Tuesday, July 10, 2012

The Cost Of Buku Jingga

I’ve been asked by a friend to look at the numbers being bandied about regarding the cost of the proposals that a Pakatan Rakyat government would implement if it came into power, for example, as brought up in the recent debate between DAP’s Lim Guan Eng and MCA’s Chua Soi Lek (excerpt):

Pakatan’s call for change will bring uncertainty to the country, warns Soi Lek

…Dr Chua said the country would be bankrupt within two years of Pakatan's five-year tenure if it implemented all its pledges.

Even if the Pakatan could achieve 100% no-corruption and no-leakages, it might only save RM26bil; while its total pledges amounted to between RM200bil and RM230bil which is the country's total revenue in a year, he said.

Giving the breakdown of the figures, Dr Chua said this comprised between RM50bil and RM100bil for free toll, RM43bil for the abolition of PTPTN loans and RM93bil for the promise of the minimum monthly household income of RM4,000…

[If you click through the link, just ignore the very obvious spin in the article]

Since I don’t know the basis of the calculations on each side, and because Buku Jingga itself is rather short on details, an objective assessment is really out of the question.

Nevertheless, from my point of view, there’s a certain level of justice on both sides. It’s just that one side takes the best case scenario, while the other takes the worse – that’s just the way the incentives work out. The truth, as is usual, is probably somewhere in the middle.

There’s certainly a good argument that leakages and poor procurement practices can be plugged and that could result in some savings of outlay.

There’s however only so much you can do – some part of the overage in spending is due to government departments trying to “spend up” to their budgets, some part to corruption, and some part to incompetence. But some of it is purely down to the inherent inefficiency of centralised procurement. Unless you’re willing to trust your people enough to do their own individual purchasing, you’re not going to get “market” prices.

As well, shifting to open tenders will generally only save money for supplies, but not for more complex projects where the big money is actually spent and contract fulfilment is a greater priority than cost.

Trust me, it’s not only governments who have to deal with overpriced goods and services. These problems are endemic within the corporate sector too. I’m also wondering how much more cost-effective PR’s policies would be relative to what the government and Pemandu are doing now in reforming the government procurement process. Believe it or not, there have been changes and progress made.

Whatever controls are put in, I doubt you’ll save more than half the wastage identified on the outside (that’s a guess by the way) – significant money nonetheless, but not to the extent of RM26-28 billion (depending on who you’re reading).

On toll and utilities, there’s an even bigger gap in the numbers from the two sides. Personally, I’d keep toll concessions in the private sector as much as possible as that makes more economic and financial sense – unless you believe JKR can do the same job of building and maintenance as efficiently as a private company with a profit incentive.

There’s however grounds for looking at the process of awarding toll concessions. And there’s certainly a good case for taking a long hard look at prices and practices in the private utility sector. Will any of these result in “savings” for the federal government? As things stand, probably not. Utility subsidies are mainly borne by TNB and Petronas, not the government directly. Abolishing toll concessions might be as cheap as PR believes, but that doesn’t factor in the government bearing future upgrade and maintenance costs, nor the implications for future infrastructure development.

As for “free” education – there’s no such thing. Whether the government provides loans or scholarships, somebody (i.e. the taxpayer) foots the bill. In terms of expanding the number of public universities to cater for all who qualify, I think the government estimates for setup costs can be brought down – it really depends on what type of university you want.

The traditional sprawling campus approach costs more to build because more land is used up; but if you don’t care for such things, a few office blocks will do. Take my alma mater – our “campus” was a narrow crooked alleyway maybe 150m long in between a couple of decent sized (but old, cramped, and drafty) buildings.

But setup is just the start; I think KJ in his debate with Rafizi a few months back brought up the point about running costs, and that’s where the real constraint on the supply side lies – can you actually get the faculty given the already short supply of skilled labour, and pay them what they’re worth? And if you can’t, aren’t you embedding a lower quality of education into the system, while at the same time bidding up labour costs? You pick your poison.

As for raising household incomes to a minimum of RM4,000 – sorry that’s a pipe dream, at least not within this decade and not without some really serious consequences for employment and inflation. One of the virtues of the minimum wage as it will be implemented next year is that its not too far off average market wage for low skilled labour. But a RM4000 target implies a minimum wage of around RM2250, which is way, way above and truly distortionary.

It’s one thing to put a floor on wages to limit employer abuse and encourage capital intensity, but it’s quite another to upset competitive balance and relative prices in an economy. My belief is that at this moment, we would see unemployment effects (and hence lower GDP growth) starting at minimum wages above Rm1,200, rising to a limit of about RM1,900-RM2,000 by 2020 (and that’s being very, very generous).

Unless PR are willing to go the whole hog and install a full welfare state (with all that implies for government finances), I don’t see how this can be done. My cost estimate for this, assuming a RM2250 minimum wage, a commensurate unemployment benefit, and assuming a doubling of the unemployment rate to 6% suggests a minimum annual pay out of about RM23 billion, not including income top-ups for low wage employment or the social and economic costs involved with higher structural unemployment (structural unemployment in welfare state Europe is about 8%, and double that rate for the younger age group). Lower than Dr Chua’s cost estimate, but a significant pile of cash nevertheless.

Bottom line here, the above discussion notwithstanding, is that you can argue the figures one way or the other for a month of Sundays and still be left with only opinions and no objective basis for choosing. I’m certainly not going to pretend that what I’ve talked about here is anything but my opinion. I think that PR is being way too optimistic in its assessment and their proposals will cost significantly more than they estimate, just as I think the government might be leaning too much the other way.

My preference is to establish something along the lines of the Congressional Budget Office in the US, which is an independent body tasked with assessing budget proposals and their long term impact, as well as providing independent forecasts of government revenue and expenditure. If we’re serious about getting an objective, non-partisan view of competing fiscal platforms and get beyond, "he said, he said", that’s really the way to go.


  1. According to LGE during the debate, the oil royalties to the state governments will be increased from 5% to 20%.

    So with the reduced income from oil royalties to the Federal Government, how PR is going to implement all the proposals in buku jingga?

  2. Petroleum royalties ultimately come from Petronas, not the government. Obviously, they're looking at increasing the take from Petronas, which is doable provided they cut the subsidies on gas that Petronas pays for. That's RM20 billion plus right there.

  3. In the weeks after having taken over Putrjaya, The Evagelist born again Christians of DAP will demand from The PM Anuar AlJuburi a land besides the lake for the construction of a grand cathederal. Karpal will also ask for land for a golden gurdawara.The manoharan and the Tambi of PKR will also ask for a grand temple .The kiasu Chinese will ask land for a resting place in Putrajaya on the hills overlooking F1 circuit and KLIA

  4. Honestly don't know enough of the Buku Jingga or Shadow Budget to give enough commentary outright; but the minimum wage and household income assessment seems right to me (I am a structuralist at heart after all)

    But I'm more interested in the Malaysian CBO idea. I have suggested this idea to more than a few people recently actually, but not quite sure what to do to get it started up. Keep me in the loop if you ever do :)

  5. Jason,

    It was part of our recommendations to MoF for the 2013 budget dialogue. God knows if they'll ever take it up though. There are vested interests in keeping the current system.

    Ideally, like the CBO, it would be funded and report to Parliament. I don't think something like this would fly as a private organisation, or as a department under the executive.

  6. Your suggestion (below) is very good Hisham, and should be established immediately. Malaysia needs policy competition but those polices must be assessed and costed.

    ""...My preference is to establish something along the lines of the Congressional Budget Office in the US, which is an independent body tasked with assessing budget proposals and their long term impact, as well as providing independent forecasts of government revenue and expenditure. If we’re serious about getting an objective, non-partisan view of competing fiscal platforms and get beyond, "he said, he said", that’s really the way to go..."

  7. Not true on ur take that open bids don't work for big n quick delivery projects.MRT for intance>Delhi Metro is case in point >> on schedule and 30% of our MRT.And Suzhou..all underground is 1/3 of SBK underground.

    Our toll hiways is of cos exorbitant..MEX is a perfect example.Up front construction profits and toll IRRs based on the inflated capex..disastrous.Audit MRCB EDL to get a full picture..Bina Puri is the subcon for viaducts.

    Tertiary education is not only Uni..thus in that respect free "academic or tuition" fees is not a pipedream.Turkey hv doubled tertiary Edu intake in 5 years.Why can't we?We can get academic staff from Egypt,Pakistan if local ain't enuff.Btw..UK working on space allocation and increasing utilisation and creating 30% more capacity on existing Unis.

    And govt OPEX can be reduced if u sweat it hard enough.Less of Jom Heboh..and the trappings..and a few billion can be realised.Consolidate the many2 Agencies..with million dollar CEOs.

    On minimum household income of 4k...think it might hv been based on a three breadwinner scenario as is quite normal these days.

    So...like you say...no definitive answer.But at least there will be change.

  8. @anon

    Point by point:

    1. When doing cross country comparisons across time, make sure you're comparing apples to apples. Delhi for instance was started in 1998, with phase 1 complete by 2006. The price of industrial and construction inputs has risen 300% since 1998 and about doubled since 2006. Also you have to factor in inflation (purchasing power falls every year, and at different rates for different currencies) as well as exchange rate movements. China has an inflation rate double ours, while India's is about three times. The rupee has lost about 15%-20% of its value against the Ringgit in the last ten years. Put that all together and I don't think you'll see much difference in cost, never mind qualitative differences.

    2. What you're saying doesn't detract from the principle I wrote about, nor does it refute the points I made. There's certainly room for considerable improvement in the award and structure of concessions, but its still more efficient to have toll highways in private hands. Why should a taxpayer in East Malaysia pay for highways in KL?

    3. Actually, Turkey and Malaysia's record of tertiary enrollment is remarkably similar. In fact I'm on record as advocating pushing for higher enrollment - we're far below the level of other high income economies. (Digression: the UK has one of the worst enrollment rates in the western world).

    But that's not the point here - the question is whether it makes sense for the government to pay for both expansion in capacity and the cost of fees (which are already highly subsidised). Much of our increase in enrollment in the past decade has come from private sector institutions. May I point out that I already noted that the government's cost estimates are inflated?

    3. On opex - that's what I wrote. It's just that I think the savings are likely to be much less than PR thinks can be achieved, not that savings can't be achieved at all.

    4. If this is based on three income earners per household, then its a pretty worthless exercise (the current is just under 1.8), and in fact implies no gains in real income at all. What's the point?

  9. >Delhi Metro current phase budget is also about same figure.The RM150 per km is already "adjusted" to current prices.Suzhou was just completed btw.And bear in mind...2006 to 2010 are very high cost period for construction.
    >Academic fees only subsidised.Students in private colleges will only get subsidy equivalent to "cost" of public education.Thus its wise to create more affordable slots.Its not great for private sector education companies but its way fwd to make education more affordable.A degree incl foundation year now cost 1.10k in a private college.Whats ur take on the default rate of PTPTN...some tells me that its 20% up.And its subsidised.
    >>Toll hiways in private sector hands is great but if the hands are very oily...shldn't it be cleansed?RM60mil invstment turning into a billion on a not too particularly busy hiway is first exposure of how lucrative concessions are.Do you think Hiways shld deliver a certain level of service or else pays the price i.e expand or pay penalties?There are provisions in most hiways overseas as I am sure there is in Msia.If concessions agreements done correctly...most urban hiways are really in default.So thats how issue will be resolved.Bear in mind...strategy.
    >>Minimum wage...target of 1.1k before 2014.Think wld not stretch byond 40% of gni/cap.

  10. 1. "Adjusted" in what sense? Care to share your data sources? Construction costs started climbing in 2006, but didn't peak until 2008-2009. Current costs are almost back to that level.

    2. There are plenty of proposals for ensuring more affordable education - that doesn't mean it all has to be financed by the government. With respect to PTPTN, it's obvious the business model was never sustainable right from the start.

    3. Restructuring the toll concessions would be nice, but that's not the point under discussion. Nationalisation is.

    4. Too fast. RM900 minimum wage will only be effective Jan 1, 2013. A 20% jump in one year might be more than some businesses can swallow. Assume inflation for low income households is running at twice the headline rate, 5%-6% increment every year is more reasonable.

  11. Thanks for writing this. Interestingg economist logic.

    Just found back some stuff accumulated during thr bu elections. Prthaps wud love to reproduce why the estimate of pr's buku jingga is rm200 bil but was spinned by lge ss rm25 bil.

    Thats after my submarine issue is finished soon.

  12. Pls read up on Delhi Metro Phase 4.Budget is abt 200 mil per km with 30% tunnels and 200 m platform i.e up to 8 car trainsets.Initial awards are within budget.
    Personal experience on Delhi Metro project..so can explain in full of how they managed the cost on the project right down to engineering details esp on reinforcement details.Trust me only via open tender can you find true cost.
    And similarly for hospitals,universities,roads...even powe stations.If you wish we can hv tea to discuss this.I can provide real exact details.Savings of 10 bil per year is achieveable on Public Capex

    Building more public University/colleges is reasonable way to open up more tertiary opportunities.Private colleges are just too expensive.RM110k for a degree in mgmt/biz is not affordable to the country.PTPTN remodelled plus free academic fees is way fwd.

    I agree that wages restructuring is no easy task.But I believe in 2020 we can't afford foreign labor anyway...so it got to be done in stages frm today.W/out foreign workers..labor cost even today will be RM1200 minimum.

    Think...we hv agreed on a few issues...and agreed to disagree on the others.The offer to discuss over tea is always open.

  13. Anon:

    Personal experinece on Delhi Metro? From MTD ACPI?

  14. @anon,

    I stand corrected (and I'd appreciate some links to the construction cost for Suzhou, can't seem to find it). I'm wondering however just how much is due to the specific circumstances of tunneling under KL. But I continue to disagree that open tenders will necessarily result in finding "true costs". That's not obvious from either theory or practice - open tender bids aren't a competitive market in the economic sense.

    On tea, email me. I'm free after next Tuesday.

    1. I should have added - Delhi Metro, from what I've been reading, appears to be highly unusual and quite unlike any other infrastructure project anywhere else.

  15. http://www.railway-technology.com/projects/suzhou-metro-rail-jiangsu/ 25 KM/24 Stations fully underground/200 m stations.Construction period 2009-2012..COST RM250/KM (all inclusive)

    http://www.urbanindia.nic.in/programme/ut/Delhi_MRTS.pdf >> Phase 1 65 km with 20% underground.Construction period 2002-2007.Cost RM100 mil/KM.(including rolling stocks &land Acq)

    Bucharest Metro..2009-2013 Cost RM 140/KM 65% underground..200 m Stations ( C&S only)

    SBK ?>> 80 m station platform 16% underground.Indicatives C&S only for underground RM876/KM.Viaducts C&S excluding stations RM150-200/KM

    But hv a read on process adopted by www.crossrail.com Of note is the planning and approval process,feasibility and funding plan,procurement methodology and general transparency.Its not public relations only (soft bits as per MRT) but real info including Terms Of Contract.

    Worlds apart.But of cos it doesn't quite confirm that open tenders will give owners best prices.But hv a look at these tender results for a small stretch of underground that our little southern red dot published
    http://tunnellingjournal.com/news/more-shortlists-for-singapore-dtl-3-tunnel-contracts/ Note the number of tenderers and bids variance.
    And a little bit on how engineering can be so sexy..an example of the blonde 36-22-36 stats orgasmic design http://www.pci.org/view_file.cfm?file=JL-09-FALL-15.pdf

    Sorry for the messy info.Rushing to catch a flight.
    I do believe that a better structure including the planning and approvals wld hv been beneficial.And if we are positioning ourselves as a high income nation,its only right that we adopt best global practices.

  16. Is PR planning to spend RM 200 billion per year on all those programs?That is most ridiculous.
    However,if they spend it over a number of years,it is not so crazy.In fact,it is similar to government funding for the EPPs.With annual savings of RM26 billion,government would be able to fund more than RM200 billion.

    Like everything else,I presume Buku Jingga should be dynamic and will change as they go along.Their true North is a government that takes care of rakyat by being clean and less leakages of public funds.I think thats a better True North than Pemandu's.By the way...BAU will get us past the HIE threshold by 2018.
    Question is who will do most damage?

  17. @anon 7.53

    Thanks for the links, and the obvious effort you put in.

    Last thought: Personally, I think number of bids is likely to produce a lower award, but bid variance is more an indication of how complete the tender information and briefing are, and how much risk mitigation is built in. It's a matter of how much homework the tender offerer has put in.

    @anon 8.31

    Toll will be a one-off (though not inclusive of maintenance costs). Education and incomes support has to be ongoing.

  18. You are very2 right...and tunneling projects are even more so.Cost a fortune to do a proper bid.Thus the more info given...and a promise of a level playing field..more willing to submit to bid process.
    And of cos...soil conditions plays big impact on job cost.