Responding to Critiques of the Pakatan Harapan Alternative Budget 2018 (Part 2) – Abolishing Toll Highways

Media Statement by Dr. Ong Kian Ming, Member of Parliament for Serdang, on the 10th of November 2017

Responding to Critiques of the Pakatan Harapan Alternative Budget 2018 (Part 2) – Abolishing Toll Highways

Last week, I addressed those who criticised Pakatan Harapan’s proposal in our 2018 alternative budget to get rid of the GST.[1] Today, I want to address those who are sceptical of our proposal to abolish the toll highways.

Response 1: The government has paid billions of RM in compensation to the toll concessionaires and will continue to compensate them billions of RM to defer hikes in toll prices

The sceptics who question the financial viability of our proposal to buy back the toll concessions has to examine the BN government’s current policy which has been to (i) compensate toll companies to defer toll hikes (ii) extend the concession period in lieu of compensation and (iii) allow unreasonable toll hikes to take place.

The compensation formula to defer toll hikes is based on current traffic volumes and the toll hike amount that is in the concession agreement. The compensation paid out by the federal government is far more favourable to the toll concessionaires compared to the alternative of buying back the tolls since the latter is based on the cost of construction of the highway (more on this below).

For example, if the toll rate was supposed to go up from RM2 to RM4 in 2018 and the government does not allow the toll increase to take place, the government has to compensate the concessionaire RM2 multiplied by the total number of vehicles which will use the toll in 2018. The higher the toll hike in the concession agreement, the higher the compensation which the government has to pay. (See sample Compensation Amount in Appendix 1 below)

The compensation cost payable by the government (if the toll rates are not allowed to be hiked) FAR EXCEEDS the cost of buying back the toll highways from the concessionaires! Indeed, according to a parliamentary reply, the government has already forked out RM4 billion from 1990 to 2015 for compensation to toll companies including RM1.05 billion for the LDP and RM443 million for SPRINT, two of the earliest and most lopsided toll concession agreements! (Appendix 2 below)

Response 2: The government has and continued to subsidize the construction of toll highways in lopsided deals which favours the toll concessionaires

The compensation stated above does not include the many millions and billions of RM which the government has given and lent to the toll concessionaires for the construction and / or upgrading of the tolls.

For example, my colleague Tony Pua, pointed out back in 2012 that the government had given a grant worth almost RM1 billion to the concession holder for the MEX highway which was 74% of the total construction costs of the project.[2] In my own constituency of Serdang, a new interchange was built on the MEX highway for entry and exit into Seri Kembangan at a cost of RM90 million out of which RM20 million was provided by the government as land acquisition costs. But the revenue and profit from the additional RM2.20 toll collection per car for this new entry and exit benefits only the toll concessionaire.

Rather than continue to subsidize these toll concessionaires, it makes more financial sense for the government to buy back these tolls and fund any new construction or highway upgrades from its development expenditure.

Response 3: The costs of acquiring the toll concessions is cheaper than the costs of compensation plus the costs to drivers

In every highway concession agreement, there is always a clause for the government to buy back the toll concession using a certain pricing structure based on ‘national interest’.

The buy-back terms and conditions is usually a combination of:

  • the construction costs, less the liabilities and obligations of the concessionaire and government grants, if any.
  • The Government is further obliged to compensate the concessionaire an internal rate of return of between 8% to 12% on the share capital only for the years it was in operation. If the operator is already enjoying returns above and beyond the stipulated rate of return above, the Government does not have to make the ‘internal rate of return’ compensation.
  • The buy-back terms and conditions does NOT compensate the concessionaire based on future profits.[3]

Writing back in 2009, my colleague Tony Pua estimated that it would cost the government RM1.4 billion to buy back the LDP highway concession.[4] The government had already paid out RM628 million to LITRAK, the owner of the LDP concession, at the end of 2008.[5] This amount has ballooned up to RM1.05 billion at the end of 2015. If the government does not want to continue to pay this compensation, it must allow the LDP toll rate to increase to RM3.10 (for passenger cars), which is a ridiculous amount to pay to get stuck in one of the notorious LDP traffic jams during peak hours!

Instead of questioning why PH is recommending that the government buy back these toll concessions, our sceptics should be asking why DOESN’T the government immediately carry out these buy-backs given the long term financial benefits for the government as well as the road users.

Response 4: The government has no political will to enforce the toll agreements with the concessionaires which explains why it is very reluctant to acquire the tolls concessions

A common frustration expressed by motorists is that they are often stuck in traffic jams before and after toll highways. In other words, they are paying to be stuck in traffic jams! For example, in my own constituency of Serdang, traffic jams during peak hours start from the Mines shopping center all the way to the BESRAYA toll at Sungai Besi, a distance of about 3km.

What many drivers do not know is that there are clauses in the BESRAYA concession agreement which states that the concessionaire must take mitigation measures to resolve these traffic jams or face the consequences. For example, if the highway concessionaire cannot maintain a Level of Service (LOS) “C” in terms of traffic flow along this highway, it must introduce off-peak toll rates which are at least 10% lower than for the peak period in order to divert traffic to off-peak times. (The evening peak hour LOS at BESRAYA is at the “F” level or bumper to bumper traffic). If this still doesn’t work, the concessionaire must upgrade the toll plaza and the toll highway to achieve LOS “C” traffic flow. During the period of upgrading works, the concessionaire must pay the government an amount equivalent to 10% of the estimated costs of upgrading works per month for the inconvenience caused until the upgrading work is completed. Although these conditions are in the supplemental concession agreement with BESRAYA, it has never been enforced even though the traffic conditions along the BESRAYA highway immediately after the Sungai Besi toll plaza has gotten worse since 2014 (the year of the most recent supplemental agreement).

This example clearly shows that the government has no political will to exercise the conditions which are clearly stated in the various toll concession agreements. The toll concessionaires have strong lobbying power which they have, no doubt, put into good use in ‘forcing’ the government not to buy back these tolls, to continue to pay them excessive compensation and not to enforce the conditions stated in these agreements.

Notice that the government has no problems in ‘convincing’ toll concessionaires which are loss making to allow the government to buy them back. For example, the Eastern Disposal Link (EDL) in Johor has been facing financial difficulties right from the start and was in danger of declaring bankruptcy.[6] This was one of the toll highways where tolls will be abolished as announced in Budget 2018. The way in which this will be done is through a government buy-back of the EDL. The total cost has not yet been announced. This example clearly shows that if the government has the political will, a toll buy-back plan can be implemented on a financially sustainable basis.

Response 5: PH will pay proper compensation as stipulated in the concession agreements in the toll acquisition process but will need complete access to ALL the toll concession agreements

Some people fear that PH’s proposal to buy back these toll concessions will cause uncertainty in the markets since many of these concessions are owned by public listed entities or by Government Linked Investment Corporations (GLICs) such as EPF, Khazanah and PNB. PH will clearly follow the terms and conditions as set out in the concession agreement for the toll buy-backs. The toll concessionaires will earn an acceptable rate of return for their investment in these highways (but not earn supernormal profits).

For PH to evaluate the total cost of acquiring all of the toll highways, we would need access to ALL the toll concession agreements. Although some of them have been declassified, others such as the MEX as well as the PLUS highway concession agreements are still classified under the Official Secrets Act (OSA). The toll buy-backs will take place only after a careful study of all the terms and conditions in these concession agreements and in a way which is responsible and fair to the government, to the tax payer, to the road users and to the concessionaires.

Dr. Ong Kian Ming
Member of Parliament for Serdang

Appendix 1: Sample Toll Concession Compensation Amount

CA = Σ[AT x (2 x TV)] – TA; where:-
CA: The amount of compensation payable in respect of the relevant
Operating Year
Σ: The summation for all classes of vehicles
AT: The Agreed Toll which should have applied for the relevant Operating
Year for the particular class of vehicle
TV: The actual traffic volume for the particular class of vehicle in the
preceding six (6) months
TA: The aggregate toll collected by the Concession Company for the
relevant Operating Year

Appendix 2: Total compensation paid to Toll Concessionaires from 1990 to 2015



[3] The exceptions are the PLUS owned highways whose concession agreements were renegotiated after PLUS was privatized in 2011. The terms of conditions of the new concession agreement have not been declassified at the time of writing.




Pakatan Harapan’s Alternative Budget: Responding to the critiques (Part 1)

Media Statement by Dr. Ong Kian Ming, Member of Parliament for Serdang, on the 2nd of November 2017

Pakatan Harapan’s Alternative Budget: Responding to the critiques (Part 1)

I have been digesting the comments and commentaries made about the 2018 Budget announced last Friday by Prime Minister Najib and also the Pakatan Harapan Alternative Budget for 2018. I want to use this opportunity to address several critiques directed at the PH Budget starting with our proposal to abolish the GST.

One of the major critiques levelled against the PH Alternative Budget is that we are not being responsible or realistic by advocating for getting rid of the GST. The following are the responses to some of these critiques:

1) Critique: Companies have spent millions if not billions in implementing the GST system. Won’t all this money be wasted if we get rid of the GST?

Response: We will not get rid of the GST system. All of the items which were not taxed during the SST regime will be ‘zerorised’ i.e. 0% GST tax rate. All of the items which were taxed at the point of production during the SST regime will have the same tax level at the point of production. We will use the existing GST system to collect the SST related taxes.

2) Critique: Why not say you will ‘zerorise’ the GST rate rather as opposed to saying that you will get rid of it?

Response: Most Malaysians don’t know the meaning of ‘zerorising’ the GST or the difference between goods which are zero-rated versus exempt. The effect on the consumer will be that they no longer have to pay the GST so this effectively means we are getting rid of it.

3) Critique: Will there by a reduction in the price of goods and services if you get rid of the GST? Wasn’t the GST already priced in during the implementation phase in 2015 and 2016? Aren’t the price of goods and services ‘sticky’ downwards?

Response: When we get rid of the GST, consumers will expect prices to go down. Even if retailers don’t decrease prices by 6%, there will be competition between retailers to offer at least some discounts in order to attract customers. Getting rid of the GST puts downward pressures on prices on the whole.

Also, by collecting less taxes (by going back to the SST regime), we are directly and indirectly putting money back into the wallets of consumers and business and this will have a healthy multiplier effect on the economy.

4) Critique: But the GST is not really that regressive because many items are tax-exempt and / or zero rated!

Response: Firstly, the impression that many basic goods and services are not subject to the GST is not entirely accurate. For example, the government has said that banking services are exempt from the GST. But in reality, whenever you transfer money online to your friend or your employee, you have to pay the 6% GST on the cost of the financial transaction. If you are charged for withdrawing money from a MEPS ATM, you will have to pay the 6% GST on that charge. There are many such items whereby GST is charged on areas which many in the public thinks they do not have to pay GST on.

Secondly, just because an item is exempt from GST does not mean that the price of that item will not increase post-GST. For example, even though residential property is GST exempt, this merely means that the developer cannot tack on a 6% GST charge on the final price of the property. The inputs i.e. the construction materials and the professional fees which goes into the building of that property is still subject to GST. This means that the cost of the GST will be implicitly included in the final property price.

In cases where the cost of the GST cannot be passed on to the consumer because of price regulation, others have to bear the cost. For example, public transportation such as taxi fares are not subject to the GST. But the cost of maintaining the taxis and also the insurance policies for the taxis are subject to the GST. This means that either the taxi drivers have to bear the increase in these costs due to the GST (more likely) or their taxi companies need to absorb these costs (less likely).

5) Critique: We are making it easier for people and companies to avoid tax by getting rid of GST

Response: We will still be using the existing GST system to collect taxes that will be based on the SST regime. Hence, the same reporting system that was supposed to have increased tax transparency will still be in place.

At the same time, having the GST is no guarantee that the amount of illicit financial flows out of the country (another form of tax avoidance) will be decreased. Malaysia was ranked as one of the top 5 countries in terms of illicit financial flows by the non-profit research organization, Global Financial Integrity (GFI).[1] Three of the other countries in the top 5 list namely Russia, Mexico and China had GST or value added taxes during the time period of the study. What is needed to decrease these illicit flows is a government which is committed to transparency and not dictated by self-interest especially when it comes to illicit financial flows of billions of RM in and out of personal bank accounts.

One commentator has also said that having a GST will make it less likely that companies will evade tax by parking their profits in low tax countries.[2] Despite the fact that Ireland has a value added tax of 23%, its low corporate tax rate of 12.5% continues to attract many multinational companies to park their profits in this country. The European Union (EU) has been clamping down on these practices of getting income tax breaks from low corporate tax countries[3] but this is due to the EU having an institutional framework that has the force of law, rather than the presence of the GST. There is no such framework in ASEAN and I would be surprised to learn, for example. if the government would go after Malaysian companies which park their profits in Singapore because of its relative low corporate tax rate of 17%.

6) Critique: GST broadens the tax base. If we get rid of the GST, we are narrowing the tax base

Response: It is true that the GST broadens the tax base by taxing a larger number of people compared to the personal income tax. Only 15% to 20% of the working population earn enough to pay personal income taxes whereas everyone has to pay the GST through the goods and services consumed. But this is the very reason why the GST is regressive since it shifts the tax burden from those who are rich enough to pay income tax to the larger population, the majority of whom don’t earn enough to pay income tax.

Even then, the argument that implementing the GST will broaden the tax base is not necessarily accurate in the context of Malaysia. Theoretically, implementing the GST and reducing the personal income tax rate should decrease the % of overall revenue collected via the personal income tax. Instead, the % of total revenue collected via the personal income tax has increased from 11.1% in 2014 (pre-GST) to a projected 13.4% of total revenue in 2018. This is in spite of the 2% reduction in the income tax rates among those who earn between RM20,000 to RM70,000. The total personal income tax collection is projected to increase from RM30.1 billion in 2017 to RM32.2 billion in 2018, an increase of 7%. While some of this increase could be due to increasing wages and bonuses in 2018, one cannot discount the possibility that the Internal Revenue Board (IRB) will pursue a more aggressive strategy in chasing after back taxes from individuals and have their tax officials ‘knock on more doors’ as reported in the Edge Financial Daily on the 30th of October, 2017 (See Figure 1 below).

Figure 1: “Tax Officials to knock on more doors” The Edge Financial Daily, 30th of October 2017

One commentator also said that having the GST will allow us to tax those who consume heavily especially in luxury items. The example he cited was that GST would enable more than RM6 million to be collected on the sale of a diamond ring costing more than RM100 million. Perhaps he has forgotten that if this diamond ring (and other such luxury items) was bought overseas, then Malaysia would not be able to collect the GST for this diamond ring.

7) Critique: The GST is a very effective way of raising revenue for the government.

Response: This is very reason why Pakatan Harapan is committing ourselves to getting rid of the GST. In times of economic hardship or if the government is forced to raise additional revenue for bailouts and massive infrastructure spending, the easiest way to increase this revenue is by raising the GST rather than cutting expenditure in other areas. Increasing the GST as a way to raise additional government revenue has adverse effects especially on the poor since they are the ones most susceptible to sudden price increases. Would anyone be surprised if the BN government is forced to increase the GST rate if they win GE14 and need to raise additional revenue to bailout 1MDB or to pay for the ECRL, for example?

8) Critique: What about the more than 100 countries which have implemented GST?

Response: The countries which have implemented some form of value added tax such as the GST can be divided into two categories, more or less. In the first category are the developed countries whereby most of the working population earn enough to pay income taxes. Shifting the tax burden from income tax payers to the consumer does not have significant adverse effects in these countries since their citizens, by and large, are rich enough to absorb the value added taxes.

For many developing countries, their tax collection systems are too weak to collect significant amounts of revenue from personal income and corporate taxes. Hence, implementing the GST is a way for them to improve their tax collection system and also a necessary means of raising additional revenue.

Malaysia is not rich enough to be categorized as a developed country especially in terms of the % of the population which earn enough to pay personal income taxes. But we are fortunate to have a relatively competent tax collection system under the Internal Revenue Board (IRB) and to a lesser extent, the Customs Department. Given this, Malaysia had the choice of postponing the implementation of the GST until we reach the status of a developed economy. The finances of the government were relatively intact prior to the implementation of the GST and there is no reason to think that under a new government, with a new mandate to decrease wasteful expenditure and corrupt practices, cannot survive without the GST.

9) Critique: Most tax experts and economists agree that implementing the GST is a good thing. Are they all wrong?

Response: Most of the tax experts work for auditing companies such as PwC and Ernst & Young. They stand to gain from the implementation of the GST in terms of increased business from tax advice and auditing services. It is unlikely that they would speak out against the implementation of a policy from which they stand to gain financially.

Most economists follow the conventional theories regarding taxation some of which has been highlighted above. GST is a broad-based tax that is more efficient compared to other forms of taxation. But most economists don’t have much to say about the effects of corruption on government finances. There is less conventional economic theory on this except to say that corruption is bad for the economy and for government finances. But by how much? Have economists estimated how much we can save through the reduction of corruption and wastage in the government? Not to my knowledge, at least not in the case of Malaysia.

It is also worth noting that tax experts and economists are most likely to be in the upper 20% of the income bracket and thus, are not likely to feel the brunt of the implementation of the GST in the same way as someone in the B40 income bracket.

10) Critique: We cannot afford to get rid of the GST as the financial gap is too big to cover.

Response: We have shown in the PH budget that we can cut wastage and corruption by as much as RM20 billion which is almost enough to fill the financial gap of RM25 billon as a result of getting rid of the GST and reverting to the SST tax rates.

But since this is an important topic, I will dedicate an entire statement to explain this in greater detail.

Dr. Ong Kian Ming
Member of Parliament for Serdang




The ‘nudge’ theory and policy-making in Malaysia

(This article can also be read at the Penang Institute in KL Column in the Malaysian Insight, 15th October 2017)

EARLIER this week, Professor Richard Thaler was awarded the Nobel Prize for Economics for his contribution to the field of behavioural economics. He is probably most well-known for his “Nudge” theories on providing incentives to change people’s behaviours on a number of dimensions, such as one’s propensity to save money or to switch to a healthier lifestyle.

In 2010, the transition of behavioural economics from a marginal topic in the discipline to mainstream public policy making was formalised with the establishment of a Behavioural Insights Team (BIT) or better known as the “Nudge Unit” within the Cabinet Office in the United Kingdom government. Around the same time, Thaler’s co-author for the best-seller “Nudge: Improving Decisions About Health, Wealth, and Happiness”, Professor Cass Sunstein, worked as a regulatory ‘czar’ in Obama’s White House from 2009 to 2012 and a “Nudge Unit” was formally established in Obama’s White House in 2015 via executive order.

Some examples of the UK’s Nudge unit achievements include using various telephone messages to encourage greater participation in organ donation drives and personalised messages to increase the percentage of those who pay their government fines on time.

Such “nudge units” are fashionable among politicians and policy makers, because the positive results arising from such initiatives are usually measurable and yield benefits which far surpass the low-cost implementation methods.

How likely will such “nudge” ideas find their way to our shores? To answer this question, we must first understand the potential obstacles that lie in the way of implementing such initiatives in Malaysia.

Firstly, we have scarcely any local experts in the field of behavioural economics in our public and private universities. Whereas places like the UK, the US and Australia have established economists working in this field and full-fledged research centres dedicated to the testing and implementation of ‘nudge’ initiatives, we would be hard pressed to find even one well-trained and experienced Malaysian behavioural economist.

Secondly, for any ‘idea’ to take root in a government, the politicians in charge must have some basic level of understanding of that ‘idea’. For example, most politicians and senior civil servants in Malaysia are familiar with the “Blue Ocean Strategy” (for better or for worse) through exposure to the authors of the book and various consultants who have formulated ways to weave this marketing theory into our government machinery. By contrast, few of our Malaysian politicians or senior civil servants are familiar with the concepts underlying behavioural economics and how these ‘nudge units’ can potentially work for the benefit of the population.

Thirdly, many of the initiatives undertaken by these ‘nudge units’ use randomised control trials (RCTs) to evaluate the effectiveness of various ‘tweaks’ in order to find the method with the highest returns. This kind of experimentation, although commonplace in clinical trials, could be terrifying for our civil servants and the wider population. Imagine telling a civil servant to issue different variations of a speeding fine or ‘saman’ notice to registered car owners as a test, to see which would result in the most fines being paid. He or she would find it difficult, to say the least, as it goes against the typical government procedure of standardising such documents. Additionally, car owners may doubt the authenticity of their fines, if they compare their own letter to that of others and find that the wording is different.

Furthermore, such experimentation may require a ‘control group’ to benchmark the performance of tested subjects. If incentives are given out to the test group, but withheld from the ‘control group, the ministry or government department in question may very well be criticised for unfairly ‘rewarding’ one group and ‘punishing’ the other.

This being said, I do not think that it is impossible for such ‘nudge’ experiments to be tried out in Malaysia. However, for it to be feasible, the pilot project will need to be conducted using a very limited and carefully selected sample size, using a research design that is well-thought out. Policy makers and politicians also need to be assured that these social experiments won’t come back to haunt them and that the potential benefits could be significant.

It would be very useful, for example, to identify communities which are especially prone to diabetes and provide incentives for such families to decrease their sugar intake via cash payments or the provision of healthy replacements in lieu of sugar.

The Ministry of Consumer Affairs can also work with supermarkets and hypermarkets to display healthier foods in more prominent locations and make them more visually appealing. This would be a far more effective strategy to deal with health problems associated with high sugar intake, instead of merely raising sugar prices across the board. Such ‘nudges’ to reduce diabetes rates could well result in a much healthier population and lower health care costs for the government.

* Dr Ong Kian Ming is the Member of Parliament for Serdang, Selangor and is also the General Manager of Penang Institute in Kuala Lumpur. He holds a PhD in Political Science from Duke University, an MPhil in Economics from the University of Cambridge and a BSc in Economics from the London School of Economics.