Monday, September 9, 2013

Middle Income Pain? Try High Income

From the Edge Daily (excerpt; emphasis added):

Highlight - Middle-class pain

KUALA LUMPUR: Salary earners in the “sandwiched” middle-income group will soon find themselves at the losing end as the government continues its fiscal consolidation.

The middle-income group is defined as individuals who earn between RM2,300 and RM7,000.

This group forms 40% of the country’s workforce. The middle-income earners are mostly taxpayers and are the vast majority who drive consumer spending — a main growth engine for the domestic economy...

Erm...slight problem here. By all accounts, less than 20% of the workforce is eligible to pay tax and about 10% actually does, which is totally at odds with the numbers quoted here. And it turns out the problem is the definition – the text shouldn’t read individuals, it should read households.

The data compiled by DOS show the mean monthly household income level for the middle 40% is just RM4573 in 2012, or approximately RM2570 per income earner. A single person earning that amount who only deducts EPF contributions pays zero tax, and I don’t think they’re the ones referred to as, "The middle-income patrons of gourmet coffee outlets will have to either cut down their visits or opt for cheaper alternatives."

Sorry, if you can afford to drink gourmet coffee in Malaysia, chances are you’re not middle income. It doesn’t detract from the main point of the article, but it should’ve been made clearer who exactly we’re talking about.


  1. Hello Hisham

    I wanna ask your view on LGE's speech

    Some key takeaway points. According to LGE..

    1) open competitive tenders and fighting corruption would save RM 51 billion annually for the Federal govt. Effectively that would solve our budget deficit problem.

    2) Through fiscal responsibility and fighting corruption by the PR state governments in Penang and Selangor, at least 25% annual savings can be obtained from government procurement contracts.

    3) Through their policies,PR has achieved annual budget surpluses in Penang, the increase in asset reserves by 50% and the reduction of the Penang state government’s debt by a record 95%

    4) only 10% of the police force are involved in crime investigation work. If that proportion is increased to 50% of the total police force, I am certain police omnipresence will be able to defeat criminals in Malaysia.

    1. @anon 5.03

      It's partly political hyperbole:

      1. The RM51 billion figure is derived from 25% savings based on government operating expenditure last year of RM205 billion. Problem is, operating expenditure is primarily stuff like salaries, pensions, debt service, transfers (including transfers to state governments) and subsidies.

      The actual amount spent on procurement was just RM32 billion. You could also potentially include the RM46 billion under the development budget which involves investment in things like schools, roads and utilities. If the 25% figure is correct, that would give potential savings of under RM20 billion, not RM51 billion.

      Unless LGE is claiming you can apply open tenders to wages and subsidies, I'm afraid the claimed savings are grossly exaggerated.

      2. In theory, an open tender should be superior to a closed tender or direct nego in terms of reducing costs. However, I have yet to see any corroboration or research that supports PR's claimed savings. In addition, the more complex and risky projects are (e.g. the MRT), the less likely savings are to be realised as the universe of potential bidders would be comparatively smaller (which reduces competitive pressure) and project uncertainty would cause bidders to build that into their bids. The biggest savings would be from simpler, lower face-value tenders, not the big ones that actually gobble up most of the budget.

      3. The budget surpluses and savings are a matter of public record. However the reduction in debt was due to the transfer of water assets and liabilities from the states to the Federal government. Note that this affected not just Penang, but almost all states whether PR or BN (here, here, and here).

      4. I can't comment on the numbers, but crime is not just a matter of enforcement. Higher enforcement could potentially reduce the level of crime at any given time, but it would not affect the trend.

    2. thank you for the clarifications.

      it does seem too good to be true.

      1)in PR Alternative Budget, did it forecast savings from procurement and development?

      2) regarding budget surplus and cash reserves, where can I see the data? how does other states fare against Penang and Selangor?

      3) wow, the debt restructuring is an eye opener. LGE is basically lying through his teeth. and to think Zambry got a better deal by having to keep 200 million of assets

      4) i am surprised that there is no research findings that support savings from open tender. it appears to be a given. btw how does the federal govt perform on open tenders.. are there any data showing how many percentage of govt project is open tender.. and which are negotiated..

      thank you for the reply

    3. @anon

      1. Yes and no (link). See page 10. There were same savings penciled in for procurement (about 20%), but the development budget was substantially boosted.

      2. The Auditor General reports on the summary financial position of each state. I don't know if anybody has thought to actually tabulate all of them for public consumption.

      3. Technically, he is not lying. I think a better phrase would be that he's being economical with the truth.

      4. You can find a running total here. Unfortunately, contract values are not published, which would be useful (note the majority are direct purchases, not tenders). That makes sense, as holding a tender (closed or otherwise) is costly and time consuming and would only be worthwhile for larger contracts.

      As for the evidence, the theory itself is sound. As open tenders would be made available to more bidders (greater market access and competition), the likelihood of a more efficient bidder winning would be enhanced. Closed tenders or pre-qualifying tenders, which restrict the number of market participants, would allow some degree of monopoly rents.

      Proving this is a lot harder than it looks however, as we can only see the results of one or the other, but not identical contracts given under both systems i.e. you cannot construct a scientific experiment where you only differentiate the variable of interest (closed or open) while holding all other factors constant.

      Most people assume you can take the tender variance (difference between highest and lowest bids) as proof of "savings", but this is a false comparison. I've been involved in complex tenders myself, and in my experience most of the variance can be explained by qualitative factors (quality of materials, design considerations, creative input for example, not to mention the quality and comprehensiveness of the tender documentation) and not necessarily a result of the type of tender system used.

    4. Dear Hisham

      thank you again for the links.

      1) From the AB, they are looking at a RM6bill savings from procurement. A far cry below the RM51bill mentioned in the speech.

      2) Yes, it would be nice for someone neutral to tabulate all the date for public consumption.Even better with y-o-y data.

      Reading the Auditor General report and comparing Perak and Penang writeup. Is Penang really doing significantly better? And is there great savings made by penang.


      "Overall, audit analysis found that the financial position of the State Government for
      the year 2011 is significantly better than in the year 2010. Consolidated Fund in the year
      2011 amounting to RM780.73 million has in
      creased by RM18.40 million from RM762.33
      million in the year 2010. Total revenue collected during the year 2011 has increased to
      RM27.11 million, while investment in the year 2011 increased by RM19 million or 2.6% to
      RM758.70 million. In the year 2011, operati
      ng expenses increased by RM45.05 million to
      RM797.86 million. Account payable for the y
      ear 2011 increased by RM3.36 million to
      RM25.92 million. Besides, the financial performance of Consolidated Revenue Accounts in
      2011 has shown a surplus of RM22.43 million as
      compared to a surplus of RM40.37 million
      in the year 2010. Total arrears of revenue
      in the year 2011 decreased by RM59.71 million to
      RM151.56 million as compared to RM211.27 million
      in the year 2010. While recoverable
      loan has increased by RM52.92 million in the
      year 2011 to RM964.95 million as compared to
      RM912.03 million in the year 2010. The State Government should maintained a good
      financial management performance and spend prudently without compromising the quality of
      service and state economic development

      In order to succeed the Tenth Malaysian Plan, a total of RM1.5 billion budget was
      approved by the State Government. This provis
      ion has been distributed to 10 departments/
      offices. Overall the performance and implem
      entation of development of Tenth Malaysian
      Plan in the year 2011 was good. As at 31 December 2011, a total of RM264.63 million or
      97% had been spent as compared to the approved budget of RM273 million. There were
      5,287 projects or 96.7% had been successfully
      implemented from 5,469 projects approved
      while the remaining 182 projects were either delayed, not yet started or in the planning stage. "

    5. contd


      "Generally, the Audit analysis revealed that the financial position of the Penang State
      Government as at the end of 2011 has improved compared to 2010. In 2011, the
      Consolidated Fund showed an increase of RM2.56 million or 0.2% to RM1,133.74 million
      compared to RM1,131.18 million in 2010. The balance of Consolidated Revenue Account as
      at 31
      December 2011 has increased by RM138.31 m
      illion or 24.2% to RM710.81 million from
      RM572.49 million in 2010. Revenue collected in 2011 has also increased by RM192.19
      million or 46.8% compared to 2010, from a to
      tal of RM410.70 million to RM602.89 million.
      The assets comprising cash and investment remain unchanged at RM1.13 billion. The State
      Government is recommended to maintain the performance of increasing revenue and
      prudent spending to ensure continued good financial position
      Better investment analysis
      should be carried out to increase the dividend returns on investment and also make
      continuous efforts to collect arrears of rev
      enue totaling RM77.84 million as at the end of 2011
      which comprise of quit rent, repayment of student loan, installment or rental of the shops and
      other revenue.

      For the Tenth Malaysia Plan of Penang to be successful, a ceiling of RM810.29
      million was allocated by the State Government for the period of 5 years for 2,489
      development projects to be implemented with
      an approved total allocation of RM557.25
      Overall, the implementation of development projects under the Tenth Malaysian Plan
      which is funded by the State Government was very good because 2,455 or 98.6% of 2,489
      planned projects have been successfully completed. However budgetary performance was
      found unsatisfactory because only a total of RM171.05 million out of RM557.25 million
      allocations was spent.

      3) economy of truth. ah that is one way to spin it. I must admit.. I am a big supporter of LGE so founding this out was quite disheartening and a big eye opener for me.

      4) in terms of comparison between different methods of procurement, perhaps the building of schools and roads could be used for comparison. the specifications are pretty generic and building materials used are the same.

      is there any ways to verify Penang's claim that 70% of state contracts were awarded to Bumis?

      thank you again for the info and education!

    6. @Anon

      You're welcome!

      It's very difficult to disentangle in a statistically rigorous way the effect of different leadership or policies have on growth. Different states have different economic structures and respond to outside shocks differently, with a correspondingly different impact on state finances.

      Moreover, the record of spending and savings alone do not portray a complete picture, as you cannot assume that the level or quality of service delivery is the same. Which one is better depends on the perspective one takes.

      On point 4, yes that would be one possible strategy to take. Unfortunately, we'll need the data to actually prove it.

      No, I don't know personally of any way to verify the claim on Bumi contracts, though I have no particular reason to doubt it. I would be interested however if the contract face values correspond to the number of contracts.

    7. 1) Then how do we know which leadership is doing a better job? Is there at least an indicator we can look at?

      2) Perhaps the Penang or Selangor state govt could do the 'experiment'. that would prove once and for all their point, assuming the experiment proves that open tender really do provides astronomical savings

      3) Yes. that is what I am wondering too. The number of contracts is one thing. But what's more essential, one that Penang curiously is being 'economical' about, is the face value of the contracts.

    8. @anon

      1. "Better" depends on what is more important to you and what your priorities are, which would be different for each person. If minimising fiscal spending is important to you, than I'd say they've done a decent job. If the level of service delivery is more important (and hang the cost), then maybe they haven't. Some people will give their support based on environmental, social or business reasons - they're all valid. That's why we have a democracy.

      Personally, I'd go by their economic policy platform, and not so much on performance, because performance is dictated by many factors outside the control of either state or federal governments. But that would just be me. I can't answer the question for you because you would have different preferences.

      2. Yes that would be one way. Better yet if somebody independent conducted the study.

    9. I can't verify whether the numbers are correct, but I have no particular reason to doubt them.

      Based on my hazy recollection of the law, this is a pretty tricky legal situation. Land and property rights are always under state administration, not federal, but these rights do not extend to mineral rights or waterways (inland or offshore). Basically, state rights end at anything more than six feet underground or beyond the high tide mark.

      So technically, Petronas is under zero obligation to pay anything at all to Sabah, Sarawak or the East coast states, although they do anyway.

      Most of the actual oil & gas extraction actually takes place beyond the three mile mark, which is another legal gray area, as by convention this would be - again technically - international waters. I don't what justification we use for this, though there appears to be ample legal precedent (e.g. Denmark, Norway and the UK drilling in the North Sea).