and consultants to turn Karambunai’s plans into an EPP. Indeed, this is what seems to have happened. Karambunai Corp Bhd, in an announcement to Bursa Malaysia, said PEMANDU chose to use “drawings from Karambunai which has copyrights source and status”;

    ● It would also not be surprising if PEMANDU took the project at face value without scrutinising the investment, incremental gross national income (GNI) and jobs created numbers, given the intense time-pressure.

    Why isn’t the auto sector one of the 12 NKEAs?

    Our concern about private sector interests trumping genuinely transformative ideas is not academic. There is a glaring omission from the 12 NKEAs (National Key Economic Areas) prioritised by the government under the ETP.

    The 12 NKEAs are Agriculture; Business Services; Education, Electronics and Electrical; Financial Services; Healthcare; Greater KL/Klang Valley; Oil, Gas and Energy; Palm Oil; Communications, Content and Infrastructure; Tourism; and Wholesale and Retail.

    Where is the automotive sector?

    Malaysian taxpayers and Petronas have supported Proton, our national car company, for 25 years. Proton cars are actually 53 per cent cheaper in Saudi Arabia than they are at home here in Malaysia.

    “We have to protect our national car industry” is the justification given for the heavy tariffs and other obstacles placed on foreign cars in Malaysia. That being the case, why is the auto sector not classified as an NKEA?

    On the other hand, if the government no longer deems the automotive sector as a priority sector, then tariffs and other forms of protection should be completely removed. The sector should be liberalised and open competition allowed, which will lead to cheaper cars for all Malaysians.

    The exclusion of the auto industry puzzles industry experts such as Yamin Wong of the New Straits Times:

    “It (Proton) is the only independent car company in Southeast Asia that has the full competency to build a car and with the management capability to absorb foreign car technology … It is a strategic asset that should be allowed to work for the country, i.e. be another regional car hub.”

    Malaysia is the largest passenger car market in ASEAN. But the foreign automakers are investing heavily in Thailand instead, where the rules are clearer and environment more liberal.

    Yamin points out that Proton has a state-of-the-art car manufacturing plant running significantly below capacity in Tanjung Malim. Foreign brands seeking preferential tariffs and entry into the ASEAN auto market should be encouraged to utilise the excess capacity. This would also create a whole network of supporting industries and thousands of jobs.

    Why did this not happen? Why was the massive auto sector left out of the ETP? Yamin’s sources suggest private sector interests trumped national considerations. As REFSA points out, the primary loyalty of the private sector experts is to themselves and their bosses.

    REFSA is not censuring these private sector participants. They acted perfectly rationally — they have their families and businesses to look after. Rather, it is the ETP process that was fatally flawed. The leaders of the ETP fell for these ideas that promoted the status quo instead of guiding the process towards really transformative and value-adding economic activities.

    Potential “dud” projects

    There is an even more serious problem than the acceptance of EPPs that preserve the status quo. At least these projects are viable and will generate some investment and create some jobs. Even worse are potential “dud” projects — projects with little chance for success if they are pursued as presently planned.

    We see at least two projects of questionable viability, with financially weak private sector partners and which require taxpayer support. And no, the widely disparaged 1 Malaysia email ETP for which financially-distressed Tricubes Berhad is the private sector partner is not one of them.

    Tricubes is small potatoes relative to these two projects. These two projects run into billions of ringgit and are seeking hundreds of millions of ringgit of taxpayer funding. Their selection as EPPs suggests serious weaknesses at the labs and with the due diligence process at PEMANDU.

    About this series

    Critics of PEMANDU and the ETP thus far have tended to focus on the expensive costs incurred by PEMANDU and its consultants, accusations of style prevailing over substance, the execution of specific projects (such as the MRT and 1 Malaysia email) and its apparently lofty, unrealistic targets.

    We think these issues can be further debated, but these questions ultimately boil down to PEMANDU’s raison d’être.  PEMANDU is already a fait accompli. Debating its existence serves no useful purpose at this point.

    Instead, we evaluate PEMANDU and the ETP on its own terms by looking at the goals, plans and targets outlined in the ETP Roadmap document. Doing so facilitates constructive debate as it uses the same framework which PEMANDU has chosen to work within.

    In that vein, and in keeping with the spirit of the alphabet soup of NKEAs, NKRAs, SRIs, EPPs, GNI surrounding the entire GTP, we evaluate PEMANDU and the ETP on its DEEDS:

    1. Data transparency — the ease with which an independent analyst can evaluate the figures relevant to the ETP and its targets;

    2. Execution — the progress, or lack thereof, of announced EPPs (Entry-Point Projects);

    3. Enterprise — whether the target of stimulating private investment is being achieved. The ETP aims for a 92:8 split between private and public investments;

    4. Distribution — the distribution of EPPs across the NKEAs (National Key Economic Areas), which shows whether a healthy balance of projects is being maintained; and

    5. Socio-economic impact — an evaluation of the main beneficiaries of the economic activities generated by the EPPs. —  REFSA (Research for Social Advancement)

    * Dr Ong Kian Ming and Teh Chi-Chang wrote this analysis for REFSA.

    This article was published by The Malaysian Insider.

    Read Dr. Ong’s critiques of the ETP in full here.

  • ETP: Part 3 (i) — PEMANDU strengthens the ‘know-who’ cancer

    ETP: Part 3 (i) — PEMANDU strengthens the ‘know-who’ cancer
    Dr. Ong Kian Ming & Teh Chi-Chang

    Very swift progress, but is it due to PEMANDU? In its eight ETP updates so far, PEMANDU has announced multiple new EPPs (Entry-Point Projects) worth billions of ringgit of investment and creating thousands of jobs. One EPP — Johor Premium Outlets (JP Outlets) — is already open. But how much of this rapid execution is due to PEMANDU instead of normal private sector efficiency?

    Opportunistic naming of existing projects as EPPs. For example, the JP Outlets and St Regis Hotel projects pre-dated the ETP. Their completion dates were unchanged by their subsequent EPP status, suggesting minimal input by PEMANDU. Naming them as EPPs gives the illusion of quick wins and overstates PEMANDU’s success.

    PEMANDU might have indeed helped. PEMANDU might respond that these projects would have been delayed without its help in cutting red tape. Note that the developers Genting-Simon Property and Chua Ma Yu-MRCB are global multinationals, a prominent local businessman and a GLC.

    Such help strengthens the “know-who” cancer. If such big guns are unable to navigate the bureaucratic maze on their own, what about ordinary Malaysians? In its role as red tape-cutter, PEMANDU stifles entrepreneurship by setting itself up in the position of choosing winners. It does not matter how good your idea is, it depends on who you know to get it through the system.

    The “hothouse” labs probably killed innovation. Naming already existing projects as EPPs suggests the ETP is more “business-as-usual” rather than the ambitious departure from the norm it claims to be. We do indeed see serious flaws in the lab process.

    Some Entry-Point Projects (EPPs) were already in progress before the ETP was created.

    ● Naming them as EPPs overstates PEMANDU’s success. It also suggests “business-as-usual” rather than real transformation.

    ● PEMANDU might be perpetuating the “know-who” cancer, killing Malaysian innovation, creativity and productivity.

    ● The “hothouse” culture in the much vaunted ETP labs was more conducive to status quo than real change.

    It’s too good to be true …

    By November 2011, less than 14 months after the launch of the ETP (Economic Transformation Programme), PEMANDU had announced a total 113 projects worth RM177 billion and with the potential to create nearly 390,000 jobs:

    ● The RM177 billion of investments is well above the RM140 billion per year average required to hit RM1.4 trillion by 2020;

    ● 97 of the 113 EPPs (Entry-Point Projects) are in progress. One EPP is already open for business — a Premium Outlet Centre in Kulaijaya, Johor under the Tourism NKEA.

    PEMANDU appears well on track. Each of the eight ETP updates so far heralded multiple new EPPs (Entry-Point Projects) generating thousands of jobs and billions of ringgit of investment. The tone is exhilarating, extolling the considerable progress and huge investments. There is nary a murmur of hitches.

    That already raises questions. All of us have experienced having to refine, amend and, sometimes, abort plans. Rain ruins satay dinner at our favourite stall; floods in Thailand wreak havoc on the operations of the famously meticulous Japanese car-makers. The highly-paid team at PEMANDU and its expensive consultants might be better able to avoid the hitches that mere mortals like us run into, but still, a plan that is as ambitious and transformative as the ETP is bound to run into hurdles and roadblocks. It stretches credulity — that all has been hunky-dory with the ETP ever since its launch in October 2010.

    REFSA finds that, indeed, not all is well behind the glitzy façade. We now focus on Execution — the “E” in DEEDS, the framework with which we are evaluating PEMANDU and the ETP. This will cover three parts:

    ● Part 3 (i) here focuses on the value-added contribution of PEMANDU especially on its role in cutting red tape;

    ● Part 3 (ii) will examine the selection of EPPs — particularly how the NKEA lab process can be “hijacked” by vested interests;

    ● Part 3 (iii) will use the two massive but economically tenuous EPPs as examples to illustrate the shortcomings in the execution process.

    Taking credit when none is due?

    Our first execution issue is with the actual contribution of PEMANDU towards some of the EPPs announced.

    Some early wins are due to projects that got off the ground before PEMANDU and the ETP were created. For example, take the Johor Premium Outlets that are now open. This is a 50:50 joint venture between Genting Plantations Berhad and the Simon Property Group, a company listed on the New York Stock Exchange:

    ● Genting Plantations formally announced this project to Bursa Malaysia in September 2009;

    ● The much vaunted PEMANDU labs that selected the EPPs that would constitute the ETP were convened only in May 2010;

    ● The ground-breaking ceremony for the project took place on August 5, 2010. This was more than two months before the release of the ETP Report at the end of October 2010;

    ● The project was open in 2011, as per the target in Genting Plantations’ very first announcement to Bursa Malaysia. This was before the term EPP was even heard of. What then was PEMANDU’s contribution?

    It smacks of opportunism — that PEMANDU should name this project as an EPP under the Tourism NKEA when it was already well under way before the ETP. It is hard to see what PEMANDU contributed to “facilitate the implementation and delivery” of this EPP.

    PEMANDU might claim that its role in the Johor Premium Outlets went way beyond monitoring. It might claim it played an instrumental behind-the-scenes role, as it did with the St Regis Hotel EPP, another project that existed long before PEMANDU and the ETP.

    Project completion dates are unchanged despite PEMANDU’s “help”

    The St Regis project was announced in 2008, but according to Minister Datuk Seri Idris Jala, CEO of PEMANDU, EPP status resulted in the building approval process being expedited:

    There’s an entrepreneur who wanted to build a six-star hotel in Kuala Lumpur, a St Regis hotel. He went around the mulberry bush trying to secure approvals for two years. He got frustrated and could not get approval. On October 25 last year, it was announced as one of the new projects. Two weeks later, piling began for this project.

    REFSA, however, is puzzled. The St Regis Kuala Lumpur is still scheduled to be open in 2014, which is unchanged from when the project was announced. Just as in the Johor Premium Outlets, PEMANDU’s involvement does not seem to have sped up this project.

    As these two examples show, PEMANDU’s involvement has not speeded up completion dates. The fast pace of execution of the ETP that PEMANDU showcases may be due more to the normal efforts of the private sector participants than to PEMANDU’s help.

    PEMANDU already uses the term “Recap EPPs” for EPPs which had been separately announced prior to specific ETP Updates. It is even more important that pre-existing projects such as the Johor Premium Outlets and St Regis be separately listed and catalogued, and not called EPPs, so as to differentiate between projects where PEMANDU had substantial input, and pre-existing projects for which it might help somewhat in execution but cannot take full credit.

    By doing this, PEMANDU can avoid the criticism that it is misleading the public by attempting to take credit for pre-existing projects. It would also then be in a position to take full and rightful credit for the truly fresh EPPs that were nurtured in its labs and blossomed to completion under its leadership.

    Is PEMANDU reinforcing the “know-who” cancer?

    PEMANDU might respond that the projects are on track only because of its help. Without PEMANDU and the ETP, their completion dates would have been delayed. This may be true, but begs the question as to why the listed companies involved did not publicly announce the likely delays. The problems would have been apparent long before these projects were selected as EPPs.

    Taking PEMANDU at face value presents an even more frightening picture. Consider this:

    ● Genting Plantations is part of the huge Genting group, which generates billons of ringgit of profit from extensive operations all over the world. It has businesses from Singapore to New York and includes five listed companies in three jurisdictions;

    ● Its partner in Johor Premium Outlets, Simon Property Group, Inc, is the largest real estate company in the US with assets in North America, Europe and Asia;

    ● St Regis Kuala Lumpur is promoted by prominent local businessman Chua Ma Yu and Malaysian-listed conglomerate Malaysian Resources Corporation Berhad, which also happens to be a major government-linked corporation (GLC) with a track record of building many high rises in the KL Sentral development area where the St Regis Kuala Lumpur hotel is located.

    Have our government and bureaucracy become so business unfriendly that huge multinationals like Genting Group and Simon Property need to engage a “fixer” like PEMANDU to shepherd their projects through?

    Has our government become so cut off from its grassroots that even a GLC and a prominent local businessman are unable to navigate the maze of approvals required to get a project off the ground?

    If so, where does that leave the ordinary small Malaysian entrepreneur trying to get his fledging business under way?

    PEMANDU, acting as “enabler” and cutting red tape is unwittingly reinforcing the cancer of “know-who” rather than “know-how” that is killing Malaysian innovation, creativity and productivity. It does not matter how good your product or idea is, or how efficiently you can make it, it depends on who you know to get it through the system.

    Genting-Simon Property Group and Chua Ma Yu-MRCB got through, but how many others are stalled because they do not have the benefit of PEMANDU’s red tape-cutting shears?

    To be truly transformative, PEMANDU must make it a primary goal to cut the red tape and make sure it does not come back to stifle other genuine entrepreneurs.

    Better yet, PEMANDU should indicate how it was able to “facilitate” in the implementation of such pre-existing projects and how these facilitation measures are being translated into long-term policy changes, one of which is to reduce red tape as stated in the Strategic Reform Initiatives (SRIs).

    Otherwise, PEMANDU is setting itself up to be a permanent entity, with the job of selecting “winners” from a beauty parade of projects striving for EPP status. This merely institutionalises the government-knows-best mentality, rather than promotes the private sector initiative which is a key pillar of the ETP.

    The “hothouse” labs probably killed innovation

    Going back to the very foundations of the ETP, PEMANDU makes much of the 12 NKEA “labs” that brought together 500 experts from the private and pubic sectors to define and detail the ETP.

    These labs, in eight short weeks, detailed and defined the 131 EPPs (Entry-Point Projects) across the 12 NKEAs (National Key Economic Areas) that make up the ETP.

    However, by naming already existing projects as EPPs, the ETP might be depicted as yet another project “grabfest” and not the ambitious departure from the norm and programme it claims to be.

    REFSA sees fundamental defects in the process of selecting the EPPs. The “hothouse” labs would have favoured incumbents with existing business plans rather than entrepreneurs with transformative ideas.

    Note on Part 2:

    We thank Nurhisham who blogs at http://econsmalaysia.blogspot.com/ for pointing out that our GDP Deflator calculations in Part 2 of our critique were not accurate. After recalculating, we find that the GDP Deflator from 2001 to 2009 increased at an annual rate of 3.7 per cent rather than the 5 per cent listed in Exhibit 1. — REFSA (Research for Social Advancement).

    About this series

    Critics of PEMANDU and the ETP thus far have tended to focus on the expensive costs incurred by PEMANDU and its consultants, accusations of style prevailing over substance, the execution of specific projects (such as the MRT and 1 Malaysia email) and its apparently lofty, unrealistic targets.

    We think these issues can be further debated, but these questions ultimately boil down to PEMANDU’s raison d’être. PEMANDU is already a fait accompli. Debating its existence serves no useful purpose at this point.

    Instead, we evaluate PEMANDU and the ETP on its own terms by looking at the goals, plans and targets outlined in the ETP Roadmap document. Doing so facilitates constructive debate as it uses the same framework which PEMANDU has chosen to work within.

    In that vein, and in keeping with the spirit of the alphabet soup of NKEAs, NKRAs, SRIs, EPPs, GNI surrounding the entire GTP, we evaluate PEMANDU and the ETP on its DEEDS:

    1. Data transparency — the ease with which an independent analyst can evaluate the figures relevant to the ETP and its targets;

    2. Execution — the progress, or lack thereof, of announced EPPs (Entry-Point Projects);

    3. Enterprise — whether the target of stimulating private investment is being achieved. The ETP aims for a 92:8 split between private and public investments;

    4. Distribution — the distribution of EPPs across the NKEAs (National Key Economic Areas), which shows whether a healthy balance of projects is being maintained; and

    5. Socio-economic impact — an evaluation of the main beneficiaries of the economic activities generated by the EPPs.

    * Dr Ong Kian Ming and Teh Chi-Chang wrote this analysis for REFSA.

    This article was published by The Malaysian Insider.

    Read Dr. Ong’s critiques of the ETP in full here

  • ETP: Part 2 — We won’t really be twice as rich in 2020

    ETP: Part 2 — We won’t really be twice as rich in 2020
    Dr. Ong Kian Ming & Teh Chi-Chang

    RM48,000 in 2020 is not real income. The ETP promises to double gross national income (GNI) per capita to RM48,000 by 2020 from RM23,700 in 2009. However, RM48,000 in 2020 will be worth a lot less than RM48,000 today, just like RM100 today buys a lot less than RM100 eight years ago, thanks to ever-rising prices. If Malaysians are really to be twice better off, nominal income must be RM64,000 by then, to compensate for the 2.8 per cent per year inflation that PEMANDU expects.

    Nothing transformational in the RM48,000 target.

    This target is for nominal income, which includes inflation, and not real income, which strips out inflation. Because of inflation, nominal GNI per capita growth averaged 8.2per cent from 2001-2010, whereas real GNI grew only 3.2%. At the historical average 8.2 per cent per year growth rate, nominal incomes will exceed RM48,000 by 2018 anyway, with or without the ETP or PEMANDU.

    PEMANDU and its expensive consultants cannot even get basic mathematics correct. If the income target is RM48,000, PEMANDU’s 6 per cent real GNI growth rate and 2.8 per centinflation forecasts are wrong. If its growth and inflation forecasts are right, then the RM48,000 target is wrong — it should be RM54,145 in 2020, not RM48,000. Furthermore, key metrics of some EPPs — the investment value, GNI contribution and jobs created – are unavailable.

    Grade ‘D’ for data transparency.  In this series, we evaluate the ETP on its own terms based on the goals and plans outlined in the ETP Roadmap. PEMANDU scores a ‘D’ for data transparency. Like us, Malaysia’s top research house finds it impossible to get the numbers to add up.

    RM48,000 GNI by 2020? Not Really! 

    The most prominent headline target of the Economic Transformation Programme (ETP) is to double gross national income (GNI) per capita to RM48,000 by 2020 from just RM23,700 in 2009 . That will be the indicator that Malaysia has arrived as a developed nation, according to PEMANDU , the government agency charged with driving the ETP.

    What PEMANDU has been less than transparent in communicating is that the RM48,000 target is for nominal income per capita, not real income . The difference is all-important. Nominal income includes the effects of inflation. For example, your nominal income may grow by 10 per cent next year. But if inflation is also 10 per cent, then your real income growth is zero!

    Here is an example that Malaysians will be all too familiar with. RM100 today buys a lot less than RM100 last year, and much less than RM100 eight years ago. That is due to inflation. As PEMANDU is quoting the RM48,000 in nominal terms, then Malaysians might be poorer in real terms in 2020 than they are today, if inflation turns out to be exceptionally high.  This is the essence of Opposition Leader Datuk Seri Anwar Ibrahim’s recent criticisms  of the ETP.

    However, rather that using the opportunity to clarify that the RM48,000 target is indeed nominal, PEMANDU engaged in further intellectual obfuscation. In an apparent response to Anwar’s comprehensive critique, PEMANDU skirted the issue and said:

    “The 6 per cent average annual growth projected by the ETP …  is real growth and excludes the inflation factor. This means that we are able to adapt to the inflation rate, whatever it may be at .” 

    PEMANDU avoided addressing the contentious point that if inflation is high, then the nominal income target of RM48,000 will also have to be raised. Indeed, based on PEMANDU’s own inflation forecast, the nominal income target should be RM54,145, not RM48,000!  We shall cover this in greater detail later.

    Nothing transformational in the RM48,000 nominal GNI target 

    Nominal GNI per capita grew by 8.2 per cent per year between 2001 and 2010 , a period during which PEMANDU for the large part did not exist. Assuming this 8.2 per cent growth rate is sustainable, nominal GNI per capita would exceed RM48,000 by 2018 . In light of this, PEMANDU’s much vaunted, ambitious RM48,000 income target by 2020 is not all that difficult to achieve, really. In fact, it is extremely easy and will be surpassed by 2018 based on historical growth rates achieved without PEMANDU.

    At this juncture, we digress into an explanation of the intricacies of nominal and real incomes for the less technically-minded readers.

    Aside: What’s real and what’s nominal income anyway? 

    We shall illustrate with another example that Malaysians are familiar with: increases in our take-home income do not necessarily lead to higher purchasing power. In fact, we are worse off in some cases. A cup of ‘kopi’ in my neighbourhood coffee shop now costs RM1.40, a 27 per cent increase from RM1.10 two years ago. My pay has gone up, but certainly by nowhere close to 27 per cent so I must now drink less ‘kopi’ than I did two years ago.

    At the national level, this is reflected in the GNI per capita growth rates. Nominal GNI per capita grew by 8.2 per cent per year on average from 2001-10. However, because of inflation, real GNI per capita grew by just 3.2 per cent per year . Going back to our ‘kopi’ example:

    •  Let’s say in the year 2001, the coffee shop sold 100 cups of coffee at RM1 per cup. Total income would be RM100.
    •  In 2002, the coffee shop sold 103 cups – real growth of 3 per cent.  But the coffee shop also raised the price to RM1.05 per cup.
    •  So, nominal income for 2002 = 103 cups x RM1.05 = RM108.20 =  8.2 per cent nominal growth compared to 2001.
    •  It appears as if we are 8.2 per cent better off if we just measure nominal ringgit. We have RM108.20 compared to RM100. But really, we are only 3 per cent better off — we sold 103 cups instead of 100.

    Economists routinely use the concept of constant prices and real income to more accurately reflect how much better off the economy really is. Continuing with our example above:

    •  2002 GNI would be quoted in 2001 constant prices, to reflect only real growth. So while nominal 2002 GNI would be RM108.20, in constant 2001 prices, real 2002 GNI would be RM103.
    •  The economy is of course much more complex. The GDP deflator is the official estimate of average inflation across the economy. The GDP deflator is then applied to the nominal numbers, to deflate them down to an estimate of the real numbers.

    The ETP Roadmap, on the other hand, in another glaring case of obfuscation, slips in a footnote stating that the RM48,000 income target is in constant 2020 prices, which would be equivalent to nominal 2020 prices.

    The whole notion of constant 2020 prices is bizarre. Elementary economic convention is that constant prices are based on a historical year, not a year well into the future.

    • It does not make any sense to compare GNI per capita in 2009 at 2009 prices with GNI per capita in 2020 at 2020 constant prices. That is akin to comparing oranges and apples;

    • Neither is it logical to express GNI per capita in both 2009 and 2020 at 2020 constant prices. We do not know with certainty what prices in 2020 will be, and even if we can project prices in 2020, the 2009 GNI per capita figure expressed in 2020 constant prices should be much higher than RM23,700 due to inflation.

    Even the basic math is wrong 

    PEMANDU’s targets of RM48,000 nominal GNI per capita by 2020 and 6 per cent per year real income growth are incoherent. Before we delve into this in more detail, we have to clarify another example of PEMANDU obfuscation:

    • PEMANDU’s 6 per cent real income growth target is for total income. Because the population is also growing, this growth must now be shared by more people, which means that per capita income growth will be slower. Based on PEMANDU’s 1 per cent population growth forecast , the target for real income growth per capita will be 5 per cent and not 6 per cent.

    It does not compute! — Lost in Space tv series, 1965-68

    Here’s how it all does not compute: 

    • To grow from RM23,700 to RM48,000, nominal GNI per capita requires a real per capita growth rate of just 3.8 per cent per year, based on PEMANDU’s inflation estimate ;

    • Using PEMANDU’s 6.0 per cent, 2.8 per cent and 1.0 per cent forecasts for total income growth, inflation and population growth respectively, and starting from RM23,700, nominal income must be RM54,145 by 2020.

    So which is correct? 

    • The RM48,000 target? In which case PEMANDU’s 6 per cent real growth target and 2.8 per cent inflation forecast must be wrong; or

    • PEMANDU’s 6 per central growth target and 2.8 per cent inflation forecast? In which case the RM48,000 target is wrong.

    Is the target RM48,000 nominal income, or 6 per cent real total income growth?  They can’t both be right

    Exhibit 1: If the target is RM48,000 nominal income by 2020, just 4.8 per cent real total income growth is achieved, not 6 per cent

     

    2009 nominal GNI per capita RM23,700

    2020 nominal GNI per capita target RM48,000

    Nominal per capita growth rate required 6.6 per cent

    PEMANDU’s population growth  forecast 1.0 per cent

    Nominal total income growth rate implied 7.6 per cent

    PEMANDU’s inflation forecast 2.8 per cent

    Implied real total income growth rate 4.8 per cent

    Exhibit 2: If the target is 6 per cent real total income growth, then the target must be RM54,145 nominal income, not RM48,000 

    PEMANDU’s real total GNI growth target 6.0 per cent

    PEMANDU’s population growth forecast1.0 per cent

    Real GNI per capita growth target implied5.0 per cent

    PEMANDU’s inflation forecast 2.8 per cent

    Nominal GNI per capita growth implied 7.8 per cent

    2020 nominal income based on this RM54,145

    Doubtful data afflicts the ETP 

    The murkiness surrounding the RM48,000 GNI per capita target is not the only example of doubtful data. The 4 key figures pertaining to the ETP are also shrouded in a haze:

    1) The number of EPPs, for a start;

    2) The projects and value of each investment;

    3) Their GNI contribution; and

    4) The number of jobs created;

    Adding up the EPPs announced at each of the 8 ETP updates so far , a total of 113 EPPs  have been announced as of 10 Nov 2011.  However, this figure includes 3 Strategic Reform Initiatives (SRIs). Excluding the 3 SRIs, the total number of EPPS would be 110. In this series of Focus Papers, as we shall be engaging PEMANDU on its own terms, we shall use the higher number (113 EPPs) headlined by PEMANDU . The confusion over something as basic as the total number of EPPs is just the start.

    Moving on to individual EPPs, figures are not always given during the ETP updates. For example, the Kuala Lumpur International Financial District (KLIFD), a project undertaken by 1MDB, is a significant development project in a prime location in the heart of Kuala Lumpur,  yet no figures have been given for the expected investments, GNI contribution or jobs created.

    These omissions raise the question of how the total expected investments, GNI contribution and job creation headlines at each ETP updates, of which there have been eight so far, are calculated.

    PEMANDU did not clarify if the headline figures given were calculated based on estimates of some of these missing figures or whether they took a more conservative approach of not including any figures for some EPPs because of the difficulty of estimation. These missing figures mean that it is very difficult, if not impossible, to accurately quantify not just the impact of individual EPPs, but also the public-private breakdown of investment and economic activity under the ETP – all key metrics under the ETP.

    These problems in reconciling the investment, GNI and jobs contribution of each of the ETP updates are also shared by other analysts. For example, a report by leading bank CIMB which sums up the EPP investment figures finds ‘discrepancies with the sums of the NKEAs due to some undisclosed investment values and rounding errors’ .

    Grade “D” for Data Transparency 

    PEMANDU gets top marks for public relations. Its website is flashy, and presentations by its head, Datuk Seri Idris Jala, are famously velvety. Idris Jala is perhaps the most media-friendly government minister, giving numerous public presentations and appearing on radio talk shows to explain the ETP and the alphabet soup that accompanies it.

    Sadly, the substance comes nowhere close to the style paraded.  PEMANDU deserves an ‘A+’ for public relations, but it gets an ‘E’ for data integrity. There must be a problem when even the head of research of the country’s No. 1 research house is forced to include ‘undisclosed investment values and rounding errors’ when attempting to make the numbers add up . This leads us to give an overall rating of ‘D’.

    Rectifying this discrepancy is easy enough:

    1. Publicly acknowledge that the RM48,000 GNI per capita target is a nominal income  target;

    2. Correct the math:

    a. If RM48,000 is the target, then the 6 per cent real growth rate, 1 per cent population growth and 2.8 per cent inflation forecasts must be changed;

    b. If, in fact, the target is 6 per cent per year real growth, then the nominal GNI per capita target must be changed to RM54,145 from RM48,000, to reflect the population and inflation growth forecasts of 1 per cent and 2.8 per cent per year respectively;

    3. Disseminate a simple table in excel format, detailing each EPP and the key parameters which include:

    a. The investment associated with that particular project;

    b. The category which that project falls under – whether public, GLC or private investment or a mixture. If a mixture, then the proportions must be spelled out – investment contribution split between public, GLC and private for that project;

    c. The expected total public investment required, including indirect government aid or help in any form or fashion, such as the building of public infrastructure to support the project;

    d. Its GNI contribution; and

    e. The number of jobs created.

    Of course, one would expect the sum of the individual projects to add up to the headline numbers, without ‘undisclosed values and rounding errors’

    These data gaps can be easily filled or clarified by PEMANDU in the interest of full disclosure and transparency.

    We shall delve further into these numbers, particularly the investment figures, in forthcoming parts of this series of Focus Papers evaluating the ETP.

    About this series 

    Critics of PEMANDU and the ETP thus far have tended to focus on expensive costs incurred by PEMANDU and its consultants, accusations of style prevailing over substance, the execution of specific projects (such as the MRT and 1 Malaysia email) and its apparently lofty, unrealistic targets.

    We think these issues can be further debated, but these questions ultimately boil down to PEMANDU’s raison d’être.  PEMANDU is already a fait accompli. Debating its existence serves no useful purpose at this point.

    Instead, we evaluate PEMANDU and the ETP on its own terms by looking at the goals, plans and targets outlined in the ETP Roadmap document. Doing so facilitates constructive debate as it uses the same framework which PEMANDU has chosen to work within.

    In that vein, and in keeping with the spirit of the alphabet soup of NKEAs, NKRAs, SRIs, EPPs, GNI surrounding the entire GTP, we evaluate PEMANDU and the ETP on its DEEDS:

    1. Data transparency – the ease with which an independent analyst can evaluate the figures relevant to the ETP and its targets;

    2. Execution – the progress, or lack thereof, of announced EPPs (Entry Point Projects);

    3. Enterprise – whether the target of stimulating private investment is being achieved. The ETP aims for a 92:8 split between private and public investments;

    4. Distribution – the distribution of EPPs across the NKEAs (National Key Economic Areas), which shows whether a healthy balance of projects is being maintained; and

    5. Socio-economic impact – an evaluation of the main beneficiaries of the economic activities generated by the EPPs.

    Note on PEMANDU’s response

    Upon hearing that we were writing an evaluation of the ETP, the communications team at PEMANDU kindly arranged interviews with a Director from the Minister’s Office who is also the Director of the Oil, Gas and Energy & Financial Services NKEAs, the Director of the Wholesale and Retail (W&R) NKEA and the Assistant Director of the Tourism NKEA. We are grateful for these interviews and will include clarification points from these interviews in our evaluation. These interviews were recorded by the ETP communications team and we hope that they would be made available online for public access.

    * Dr Ong Kian Ming and Teh Chi-Chang wrote this analysis for REFSA.

    This article was published by The Malaysian Insider

    Read Dr. Ong’s critiques of the ETP in full here

  • ETP: Part 1 — Introducing DEEDS

    ETP: Part 1 — Introducing DEEDS
    Dr. Ong Kian Ming & Teh Chi-Chang

    Let’s evaluate PEMANDU on its DEEDS.

    The Economic Transformation Programme is ambitious indeed. The ETP promises to double gross national income (GNI) per capita to RM48,000 by 2020 from RM23,700 in 2009. An average 6 per cent per year real income growth over 10 years and 12.8 per cent per year private investment growth over five years is required to achieve this. Ultimately, RM1.4 trillion of investments in 131 Entry-Point Projects (EPPs) within 12 National Key Economic Areas (NKEAs) will create 3.3 million new jobs.

    Predictably, there are critics. Any plan as bold as this is bound to attract critics. But the attacks so far have mainly been against specific projects, such as the MRT and 1 Malaysia email; carping about the slick façade and expensive costs at PEMANDU — the Performance Management and Delivery Unit, Prime Minister’s Department — the government agency that created and is now steering the ETP; or questioning the viability of its lofty targets.

    We will evaluate PEMANDU on its DEEDS. In this series, we shall evaluate PEMANDU and the ETP on its own terms by looking at the goals and plans outlined in the ETP Roadmap document. So, for example, rather than questioning its ambitious targets, we shall analyse how well it is measuring up to those aspirations. Doing so facilitates constructive debate as it uses the same framework which PEMANDU has chosen to work within.

    DEEDS — Data transparency and integrity; Execution — progress or lack thereof on announced EPPs; Enterprise — the success in stimulating private investment; Distribution — the spread of the 12 NKEAS; and Socio-economic impact — who benefits the most will be our concern.

    The ETP is an ambitious plan to double national income by 2020.

    Some criticisms of the ETP and its guiding agency PEMANDU have been off the mark.

    We shall engage PEMANDU on its terms and measure it by its DEEDS.

    The first D is for data. We find that “It does not compute!”

    The Roadmap to High-Income Nation Status 

    The ETP was launched with much fanfare on September 21, 2010. Five hundred from the public and private sectors had spent eight weeks brainstorming to produce this very ambitious roadmap to take Malaysia to high-income nation status by 2020, with a gross national income (GNI) per capita of RM48,000.

    The ETP was conceived as a comprehensive programme to lift the country out of the middle-income trap to become a developed, high-income nation. It would be action-oriented, and aims to achieve “big and fast results”, a direct contrast to the nicely laid-out but poorly implemented government blueprints in existence.

    Real GNI growth must average 6 per cent for the next 10 years and private investment growth 12.8 per cent over the next five years in order to achieve its goals, says PEMANDU.

    Over the next 10 years, the ETP aims to pour RM1.4 trillion worth of investment into the economy to create 3.3 million new jobs:

    Ninety-two per cent of this investment will come from the private sector (with GLCs investing 32 per cent and the non-GLC private sector investing 60 per cent) and 8 per cent will come from the public sector;

    Domestic direct investments will account for 73 per cent of total private investment with the remaining 27 per cent coming from foreign direct investments (FDI). This will require, on average, 60 per cent more private investment than the historical average.

    The ETP focuses on 12 National Key Economic Areas (NKEAS) for which it has identified 60 business opportunities and 131 Entry-Point Projects (EPPs). They include:

    1. Expanding the production of swiftlet nests and unlocking value from Malaysia’s biodiversity through herbal products under the Agriculture NKEA

    2. Growing aviation maintenance, repair and overhaul (MRO) services and building globally-competitive outsources under the Business Services NKEA

    3. Scaling up early childcare and education centres and building an Islamic finance and business education discipline cluster under the Education NKEA

    4. Expanding the semiconductor and solar power industries under the Electronics and Electrical NKEA

    5. Becoming the indisputable global hub for Islamic finance under the Financial Services NKEA

    6. Pursuing generic export opportunities and developing a Health Metropolis under the Healthcare NKEA

    7. Attracting 100 of the world’s most dynamic firms within priority sectors to set up shop in Kuala Lumpur/the Klang Valley and revitalising the Klang River under the Greater KL/KV NKEA

    8. Building a regional oil storage and trading hub and attracting MNCs to bring their global oil-field services and equipment operations to Malaysia under the Oil, Gas and Energy NKEA

    9. Developing oleo derivatives and increasing the oil extraction rate under the Palm Oil NKEA

    10. Ensuring broadband for all under the Communication, Content and Infrastructure (CCI) NKEA

    11. Improving rates, mix and quality of hotels under the Tourism NKEA

    12. Modernising small retailers under the Wholesale and Retail NKEA.

    Let’s move beyond criticism of PEMANDU

    A programme as massive and ambitious as the ETP is bound to have detractors. Critics have focused on four main issues:

    1. The enormous budget allocated to PEMANDU and the exorbitant fees running into tens of millions of ringgit paid to consultants:

    ● RM66 million was spent to set up PEMANDU, the bulk of this going to foreign consultants including RM36 million to McKinsey and Co;

    ● RM16 million was paid to seven consulting firms to run the 12 NKEA labs;

    ● The operating cost of the now 60-strong ETP unit is estimated at RM53 million per year in 2011 and 2012. Its eight directors pocket about RM39,000 a month each, while the associate directors each receive an average RM23,300 per month.

    2. Accusations that the ETP lacks substance and is given weight only by the excellent presentation skills of Datuk Seri Idris Jala, the charismatic PEMANDU CEO who has skilfully hyped up the “many EPPs” during each of the eight ETP updates so far;

    3. Carping that many projects were private sector projects that would have proceeded regardless but were shoehorned into the ETP to boost its scale. Some examples include the St Regis Hotel at KL Sentral, which was already under construction when the ETP was launched, as well as the Educity initiative in the Iskandar Development Region; and

    4. Claiming that the ETP has unrealistic assumptions with regard to expected investments, job creation, incremental GNI and real wage and GNI growth rates.

    For example, if the objective of the ETP is to really double our incomes, it would require a per capita real GNI growth of 6.6 per cent per year from 2009 to 2020. This is two times the 3.2 per cent average real per capita GNI growth rate achieved over the ten years ended 2010 — a tall order indeed.

    Supporters of PEMANDU, in response, may say:

    1. The fees and costs associated with developing and overseeing the ETP should be considered sunk costs and would be paid back many times over if the ETP is indeed successful in significantly increasing economic activity in the country;

    2. Assuming the “hollowness” of the EPPs without going through the due diligence of examining their individual economic potential is unfair;

    3. PEMANDU as co-ordinator between the private and public sectors clears red tape to help expedite private sector projects. In addition, naming hitherto private sector projects as EPPs focuses the energies and budgetary commitments of the stakeholders — the government, government-linked companies (GLCs) and the private sector — to drive these projects to completion in a timely fashion; and

    4. PEMANDU should be expected to set ambitious targets in terms of real GDP growth, attracting investments, creating jobs, increasing wages and incomes. PEMANDU as an organisation is adding value only if it delivers performance exceeding the ordinary expectations of economic forecasters and analysts. It is unfair to criticise these targets as unrealistic. Rather, PEMANDU should be evaluated annually to see if it meets its targets and justifies the high fees of its directors.

    We think these issues can be further debated, but these questions ultimately boil down to PEMANDU’s raison d’être. PEMANDU is already a fait accompli. Debating its existence serves no useful purpose at this point.

    Evaluating PEMANDU on its DEEDS

    In this series of Focus Papers, we shall evaluate PEMANDU and the ETP on its own terms by looking at the goals and plans outlined in the ETP Roadmap document. Doing so facilitates constructive debate as it uses the same framework which PEMANDU has chosen to work within.

    In that vein, and in keeping with the spirit of the alphabet soup of NKEAs, NKRAs, SRIs, EPPs, GNI surrounding the entire GTP, we evaluate PEMANDU and the ETP on its DEEDS:

    1. Data transparency — the ease with which an independent analyst can evaluate the figures relevant to the ETP and its targets;

    2. Execution — the progress, or lack thereof, of announced EPPs (Entry-Point Projects);

    3. Enterprise — whether the target of stimulating private investment is being achieved. The ETP aims for a 92:8 split between private and public investments;

    4. Distribution — the distribution of EPPs across the NKEAs (National Key Economic Areas), which shows whether a healthy balance of projects is being maintained; and

    5. Socio-economic impact — an evaluation of the main beneficiaries of the economic activities generated by the EPPs.

    In Part 2 of this series of Focus Papers, we will evaluate PEMANDU on the first D of DEEDS — Data integrity and transparency. — REFSA (Research for Social Advancement)

    * Dr Ong Kian Ming and Teh Chi-Chang wrote this analysis for REFSA.

    Article Link: The Malaysian Insider.

    Read Dr. Ong’s critiques of the ETP in full here.

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