2009 NATIONAL BUDGET AND ECONOMIC POLICY BRIEF BY DSAI

2 September 2008

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PARTI KEADILAN RAKYAT MALAYSIA
2009 NATIONAL BUDGET AND ECONOMIC POLICY BRIEF

Parti Keadilan Rakyat (KeAdilan) recognizes that for millions of Malaysian citizens the economic climate has become a troublesome one. Malaysians today face ongoing reduction in their purchasing power, growing job insecurity, increased fuel prices, low wages, and a high gap between the rich and poor. KeAdilan believes that Malaysia can no longer afford to stand on the sidelines and allow the BN government to pursue a ‘too-little-too-late approach’ in addressing these issues. That is why, on this day, KeAdilan is pushing one more step forward its position on the Malaysian Economic Agenda, to relieve the burden on Malaysians struggling with record high inflation and dwindling economic prospects. Whereas the current government has failed to adequately address these issues, KeAdilan will pursue the policies critical to restoring Malaysia’s quality of life, economic strength and competitiveness in the global economy.

1.0 Summary:
The Parti Keadilan Rakyat (KeAdilan) proposals on the budget and response to the current BN government’s 2009 National Budget are based on a new model of socio-economic development which draws on an analysis of some of the best performing economies in the world. This specifically includes understanding the successes of Taiwan, Korea and Ireland, and integrating the best practices of these economies with the enormous potential of Malaysia’s natural and human resources and the positive aspects of Malaysia’s past development plans.

When KeAdilan’s model is implemented, the gap between Malaysia and other developed countries in terms of economic performance and living standards will be narrowed, instead of widening as it has under the current government. KeAdilan’s policies will spur a rapidly growing economy that can effectively compete at the regional and global level as well as open up numerous opportunities for all Malaysians and for all scales of business at the individual and sector levels. KeAdilan’s education and human development reforms will bring about an improved educational system and knowledge based economy that will enable Malaysia’s domestic businesses to meet the global challenge with a locally sourced and higher skilled labour force.
KeAdilan’s policy changes target attracting increased foreign and domestic investment and improving labour skills and productivity in the private and public sectors. Underlying this, and in contrast to Malaysia’s recent trends, KeAdilan is unwavering in its focus on ethical principles to ensure Malaysia’s success: fairness, transparency, accountability and good governance will be the key pillars of our economic revival.
The key features of the Parti Keadilan Rakyat Model include:
• Faster pace of economic liberalization
• Extensive investment in quality education
• Higher rate of investment in public-oriented infrastructure
• Integration with more developed ASEAN and East Asian countries
• Stronger role for the private sector
• Merit and need driven policies with a stronger safety net for the poor
• Higher standards of governance and accountability
In the near future, Pakatan Rakyat will unveil in greater detail the full policy regime of its Malaysian Economic Agenda.

2.0 Response to Barisan Nasional (BN) Malaysia 2009 National Budget:
2.1 BN Government’s Misrepresentation of the Current Situation -
The BN government’s budget has been described in mainstream BN-controlled papers as a budget with ‘something for everyone.’ KeAdilan acknowledges that on the surface this seems to be the case, but much of it is illusory. Furthermore, this economic plan will clearly not produce the concrete results that BN has been promising Malaysians. Unfortunately, it follows the trend of previous years which resulted in gross examples of mismanagement, inefficiency and missed opportunities to take Malaysia and its people forward. Since this BN government came to power, they have repeatedly emphasized to Malaysians that their economy is becoming more resilient, that people are more prosperous, that standards of living have gone up, that the country has become more competitive, and that everyone has benefited equally from the country’s growth. Yet, KeAdilan believes that many citizens are aware that the reality of Malaysian achievement compared with other countries, particularly in the context of this country’s enormous potential in human and natural resources, is far from the BN government’s rosy rhetoric. KeAdilan believes that the disillusionment and disenchantment of our citizens was clearly demonstrated at the ballot box in March and in August of this year.

The socio-economic impact of the BN government’s mismanagement include:
• Worsening socio-economic disparities
• Rising income inequalities
• Spiraling costs of living
• Growing urban and rural poverty undetected or underestimated by the Government’s unrealistic poverty line
• Endemic corruption
• Falling competitiveness and sluggish growth
• Rising cost of doing business
The above shortcomings are in addition to the many failings on key non-economic sectors including in the field of civil liberties, judicial independence, media freedom, race relations, religious tolerance, national unity, and crime and security. While not addressed in this brief, these sectors also directly impact on the economic progress of the country. There is much evidence that the current government’s mismanagement and manipulation of developments in the social and political realm to ensure the self interests of certain individuals against that of the greater public good has impacted negatively on our economy..

2.2 Deteriorating Public Finances and Economic Sluggishness -
As the current government has not been open or honest about Malaysia’s current economic and financial position, KeAdilan is providing below various indicators which raise grave concerns about the level of financial and economic mismanagement under BN rule:
1. Operational expenditure in the 2009 National Budget has had an alarming increase of almost 20% year-to-year, now up to RM154.2 billion from RM128.8 billion in 2008. This is an almost 100% increase or doubling from the RM80.5 billion in operating expenditure in 2004 when Datuk Seri Abdullah Badawi first became Prime Minister. And finally, a further worry is that the current operating budget is nearly a 200% or three-fold increase from that in 2000.

2. Malaysia is suffering from sluggish domestic investment, despite not being short of domestic capital. Private fixed capital formation averaged less than half of total fixed capital formation. In addition, since the current government first entered office, Malaysian investments abroad (outward FDI) has risen dramatically: from less than 50% of inward FDI in 2004, to approximately equal to inward FDI in 2006, and to the position now of exceeding inward foreign investment. This is not characteristic of any growing economy in the world. It raises grave concerns about the type of policies and the driving Malaysian capital flight.

3. The economy grew 6.3% in the three months ending in June from a year earlier, down from a 7.1% gain in the first quarter. Economic growth is forecast to slow to 5.7% this year and 5.4% in 2009, the weakest pace since 2005. The figures suggest potentially a growth of just 4% for Q4 2008. The government’s proposed budget will be unable to do the heavy lifting required of it in 2009. KeAdilan is concerned that the government has no plan to increase Malaysian growth other than pinning its hopes on a global upturn in 2009 to lift our growth rate.
4. Inflation was at a 27-year high of 7.7% in June as a result of the government’s mismanagement of the petrol subsidy issue. There are signs that it is worsening. For July’s inflation rate Bank Negara’s Monthly Statistical Bulletin (Table VI.13), gives a figure of 8.5% increase in the CPI, with food rising 11.2%, non-food rising 7.2%, transport rising 22.7%l, and consumer non-durables rising 15.4%. While KeAdilan acknowledges that higher transport and food prices are working their way through the economy and is commited to strong action to ensure that the advserse impacts are minimized, the government appears oblivious to this fact.
5. The fiscal deficit has risen from 3.2% in 2007 to 4.8% of GDP this year
6. The KL composite index is down from 1,374 points to 1,163 year to year
7. The KL market capitalization experienced a loss of over RM200B, or almost 1/5th of its value, within one year.
8. The ringgit’s value has weakened against the major currencies. Against the US dollar, the RM recently completed its biggest monthly loss since the end of its peg against the dollar in 2005
9. Recently, Malaysia’s credit rating outlook was downgraded by Standard & Poor’s to the fourth lowest investment grade. This is indicative of government mismanagement and excesses that are putting credit ratings and currency at risk.
10. Short-term (less than one year) federal debt, the bulk of it domestic has ballooned from RM21 billion at end Mar 2004 to RM51 billion at end Jun 2008, and total federal government debt has gone from RM192 billion at end Mar 2004 to RM285 billion at end Jun 2008. This is a cause for concern of worsening fiscal health.

2.3 Government Budget Initiatives are ‘Too Little, Too Late” -
The 2009 National Budget presented by the current government last week clearly appears to collect piecemeal proposals to allocate what have been described as ‘little goodies’ to various voting blocks – the poor, the middle class, the rich, the corporate sector, and civil servants. The BN Budget lacks a disciplined and well targeted vision, and is indicative of the government’s failure to provide sound economic direction in a challenging global and domestic environment.

This analysis, however, will not focus on the small handouts and various fiscal ‘goodies’ which are fairly transparent in their political purpose. Instead, this brief is focused on analysing the substantive thrusts and programs of the BN Budget, to assess whether they can respond to the need for reform and change in our economy, and to outline the KeAdilan policy options that can lead to greater economic prosperity and security for all Malaysians in these turbulent times..

2.3.1 Suspicious Public Transport Measures
The various initiatives providing $35 billion to public transportation are ostensibly to address the needs of Malaysia’s urban population, especially in Klang Valley and KL as well as Penang. But characteristic of much of this budget it is simply too little and too late.

This large allocation will not resolve the public transport woes of the country, not even for urban commuters. Given the current systemic flaws and the past track record of BN, it is likely that the building new infrastructure without good governance, proper execution and maintenance will result in large portions of public funds going to waste, or lost through bribery and other leakages with the public transport issue largely left unresolved.

KeAdilan has two specific concerns on this issue: First, the proposed Public Land Transportation Commission is a central federal body in the PM’s Department, although these projects are almost entirely local or regional issues. Until and unless power over public transport planning and design is devolved to state and local authorities, the problem cannot be properly solved. Second, based on previous examples, there is a strong possibility of misguided centralized planning attempts and award of tenders and contracts to insider and favored companies such as Scombi which may lead to allegations of nepotism. To forestall this, KeAdilan emphasises the need for open competitive tenders, with special consideration given to genuine multi-racial partnerships in those tenders. In addition, KeAdilan has additional policy proposals for more productive public transportation initiatives it intends to pursue.

2.3.2 Failure to Strengthen the Safety Net
KeAdilan has for many years consistently criticized the meager safety net provided to Malaysia’s poorest and most vulnerable citizens. While the current government has finally taken heed of these concerns and deemed it advisable to raise the cut off point for welfare assistance and the increase in pensions for the lower levels, it is again ‘too little, too late.’ Apart from the adjustments being several years late, the proposed increases only appear to be intended to raise beneficiaries above the PLI (Poverty Line Income) established in 2004, and as published in the 9MP (Ch 16), adjusted by a mere 10%.
Of grave concern, and indicative of irresponsible policy, is that the beneficiaries of this initiative will still be below the nominal Poverty Line Income’s for Peninsula Malaysia, Sarawak and Sabah. Going by the overall CPI for the 3 regions, the adjustment from 2004 to 2008 should be closer to 120% than the 10% proposal. (As of mid-year 2008, CPI for PM was 113.4 [2005=100 ]. Seeing that the 60+% of the PLI is the food PLI, the actual adjustment should have been higher since the food weight in the CPI is around 31%). (See “Note on Safety Net for the Poor, KeAdilan 2009 Budget & Econ Policy Brief” for more details on this proposal)
KeAdilan has also been clear about its concern regarding the importance of targeting Malaysia’s most vulnerable segments exposed to escalating inflation. The government has not only ignored this problem but by its flip-flopping over the fuel price increases has been the main culprit in the galloping inflation which has hit Malaysia and has most affected the poor.

2.3.3 Meaningless Corporate Sector Initiatives
While the 2009 National Budget has been touted in the mainstream government press as a “business friendly budget”( Star, 30 Aug.), experts have already contradicted that notion. This can be seen in the two page coverage of responses by leading tax experts (from Ernst & Young, PricewaterhouseCoopers, Deloitte and KPMG) acting on behalf of the country’s top businesses and corporate clients. Their verdict was that this is a budget that, whilst not penalizing business, is going to do practically nothing to encourage business. The plan has no substantive initiatives to encourage business big or small, and contains no compelling proposals to improve Malaysia’s competitiveness in the context of the global economic slowdown.
It is not only the tax experts and business consultants that have lost faith in the government’s business policies. Clear evidence can be found in the government’s own data. From table 8.2, Investment in Approved Projects by Industry, it can be seen that there has been a significant reduction in investment of almost all industries this year – most significantly in textiles and textile products; paper, printing and publication; and petroleum products; and electric and electronic products. KeAdilan is concerned that if this trend is allowed to continue, domestic and foreign investment would continue to avoid Malaysia due to the BN government’s continuing failure to develop attractive and meaningful policies, within the context of structural reform, reducing of business costs and to the implementation of improvements in government response and operating efficiency. Without a clear investment and business oriented strategy, BN’s lack of planning would have serious implications for overall economic growth and private-sector employment.

2.3.4 Exaggerated Food Sector Claims and Unsubstantiated Targets
KeAdilan is concerned that the BN government is exaggerating claims and misrepresenting statistics to create a ‘rosy’ picture of its achievements and the economic progress achieved under its administration. One example comes from the food production and padi sector, to which KeAdilan attaches great importance. Firstly the BN 2009 National Budget refers to laying the foundations for achieving 86% self-sufficiency in rice by 2010, from 73% in 2008, through a variety of interventions. This implies an increase in domestic production of 13 % in 2 years, or a compound annual rate of increase of over 6% per year in the two years left. This is an implausible and unachievable target given that since 1980 to the present, despite billions spent on new irrigation system intensification, research, extension services, and allocations to agencies and padi based IADPs, Malaysia has not been able to achieve an annual rate of increase in national padi output even approaching 1%. The reality is that domestic rice production nationally has been flat.
KeAdilan proposes greater research invested to understand why some farmers are able to get yields of around 10 tonnes per hectare, amongst the highest in the world especially in the tropics, and transmit that knowledge and technique to all farmers. This does not require huge expenditure, nor an obsession with large-scale farming and the subsidies the government provides such large-scale farms. Instead it will benefit smaller, lower income farmers, almost all of who are Malay. KeAdilan also proposes further investment to research improvement of hill rice yields in Sarawak and Sabah, as it is possible to obtain up to 5 tonnes per hectare. This will improve food security as well as incomes, and it will also sustain a form of agriculture that is often the most environmentally friendly for the terrain in question.

2.3.5 Opening the Door to Wider Corruption and Abuse
KeAdilan’s concerns do not stop with misleading targets. The concerns are with the BN’s historical practices of spending large sums of scarce public funds on a problem – without proper concern for prudent and responsible spending and a strong commitment to high execution standards and results that merit the expenditure. This has been clear across all the major sectors of government spending. In agriculture and padi we see that what is not specified in the 2009 National Budget document, but included in the lump sum allocations are a number of handout programs which are likely to have the following outcomes:
• Special yield enhancing inputs to be given free, whose efficacy in terms of yield increase is questioned by many parties, but which will enrich suppliers. Hence the scramble now for many UMNO and BN companies to get their products on the favoured list.
• Farm machinery handouts, again immediately benefiting a small group
• Various production incentives in cash but in practice subject to significant abuse in implementation. For example: the yield increase bonus.
These KeAdilan concerns extend equally to many other sectors. For example, in Sarawak, there is a 20% allowance for Sarawak tenders, on top of the 10% allowance for bumiputera, i.e., a total of 30% allowance for those individuals and companies that can claim Sarawak bumiputera status. If the RM3 billion allocated to Sarawak for infrastructure is subject to this, it means that, RM1 billion will immediately have been siphoned into pockets of such companies as CMS and individuals directly associated with key BN political leaders and their families.

In conclusion, the implementation of the BN government’s 2009 Budget Proposals will see the past trend of economic mismanagement and failure to rectify structural weaknesses continue. In its place, KeAdilan proposes a plan of constructive stewardship and good governance of the economy. We will introduce pragmatic but innovative reform policies and programs that will revitalize our economy and make it more resilient to meet the challenging time ahead

3.0 Key KeAdilan Policy Initiatives:
The policy initiatives that comprise KeAdilan’s Malaysian Economic Agenda, will cover the full spectrum of social, political and economic development for Malaysia. The following are examples of specific policies which KeAdilan will implement to spur our economic growth.

3.1 STIMULATING INVESTMENT
Increasing both domestic and foreign investment – the key drivers in Malaysia’s productive growth – is a primary focus of KeAdilan’s policy proposals. Despite strong fundamentals in Malaysia such as high domestic savings, high private consumption and strong domestic demand ithat would be expected to lead to strong and continuous investment flows, FDI is still unimpressive compared to the region and even more domestic capital is flowing out of the country than investment coming in. KeAdilan believes there are fundamental regulatory and business environment factors which must be reformed to truly reach Malaysia’s goals of global competitiveness within the next decade.
First, KeAdilan recommends a shift away from the historic equity restrictions for approved investments, and that the FIC should be retasked to monitor the national distribution of equity under present policy. The foreign share of the national economy has reduced significantly since the NEP (and its consequent policies) and the FIC was introduced. The equity restrictions imposed by FIC are now seen as a barrier to investment while not materially assisting the growth of disadvantaged groups. For example, corporate transactions through mergers and acquisitions when they fall under the Guidelines of the FIC on Take-Overs and Mergers, have to restructure their ownership structure to comply with the NEP (now the NVP). Moving away from equity limitations at the enterprise level will stimulate investment (and FDI) while FIC can act as a facilitator and monitor for participation of disadvantaged groups in macro economic context using incentives to encourage participation rather than restrictive legislation.
Second, KeAdilan proposes that tariffs and other entry barriers need to be eliminated in order to negotiate trade agreements with other ASEAN countries, Japan, the EU and others. To sustain the competitive advantage against especially India, China and Singapore, Malaysia will need to upgrade the educational system to educate and attract high skilled labour in focus sectors, such as engineers, biochemists, industrialized farmers, etc.

3.2 PRODUCTIVE BUSINESS INCENTIVES
KeAdilan believes that reduction in taxes and other levies to the business sector, in the proper environment, will result in increased investment and consequently job growth. Additionally, KeAdilan’s proposals are to focus on key sectors to maximize impact of tax-rebates on industries strategic to Malaysian growth and development. In addition to opportunities to lower the overall business tax burden, we propose to provide more sector- and productivity-driven incentives to increase investment in critical areas and companies. Examples of these policies are:
i. Tax rebates for those who export to a certain level (similar to Chinese initiatives)
ii. Tax rebates or even direct subsidies to encourage efficient and labour intensive operations as well as to provide incentives for companies to migrate to more fuel efficient production methods.

3.3 REFORMING THE PUBLIC TENDER SYSTEM
One of the core pillars of the KeAdilan economic agenda is that all government contracts must be tendered in an open, competitive and transparent manner. Towards this end, the following policies will be implemented by KeAdilan as quickly as possible:
i. All qualified companies shall be provided with equal opportunities to secure Government supply contracts and projects.
ii. To prevent destabilizing disruption to the current system, this policy shall be implemented on a gradual basis, commencing with projects or supply contracts sized above RM10 million for 2009.
iii. In view of the challenges brought by globalization and to honor our international commitments to free trade, all tenders shall be made competitive, open and transparent by 2015.
KeAdilan projects that on the conservative assumption a 10% savings is achieved via the new tendering system, it will generate an absolute savings in excess of RM5 billion per annum as well as bring about quality improvements that are of a large magnitude.

3.4 DOWNWARD ADJUSTMENT OF THE FUEL PRICE
KeAdilan proposes to review the downward adjustment of fuel price so as to reduce growth constraint pressure brought about by the government’s mismanaged and excessive fuel price hike and other inflationary factors in the economy. The downward adjustment will mean lower fuel costs for businesses which will enable them to expand production. Further growth will also come about as a result of the increase in disposable income of the average Malaysian arising from reduced energy related prices. The impact of the oil price adjustment will also result in a stimulation of consumer spending and help moderate the current slowdown in consumer credit growth.
With our proposed downward adjustment of the fuel price, our aim is to reduce inflation to less than 5%

3.5 STRATEGIC PUBLIC TRANSPORT INITIATIVES
KeAdilan considers public transportation infrastructure a priority for investment, and also as a target for major systemic reform. KeAdilan will improve the quality of the nation’s transportation infrastructure by optimizing the development expenditure for the sector. Key attention will be given to the three highly congested urban centres – the Klang Valley, Penang Island and Johor Bahru. A blueprint for a “Klang Valley Circle” rail network will also be developed to improve inter-suburban connectivity, by-passing the congested Kuala Lumpur city centre.
KeAdilan also supports a policy to strengthen and link up the public transportation network nationwide in a manner that revisits Malaysia’s “old” cities such as Ipoh, Seremban, Melaka, and Alor Star and links them with fast rail service.. In addition to attracting foreign and local tourists, the interconnectivity of these cities will foster greater trade and information flows which will positively affect domestic consumption and investment. Finally, improved rail transport opens the path to future re-developments of these older cities in the medium term with less infrastructure costs as compared to current investment in mega-projects including those aimed at creating new cities from nothing. KeAdilan believes Malaysians must think of the public transportation network of the future in terms of the flow of people, investment and business.

3.6 CURBING PUBLIC EXPENDTURE ON MEGA-PROJECTS

Historically, the BN government has had a notorious track record for wasteful and extravagant mega projects that cannot justify close scrutiny. In addition to the aborted RM1.13 billion crooked scenic bridge, a RM9 billion undersea cable-tracking project has also been proposed and there is now a proposal for a RM15.2 billion high speed broadband (HSBB) project to wire up 2.2 million so-called high economic impact premises.
Not many details have been released about the HSBB project since the plan was initially made known by Deputy Prime Minister Datuk Seri Najib Tun Razak last September. If this latest example of a mega project is approved, the expenditure will cost the public approximately RM 7,000 to wire each premise – a totally unjustifiable sum.
To prevent the likelihood of financially irresponsible mega projects burdening the public, KeAdilan proposes for the current budget year and the remainder of the 9th Malaysia Plan period to undertake a rigorous priority review of all proposed mega projects costing RM1B upwards and to assess their socio-economic viability, affordability and intended impact on national development. This review will be conducted as transparently as possible and will include the use of independent and credible professional bodies and individuals.
The strict adherence to higher standards of fiscal prudence by the KeAdilan government – beginning initially with mega projects and to be extended to all new projects – will prevent public funds from being wasted or hijacked by political cronies of the BN. It will also enable the savings to be channeled towards programmes bringing higher returns for the public, including those specifically aimed at helping low and middle income earners.

3.7 REFORMING THE CURRENT SYSTEM OF AWARD of AP’s
KeAdilan proposes as a part of our new sources of revenue, as well as to negate the rent-seeking culture, that the approved permits (APs) currently issued for free by the Ministry of International Trade & Industry to a select pool of “businessman” shall be auctioned to the highest bidders. Based on an estimated 70,000 APs issued per annum and a conservative RM25,000 market price, the auction will provide an additional RM1.75 billion to government coffers.

3.8 ADDITIONAL MEDIUM TERM PROPOSALS
KeAdilan’s additional medium term proposals are focused on the BN inititiated policies that KeAdilan believes must be changed or abandoned for good as well as on the new policies that need to be put in place in order to raise the Malaysian economy to a higher level and to realize the full potential of Malaysia’s diverse human resources and geographical regions. These proposals are also based on the removal or liberalization of archaic or self defeating entry barriers that stand in the way of ensuring sustainability and improving growth in the various sectors to benefit all Malaysians. Finally, they are based on taking the country’s economy forward in meeting the unprecedented challenge from other regional and global players and in coping with the more uncertain and rapidly changing external economic environment.

More details on these will be released shortly in the full publication of Pakatan Rakyat’s Malaysian Economic Agenda.

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