ETP: Part 5 — The ETP so far is just a handful of mega-projects

(Also published on The Malaysian Insider)

ETP: Part 5 — The ETP so far is just a handful of mega-projects
Dr. Ong Kian Ming & Teh Chi-Chang

Just two mega-projects and oil, gas and energy, really. Behind the apparently impressive RM176 billion of investments achieved in the ETP so far is a sobering picture. The MRT and Petronas’ RAPID mega-projects make up 55 per cent of total investments in Entry Point Projects (EPPs). Going by National Key Economic Area, 53 per cent of investments were in just one NKEA — Oil, Gas & Energy.

Zero progress in Financial Services. Not a single EPP has been announced in this NKEA which is targeted to deliver up to 15 per cent of the income boost envisaged in the ETP. The Kuala Lumpur International Financial District is not a Financial Services EPP and is not even mentioned in Bank Negara’s Financial Services Blueprint 2011 to 2020. Is PEMANDU in sync with the key financial regulators Bank Negara and the Securities Commission?

Broad-based investments are necessary to transform Malaysia. The RM800 billion of investments targeted by the ETP are spread across 131 EPPs in 12 NKEAs. This will deliver the broad-based growth that will turn Malaysia into the high-income nation that PEMANDU envisages.  But progress has been skewed towards just one NKEA and a few mega-projects. The ETP currently appears to be business-as-usual, government-linked mega-projects rather than private sector-led transformation.

By design or necessity? The initial focus on a few mega-projects and one NKEA might be a sensible strategy. Or it might have been forced by the lack of private sector interest in the ETP. PEMANDU will no doubt claim the former. We think it is the latter. Time will tell. We shall be monitoring.

● The ETP is about transforming Malaysia through 131 projects across 12 National Key Economic Areas (NKEAs).

● Investments achieved so far are mainly due to just two mega-projects, and are dominated by the Oil, Gas & Energy NKEA.

● There has been zero progress in the Financial Services NKEA which is crucial to high-income jobs.

● Right now, the ETP appears to be business-as-usual, government-linked mega-projects; not private sector-led transformation.

Diversity of projects is as important as size of investment

The ETP team at PEMANDU has achieved nearly a quarter of its investment target in just over a year. RM176 billion of investments in EPPs (Entry Point Projects) have been announced. This is equivalent to 22 per cent of the cumulative RM800 billion investments targeted for the entire ETP until the year 2020.

That is indeed a remarkable achievement. However, the ETP is not just about large investment numbers. Those investments must ultimately transform Malaysia into a high-income nation. To that end, the ETP Roadmap chose to prioritise 131 Entry Point Projects (EPPs) across 12 National Key Economic Areas (NKEAs).

The 12 NKEAs are a broad mix, ranging from service-based economic activities such as Business and Financial Services to heavy engineering-oriented Oil, Gas and Energy projects. The EPPs range in size from RM3 million to RM84 billion.

Zero progress on financial services NKEA

We now focus on Diversity — the second “D” in our DEEDS framework. We compare the composition of the EPPs heralded in the eight ETP updates with the spread envisioned in the ETP Roadmap Report.

How spread out are the 114 EPPs and RM176 billion of committed investments achieved so far? A diverse distribution of project sizes across the 12 NKEAs indicates a healthy and balanced progress. Conversely, a narrow distribution raises questions about the lack of broad progress and concerns about the overall viability of the ETP.

The prognosis is poor:

1. Mega-projects dominate. Just two projects — the MRT and RAPID by Petronas — account for 55 per cent of the investments so far.

2. Just one NKEA accounts for the majority of investments. The Oil, Gas & Energy NKEA contributed 53 per cent of the investments so far. In fact, six of the top 10 investments so far are in this NKEA.

3. Of greater concern is that there is no EPP in the Financial Services NKEA.

Is PEMANDU in sync with Bank Negara and the Securities Commission?

Financial Services is mainly under the purview of Bank Negara Malaysia and the Securities Commission — key policy “enablers”, in PEMANDU’s parlance. Bank Negara recently released its Financial Services Blueprint 2011 to 2020.

Nearly all of the EPPs under the Financial Services NKEA can be found in the Blueprint. However, the similarity ends there. The language and thrust of the Blueprint differ markedly from that of the ETP Roadmap and the ETP updates. We found only one mention of the ETP and no reference whatsoever to the other metrics that PEMANDU emphasises — EPPs, incremental GNI contribution and amount of public and private sector investments.

The Financial Services NKEA is important to the ETP. PEMANDU anticipates it will contribute RM121 billion or up to 15 per cent of the incremental GNI (gross national income) targeted. It is imperative that progress within this very important NKEA be tracked. It would be most helpful if PEMANDU, together with the two other main stakeholders — Bank Negara and the Securities Commission — would issue a joint communiqué clarifying the likely investments, jobs and incremental GNI contribution from this NKEA in the short, medium and long term.

KL International Financial District is not a Financial Services EPP

The proposed Kuala Lumpur International Financial District (KLIFD) by 1MDB was initially listed as a common enabler under the Financial Services NKEA. KLIFD was subsequently elevated to EPP status, but reclassified under the Greater KL/Klang Valley NKEA. The reclassification is puzzling. The scant details are worrying. The fact that KLIFD is not mentioned at all in Bank Negara’s Financial Services Blueprint 2011 to 2020 is alarming.

The ETP Roadmap Report says, “The Kuala Lumpur International Financial District … will allow Kuala Lumpur to attract higher calibre financial human talent to together help promote a vibrant financial services industry. This will also raise Malaysia’s profile in the international arena and support the country’s brand.”

But buildings alone cannot make a financial centre. What is more important is the soft infrastructure — the rules and regulations and general environment — fostered by Bank Negara as the primary regulator. The Labuan International Business and Financial Centre (Labuan IBFC) is mentioned 25 times in Bank Negara’s Blueprint. KLIFD is conspicuous in its omission.

The absence of clear support from Bank Negara and its reclassification into the Greater KL/Klang Valley NKEA suggests that the Kuala Lumpur International Financial District is another massive construction project rather than an important foundation of efforts to develop the financial services sector. This view is given credence by the various tax incentives granted to KLIFD in the 2012 Budget announced by Prime Minister Datuk Seri Najib Razak.

The inducement for more new office space is puzzling. International real estate service firm CB Richard Ellis Malaysia points out that projects such as the KLIFD would exacerbate the oversupply in Kuala Lumpur. In this environment, it is even more crucial that policy enablers such as Bank Negara are fully on board to help create new opportunities and demand to fill the fresh supply of office space.

Progress so far is just mega-projects and one NKEA 

Leaving aside Financial Services, the diversity of EPPs still leaves much to be desired. The EPPs are heavily skewed towards a handful of mega-projects and one NKEA in particular:

1. Firstly, just two mega-EPPs — the RAPID project by Petronas and the MRT — contribute 55 per cent or RM97 billion of the announced RM176 billion investments#.

2. Secondly, investments in EPPs in the Oil, Gas and Energy NKEA dominate. Oil, Gas and Energy EPPs make up 53 per cent or RM94 billion of the announced investments.

From another perspective, 6 of the top 10 EPPs are in this NKEA.

The reliance on just two projects and the slant towards the Oil, Gas & Energy NKEA would be even more pronounced if:

1. The now much higher cost of the MRT is used. The RM36.6 billion investment value still being officially cited is a 2009 estimate subject to inflation. Also, the cost of land acquisition and rolling stock is not included. Some reports suggest the cost is now in the region of twice as much;

2. Investment numbers for the intensification of exploration activities by Petronas and the formation of the Malaysian Nuclear Power Corporation announced in Updates 5 and 6 respectively are included. The investment figures for these two very large EPPS were surprisingly not given by PEMANDU when they were announced during the updates.

Based on the Roadmap, the nuclear power plant (EPP 11) is expected to generate RM21.3 billion of investments while the Petronas activities (EPP 3) will contribute RM18.4 billion. Including these numbers, Oil, Gas and Energy NKEA would have accounted for even more of the total investments in EPPs announced so far.

Three mega-projects make up nearly two-thirds of non-Oil, Gas & Energy NKEAs

It might be argued that PEMANDU is a victim of its own success in stimulating EPPs within the Oil, Gas & Energy NKEA. The RM94 billion of investments committed to this NKEA so far is already 83 per cent of the RM113 billion envisaged throughout the entire ETP period.

The massive investments here would naturally dwarf the other NKEAs. However, leaving aside the heavy reliance on Oil, Gas & Energy, the same diversity issues afflict the other 11 NKEAs:

1. The slant towards mega-projects is even more pronounced. Just three mega-projects — the MRT, TUKAR and Karambunai Integrated Resort — account for RM52 billion or nearly two-thirds of non-Oil, Gas & Energy EPPS;

2. Just one NKEA — Greater KL/Klang Valley — accounts for RM40 billion or nearly half of investments within the non-Oil, Gas & Energy NKEAs. The Palm Oil, Agriculture and Business Services NKEAs languish at the bottom. And recall that there are no Financial Services sector EPPs.

Excluding the three mega-projects, just RM30 billion of investments was generated across the 11 non-Oil, Gas & Energy NKEAs last year. To meet its ETP target, PEMANDU must generate RM67 billion per year of investments for the remaining period of the ETP. Can it pick up the pace?

The ETP Roadmap does outline some other ambitious projects. But these are also projects we are dubious about. Our scepticism is further fuelled by PEMANDU not mentioning the investment numbers when it announced these EPPs in its updates. Two examples are: 1. The Unified Malaysia Sale (EPP 11) under the Wholesale and Retail NKEA. In the Roadmap, the EPP is supposed to generate RM4.7 billion of investments. We think RM4.7 billion is a massive amount merely to organise a sale; and we noticed hardly any publicity from May to August last year when the sale supposedly took place. No figures were given when this EPP was announced in Update 6; and

2. The Invest KL EPP under the Greater KL/Klang Valley NKEA. Attracting 100 of the World’s Most Dynamic Firms within Priority Sectors (EPP1) is supposed to require funding of RM82.2 billion. Invest KL was announced as an EPP in Update 7, without numbers. We think RM82.2 billion to attract 100 firms is very expensive — it works out to RM820 million per firm. For example, the global financial hub of oil services giant Schlumberger announced so far is expected to need only RM268 million of investment.

Grade “C” for diversity

Nevertheless, in keeping with our commitment to evaluating PEMANDU on its own terms, we shall not pass judgment on these projects at this juncture. However, we would also remind readers that private investments are running at only about half the target rate, which we covered in Part 4 — Private Enterprises are Rejecting the ETP.

PEMANDU now has the dual task of catching up on EPPs in NKEAs besides Oil, Gas & Energy and stimulating private investments. For now, we grade PEMANDU “C” for Diversity — its ability to deliver a variety of EPPs across a broad swathe of sectors.

The jury is still out on whether the focus on a few mega-projects and one NKEA is driven by design or necessity. On the one hand, it is sensible to prioritise the large-ticket items. On the other hand, the focus on government-linked mega-projects might have been forced by the tepid private sector response to the ETP. Time will tell. We shall be monitoring.

Appendix 1: Breakdown of Projected Investments by NKEA, EPPs and Business Opportunities

The RM1.4 trillion total investments that PEMANDU prefers to highlight comprises RM800 billion of investments in EPPs and RM600 billion in 60 business opportunities identified in the ETP Roadmap Report.

Business opportunities “capture the potential of the sector to grow organically. Some business opportunities will be triggered by the successful execution of EPPs”.

In its ETP Updates, PEMANDU furnishes information only on EPPs. Business Opportunities are not covered in the ETP Updates. As such, we consider RM800 billion the appropriate investment benchmark when evaluating PEMANDU’s progress so far on generating investments.

Appendix 2: The gap between progress on number of EPPs announced and investment values

Astute readers will wonder at the gap between the number of EPPs announced and the total investments so far. 87 per cent or 114 out of a total 131 EPPs have been announced. However, the RM176 billion of investments announced lags far behind at just 22 per cent of the total expected.

Using a simple ratio suggests that announced investments should be RM696 billion. Why the large gap? There are two main reasons:

1. PEMANDU omits investment numbers for some announced EPPs. The nuclear power plant, Petronas intensification activities, Unified Malaysia Sale and Invest KL mentioned in this Focus Paper are examples of EPPs which have been announced but for which investment figures were not disclosed;

2. Not all the investment value in each EPP is realised when it is announced. For example, RM39 billion is the figure given for EPP 12 — Improving Rates, Mix and Quality of Hotels in Malaysia. However, the projects announced so far — Majestic (Update 2), Datai (Update 3) and Pulau Gaya (Update 3) — total less than RM3 billion in committed investments.

Whether the total investment expected in this and other similar EPPs is realistic or can ultimately be realised, we leave to the judgment of our readers and the good hands of the ETP team at PEMANDU.

The story so far

Part 1, “Let’s evaluate PEMANDU on its DEEDS”, introduced this series. We assess PEMANDU and the ETP on the goals, plans and targets stated in the ETP Roadmap document. Doing so facilitates constructive debate as it uses the 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:

Data transparency was covered in Part 2, “We won’t really be twice as rich in 2020”. We declared, “It does not compute!” PEMANDU’s target is to double nominal income per capita to RM48,000 by 2020. But using its forecasts for income and population growth, and inflation, the target should be RM54,145, not RM48,000. Can this “roadmap to transformation” be trusted when even the basic maths is wrong?

Execution took three Focus Papers:

Part 3(i), “PEMANDU strengthens the ‘know-who’ cancer”, focuses on PEMANDU’s practice of taking credit for pre-existing projects and its role in cutting red tape. PEMANDU is institutionalising the role of middleman if it cuts red tape only for EPPs. Malaysian innovation, creativity and productivity will continue to lag if long-term policy changes are not made. 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.

Part 3 (ii), “The hothouse labs probably killed innovation” posits that large companies would naturally dominate the vaunted “labs” that chose the EPPs. Also, the tight eight-week time frame to research best practices, distil them and support them with detailed analysis would have incentivised participants to select EPPs for which research was already ready, rather than pursue genuinely transformative alternatives.

Part 3 (iii), “Doubtful EPPs; doubtful achievements and due diligence” says the selection of projects with very little hope of success as EPPs raises serious doubts about the due diligence process at PEMANDU. The RM10 billion Karambunai Integrated Resort needs 2.8 million visitors per year to break even — more than all the travellers arriving at Kota Kinabalu airport! The multi-billion ringgit plan to transform Tanjong Agas from a fishing village to a petrochemical hub has REFSA aghast. It creates redundant infrastructure, and goes against the government’s own master plan identifying the already established Kertih and Gebeng as the focus areas for such activities in the Eastern Corridor Economic Region (ECER).

Enterprise is severely lacking so far. Part 4, “Private enterprises are rejecting the ETP” highlights that the private sector makes up only 35 per cent of the total investments in EPPs, far below the 60 per cent that PEMANDU says is required to take Malaysia to high-income status by 2020. It is understandable that priority is given to government-led, big-ticket infrastructure project in the early days of the ETP. However, PEMANDU’s attempt to paint a rosier picture by citing figures excluding large public sector projects like the MRT draws suspicion that something is amiss. REFSA debunks PEMANDU’s selective figures with a simple cake analogy and some telling numbers.

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. —REFSA (Research for Social Advancement)

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

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