2006 Budget will not enhance international competitiveness as it continues to rely on economic crutches and disregard merit and performance

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Speech on the 2006 Budget (2)
by Lim Kit Siang  
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(Parliament, Monday): The 2006 Budget addresses some of the past neglect faced by the more than one  million government civil servants but is disappointing to the vast majority of Malaysians who are not civil servants. There is no doubt that the Malaysian economy is in trouble with the reduction in economic growth rate estimates this year from 6% to 5%.  

Further, not all sectors grew or benefited Malaysians. For instance, petroleum products despite double-digit growth in export earnings in eight of the last twelve quarters grew very few jobs for Malaysians because the ownership structure in the petroleum industry is highly concentrated.  

The inflation rate at 3.7% in August 2005 is the highest in 6 and a half years since February 1999. Poor growth and high inflation has hurt many Malaysians, especially the middle and lower-income groups. By failing to meet the economic challenges of globalization and reward the resilience Malaysians, who are not civil servants but are businessmen or working in the private sector, deal with the problems of inflation and declining economic growth, the 2006 Budget can be considered a non-event.

The 2006 Budget neither strengthens resilience nor meet challenges when the government continues to rely on economic crutches and refuses to establish the merit and competitive environment necessary for exports to be the engine of economic growth. The government should learn from the example of newly developed countries, especially South Korea, Taiwan, Hong Kong and Singapore, who succeeded by being an export-driven economy. In the long run, Malaysia’s economic position is sandwiched between countries that venture into capital intensive knowledge-based businesses and those which continue to stick to low cost labour intensive industries

By retaining structural impediments to establishing a competitive culture such as quotas, crony capitalism (APs) and failure to combat corruption, Malaysia will not be able to meet the challenges of globalization. Malaysia risks losing out to other emerging countries like Thailand, China and India, unless Malaysia can fulfill globalization demands for competitive markets, high productivity, equal opportunity, efficiency and transparency as well as establishing excellence in their educational and employment systems.

DAP has specifically made 10 proposals on the 2006 Budget, viz:

1.       Increase Research & Development (R&D) Expenditure To 2.5% Of GDP   

Malaysia must be a knowledge-based economy revolving around Information Technology (IT) and Information & Communications Technology (ICT). There are insufficient incentives given to Malaysian manufacturers to participate and promote exports. For instance the amount allocated for R&D is only RM 868 million which is amounts to 0.6% of the 2006 budget of RM 137 billion.

The low allocation for R& D reflects the lowly 0.7% of R&D expenditures as percentage of GDP recorded for the period between 1997 and 2002 according to the United Nations Human Development (UNHDP) Report 2005. If Malaysia is serious about sustaining exports growth, allocation to R&D must reach the developed nations’ benchmark of 2.5% of GDP as stated by UNHDP 2005 Report. The government should take the lead by allocating 2.5% of the Budget expenditure to R& D, which would work out to RM3,420 million under the 2006 Budget.

2.   Open Up Half Of Government Jobs To Non-Bumi Contractors to Revive Construction Sector

The government continues to rely on out-moded and discredited restrictive policies such as quotas and no open tenders open to corruption. DAP regrets that of all the billion ringgit construction and maintenance contracts such as RM 4.3 billion maintenance and RM 1 billion special allocation; RM 3.6 billion housing allocation for civil servants and RM 2.1 billion low-cost housing scheme, non-bumi contractors can not get government contracts. What is the use then of giving licenses to non-bumi contractors when they can not bid for government jobs?

The government must make a commitment  to sustain a healthy revival of the construction sector. With the construction sector set to contract by 1.1% this year, many small-time non-bumi contractors will likely close down unless government jobs are open to them. As a first step towards full competition, the government can allow half of the government jobs to be open to be bid by non-bumis with the remaining half limited to bumis.

The setting up of a RM 2 billion Yayasan Amanah Hartanah Bumiputera to buy up commercial properties for bumis in towns and cities would be a welcome step to revive the construction sector if it were only accompanied by the removal of bumi housing quotas. Housing bumi quotas artificially restricts the housing market and causes tight liquidity and costs to both developers and non-bumi consumers.

3.       Sharing Out Petronas Profits With 25 Million Malaysians

Prime Minister Datuk Seri Abdullah Ahmad Badawi claimed that oil subsidies amount to RM 25 billion yearly, comprising of RM 16 billion by the government and RM 9 billion by Petronas to sell cheap gas to Tenaga Nasional to allow consumers to enjoy cheap electricity tariffs. Otherwise, petrol would go up from RM 1.62 to RM 2.80 per liter, diesel from RM 1.28 to RM 2.15 liter and RM 2.50 per kg for cooking gas.

Instead of subsidizing RM 1,000 per Malaysian,  DAP proposes that if substantial profits from Petronas of RM 35.5 billion last year and a substantial part of the accumulated profits of RM 200 billion since its establishment in 1974 are distributed to Malaysians then fuel subsidies can be removed, thus allowing fuel prices to rise according to market forces. This is a win-win situation:

1.     For Malaysians who can enjoy the fruits of Malaysian natural resources and  afford to pay for higher fuel prices,

2.     Economically efficient as there would be no distortion in the market price for fuel, no smuggling and black-market profiteering;

3.     Avoid misuse and abuse of Petronas funds for dubious government projects; and

4.     Apart from its accumulated profits, Petronas would still be able to fund its development activities from the RM 31.2 billion in royalties, dividends and taxes given to the government   in 2004. 

Economic efficiency requires that the long-term solution is not subsidy, but to reduce subsidy so that the market forces will operate to divert scarce resources to needed sectors and ensure optimum resource allocation. However, the government must ensure that equity considerations are followed by sharing out the Petronas profits.

4.       Increase In Personal Relief By RM 3,000 From RM 8,000 To RM 11,000

DAP calls for an increase in the personal relief by RM 3,000 from RM 8,000 to RM 11,000 to help out lower and middle-income earners deal with the the impact of fuel price increases and inflation. The people only saved RM 563.5 million from the economic relief package, reducing road tax and the two year freeze in highway toll until 2007, announced by Prime Minister Datuk Abdullah Ahmad Badawi early. This savings of RM 563.5 million is only 25% of the more than RM2.3 billion extra paid by the people from the three  fuel price increases this year.

The RM563.5 million in savings comprises:

·        RM 544 million from reduction in road tax; and

·        RM 19.5 million compensation paid by the government to UEM Builders Bhd, the operator of Penang Bridge, to defer the increase in toll rates from RM7 to RM8.50 for two years.

All other toll operators are not affected by the Government's call to restrict toll hikes this year and next. The toll for PLUS Expressways Bhd's North South Expressway was increased in January this year while charges for its two other highways – New Klang Valley Expressway and Federal Highway Route Two (Subang-Klang) – are due for revision in January 2008.

Other toll operators, including MTD InfraPerdana Bhd, Gamuda Bhd, Lingkaran Trans Kota Holdings Bhd (Litrak), Road Builder (M) Holdings Bhd and Sunway Infrastructure Bhd, are not affected by the Government's latest announcement since their toll revisions are due only from 2007 onwards.

Clearly the government has not sacrificed or lost much revenue amounting to only RM 563.5 million from the reduction in road tax and freeze in toll hikes for two years as compared to the RM 2.3 billion extra paid by consumers following the three  fuel price increases this year. How then can the government be considered to have helped the people when they only return RM 1 for every RM 4 extra paid for fuel price increases? 

The government and Petronas must not forget that oil is a natural resource that does not belong to any one person but belongs to all 26 million Malaysians. It is unfair for the people to suffer fuel price increases whilst Petronas makes money.

There has been no concrete plan by the government to help the poor face rising fuel prices and inflation, which reached the highest level in 6 years at 3.7% in August 2005. The government should move away from protecting big industrial players and focus on sustaining the economic power of the consumer.

5.       Reduce Road Tax Rate For Diesel Car Owners

The Budget 2006 proposes to give a road tax deduction of 40% to owners of private diesel vehicles exceeding 1600cc effective from 5 October 2005. Diesel vehicles of lesser engine capacity received road tax reduction last month, together with other vehicle type (para. 83).

Currently, owners of private diesel-run vehicles pay a road tax that is four times of the rate of petrol-run vehicles. The expensive road tax was premised on the basis of a low diesel price, which stabilises at 65 cents per litter until 2000, when it was increased to 70 cents per litter.  

When diesel price was at 65 cents, petrol price stands at RM 1.10, which means diesel users paid only 59 percent of petrol price, thus the justification for higher road tax of 400%. However, diesel price has gone up seven times in six years (2000-2005) with its current price at RM 1.28, or 79 percent of the new petrol price. 

Instead of a 40% reduction for diesel vehicles, DAP calls for the abolishment of the dual road tax rate and introduce a uniform road tax price for all vehicles of equal engine capacity.

6.       Increasing Petroleum Tax To 50% To Fund Alternative Energy Sources

Petroleum income taxes was reduced from 45% to 40% in 1994 and further reduced to 38% in 1998. With the huge rise in profits following the increase in oil prices, the time has come to ask oil companies to contribute their profits by increasing the tax to 50%. Such funds from petroleum taxes can be used to fund research into alternative energy sources, especially bio-fuel, and other renewable energy like wind or solar power.

7.       Human Resource: Increasing The Retirement Age From 56 To 60

Whilst RM 1.1 billion is allocated for human resource training, the government should not forget the vast pool of experienced men and women who have reached the age of 56 at their disposal. In Malaysia, life expectancy has increased from 55.8 years in 1957 to 72 years old with 70 years for men and 75 years, for women.

To maintain the retirement age at 56 when the life expectancy has increased by 31% is a waste of hard-earned experience and human potential. For this reason DAP proposes that the retirement age be increased from 56 to 60. After all if the retirement age for judges can be increased to 66, there is no reason why civil servants can not until they are 60.

DAP regrets that funding for educational training continues to be race-centered. RM1 billion was put aside for trade and industrial training at special institutes enrolled mainly by Malays and bumiputeras such as MARA, Youth and Industrial Training Institutes. The government should provide equal opportunity by opening up educational and human resource training to all Malaysians.

8.       Investing In Public Transportation

That the greatest challenge of Malaysian economy in the coming years is the escalation of oil prices is indisputable. Yet, measures announced in Budget 2006 to promote energy efficiency fails to deal with one key area – energy consumption in transportation.

Malaysia’s demand for petroleum products by the transport sector for the year 2000 was roughly 36.2% of the country’s overall energy demand. It is estimated to grow by 8.7% annually (Source: The 8^th Malaysia Plan). Any energy-saving measure that fails to reduce demand in this sector is bound to fail.

While the utilization of public transport has declined from 34 % in 1985 to 16 % currently, Malaysia’s registered vehicles will reach 14 million units this year. Such high vehicle usage is extraordinary for a country of 26 million people.

Public transportation in most countries are subsidised by the government but it is clearly not the case in Malaysia. The Government had no problem in subsidising national car producers for the past two decades to perpetuate an automobile society. It has also been building one after another public road for the use of private vehicles but had never been serious about subsidising public transportation. . Under the Eight Malaysia Plan, the government has allocated almost 20 times as much for roads (RM 14 billion) as it has for urban transport (RM 706 million).

It is time to call for a paradigm shift from our automobile dependence culture in the face of increased international petrol prices.

The Government should be commended for adding 600 new buses to the Klang Valley and refurbishing 120 existing buses (para 102) for finally recognising government’s financial obligation in supporting public transportation system. However, the measures are paltry in the face of a major transportation crisis. Worst still, there is no attempt at all to improve the quality of public transportation in other states beyond the Klang Valley.

DAP calls on the Government

·        To redirect the RM 2.3 billion savings from petrol subsidy to improve public transport system with the ultimate aim of reducing the dependence on private vehicles that consume so much of petrol products;

·        To scrap the RM 1.3 billion 26km-KL-Putrajaya dedicated highway;

·        To scrap the RM 368 million 18km-Putrajaya Monorail Project.

DAP is of the view that existing roads to Putrajaya and an efficiently run bus system are good enough to serve the need of Putrajaya, a city of 70,000 commuters and residents. 

The RM 3.968 billion savings from the above three sources should be channeled

·        To build a 10km extension for Kelana Jaya Line (formerly known as Putra LRT) from its Subang Depot to Sunway, Subang Jaya and USJ, catering for a population of 300,000. (Cost: RM 600 million)

·        To extend Seri Petaling Line (formerly known as STAR LRT) from Seri Petaling to Puchong to cater for another 200,000 people. (Cost: RM 600 million)

·        To extend Ampang Line (formerly known as STAR LRT) to the Greater Cheras areas (including parts of Selangor), catering for 500,000 people. (Cost: RM 600 million).

·        To increase the number of LRT coaches, feeder buses and parking spaces around LRT stations by four fold. (Cost: RM 600 million)   

(The cost of the original Putra and STAR LRTs were RM 2 billion and RM 3.5 billion respectively.) 

·        To add 3,000 buses, each at a cost of RM 200,000, to create a Bus Rapid Transit System in the Klang Valley, modeling after the success story of Brazil’s Curitiba. (Cost: RM 600 million)

·        To invest the remaining RM 968 million into the management of a world class integrated public transportation system in Kuala Lumpur and other major cities in the country.

9.       Channeling Part Of The Excise Duties From Cigarettes And Liquor To  Be Channelled To A Health Fund For Lung And Liver-Related Diseases

DAP calls for the excise duties and increases from cigarettes and liquor to be channeled to a health fund for lung and liver-related diseases. Even though the increases in so-called sin taxes are an annual event, no emphasis or investment is made on those who suffer from excessive smoking and drinking.

If smokers and drinkers are required to pay more, part of the extra duties collected should be channeled to this health fund for them to reduce the burden of health costs in the future. The government is expected to collect an extra RM 963 million from such sin taxes. This is on top of the RM3,267 million comprising RM 306 million in import duties and RM 2,961 million expected revenue for 2006 before the increase.

There is no reason why the government can not allocate 20-30% of the total RM4,230 million to the health fund for lung and liver-related diseases to reduce the burden of their families when they are afflicted with lung or liver diseases..

10.     Improving The Performance Of Government-Linked Corporations (GLCs) Based on A Corporate Culture Of Excellence

DAP calls for the adoption of a corporate culture of excellence to improve the performance of government-linked corporations (GLCs) based on four key performance aspects that is results-driven, technologically and knowledge-based, ethically-centred with corporate social responsibility.

GLCs contribute RM260 billion (US$69 billion), or 36 per cent of Malaysia’s market capitalisation, and employ five per cent of its workforce. Some of the major GLCs include Malayan Banking, Telekom Malaysia, Malaysia Airlines, Tenaga Nasional, and Sime Darby. As GLCs are key players in the economy, accounting for about one-third of total market capitalisation of Bursa Malaysia, the GLCs’ performance are expected not only to improve their efficiency and profitability to compete in the global environment but also set the benchmark for other companies to follow

For too long the lack of a results-driven approach has hampered the maximization of profits. Top managers should be subject to a performance bar where they will be sacked if they fail to achieve a certain minimal percentage of rate of return on capital employed of say 8%. Failure to maximize profits and reduce costs is the reason why Tenaga’s rate of return on capital employed is only at 5.2%, the lowest in the region.

The poor performance of the following GLCs, which had either recorded losses or reduced profits for this quarter compared to the previous quarter, are as follows:-

o    For the second quarter ended June 30, 2005  CAHB group’s net profit fell to RM150.29 million from RM269.67 million a year earlier as a net result of lower total income by RM76.60 million and higher allowances for losses on loans by RM250.40 million despite lower overheads by RM34.70 million. CAHB which controlled Bumiputra-Commerce Banking group, second-quarter revenue dipped to RM1.07 billion from RM1.09 billion from a year earlier.

o    Net profit of MIDF for the half year ended June 2005 more than halved to RM52.9 million;

o    The 107% drop in Proton Holdings Bhd’s net profits resulting in RM 12.35 million losses in its first quarter ended June 30, 2005 as compared with a net profit of RM166.47 million in the previous corresponding quarter. Proton suffered a loss despite a 6.8% rise in revenue to RM2.05 billion from RM1.92 billion a year earlier caused by operating costs jumped by more than 20% to RM2.12 billion.

o    Sime Darby Bhd posted a 13% drop in net profit to RM801.21 million for the year ended June 30, 2005 from RM918.70 million previously despite a 25% increase in revenue to RM18.65 billion;

o    The 45% drop in first half profits of Telekom Malaysia Bhd In 2005 of RM 801 million from RM 1,459 Million in 2004; and

o    Malaysian Airlines RM 281 million losses in its first quarter ended June 30 2005.

There is also a necessity for the GLCs to take the lead on technology, to invest in research and development where some reports estimate less than 5% of profits are ploughed back into research and development. Research and development and technology can ensure that Malaysia be more competitive internationally.

At the same time GLCs must be ethically-centred to establish integrity, prevent corruption and avoid scandals causing loss of public confidence. For instance no action has been taken over the MAS scandal even though police reports have been lodged by MAS directors over hundreds of millions of ringgit involving the previous management.

GLCs must exercise corporate social responsibility as they should give back to the society that allows them to make profits. Adequate compensation must be paid to those who are affected by their money-making ventures and the refusal to share the profits is not only unethical but also irresponsible.

Restore RM895.4 Million And RM 91 Million In Development Funds Entitled By Chinese And Tamil Primary Schools respectively Under The 8^th Malaysia Plan.

DAP considers the additional RM10 million under the Eighth Malaysia Plan 2001-2005 to repair dilapidated Chinese, Tamil and mission schools announced by Education Minister Hishamuddin Hussein as grossly inadequate and  would not resolve the problems faced by such partially assisted schools.  

This RM 10 million special allocation to partially-assisted schools was clearly a response to the rejection of the emergency motion by BN filed by Bukit Mertajam MP Chong Eng in Parliament on the tragic death of schoolteacher Chan Boon Heng in Kedah.  

It is disappointing that Hishamuddin failed to announce a special payment to the Chan Boon Heng's family for the loss of life in the course of carrying out his duties as a teacher. Chan Boon Heng's death is a cruel reminder of how the extent of government neglect can cause loss of life and this RM 10 million is a token sum that is at best only a superficial effort and at worst an insensitive dismissive response to redress decades of neglect of Chinese and Tamil primary schools.

Even though Hishamuddin claimed that he would resign if the RM 10 million is not enough, it is clear that this amount is insufficient from the partial list of 66 such schools throughout the nation needing repair work. On Sept 13, the Education ministry revealed that up to June, 48 primary schools (39 national, seven Chinese and two Tamil schools) and 18 secondary schools are in need of urgent repair work. Based on RM 10 million  distributed equally to these 66 schools alone, each school will receive only RM 152,000. How much repair work can be done for RM 152,000 or when the repairs for some schools can cost up to RM 500,000/- each?

There are 1,573 partially-assisted primary schools comprising 884 Chinese primary schools, 380 Tamil primary schools and 309 national schools (basically missionary schools). As the 66 schools are only a partial list, a full list of the 1,573 partially-assisted primary schools may reveal many more schools in need of repair. In that case, Hishamuddin may have to make good his promise to resign.

The Chinese and Indian community does not want Hishamuddin Hussein Onn's resignation as Education Minister but wants him to restore RM895.4 million and RM 91 million in development funds entitled by Chinese and Tamil primary schools respectively under the 8^th Malaysian Plan. Under the 8^th Malaysian Plan, RM 4.9 billion was allocated for the development of primary schools with the distribution of such funds contrary to their student enrolment:-

·         National primary schools obtained RM 4,709 million or 96.1% of the total allocation even though they comprise only 76% of the total primary school enrolment;
 

·         Chinese primary schools obtained only RM 133.6 million or 2.7% of the total allocation even though they comprise as much as 21% of the total primary school enrolment; and
 

·         Tamil primary schools obtained only RM 57.6 million or 1.2% of the total allocation even though they comprise as much as 3% of the total primary school enrolment.

For national primary schools to get almost the entire development allocation when they comprise only 76% of the student enrolment is grossly unfair to Chinese and Tamil primary schools. Based on the 21% student enrolment, Chinese primary schools should receive RM 1,029 million whilst the 3% student enrolment of Tamil primary schools entitles it to RM 147 million.

For Chinese primary schools to be given only RM 133.6 million when they are entitled to RM 1,029 million whilst Tamil schools are given only RM 57.6 million when they are entitled to RM 147 million shows the extent of neglect by the BN government under the 8th Malaysian Plan from 2001-2005. This RM 10 million special allocation is a pitifully small amount when compared to this shortfall of RM895.4 million and RM 91 million for Chinese and Tamil primary schools respectively.

The time has come to correct the past injustices and redress the grievances faced by these partially-assisted schools which have made their contributions towards the nation's economic development by teaching doctors, engineers, accountants, scientists and lawyers. Only by restoring this shortfall of RM895.4 million and RM 91 million for Chinese and Tamil primary schools respectively can we ensure that the sacrifice of Chan Boon Heng shall not be in vain.

Pay For Performance Concept Amongst Top Company Directors Will Ensure Not Only Maximization Of Profits And Returns On Capital Employed But Turn Government-Linked Corporations (GLCs) And Malaysia Into Global Champions.

The  Prime Minister should  adopt a pay for performance concept amongst  GLCs to ensure not only maximization of profits and returns on capital employed but GLCs and Malaysia into global champions. If top executives of loss-making GLCs continued to be highly paid, it will send out a wrong message about the government's commitment and seriousness in making our GLCs profitable and efficient.

The Malaysian Business report on August 16 – 31^st 2005, revealed that in 2004, GLCs top executives were paid between RM 500,000 to RM 2.65 million regardless whether they were making money or had a reasonable return on capital employed.  A GLC Sime Engineering Services' paid the company directors a total of RM 1,129,000 and its top executive, Md Ja'afar Abdul Carrim up to RM 550,000, despite the company losing RM 71.2 million. 

Malaysians will not be too impressed that company directors of GLCs get paid so highly for losing money. Nor will they be impressed that in 2004, Tenaga Nasional Bhd directors get paid RM 1,685,243 despite Tenaga recording the lowest return on capital employed amongst powe companies in the region of 5.2%. Or that the top MAS executive Datuk Ahmad Fuaad Mohd Dahalan (who recently resigned) was paid RM 898,000 and the company directors paid RM 1,463,000 despite recording losses RM281 million in its first quarter ended June 30, 2005. 

GLCs contribute RM260 billion (US$69 billion), or 36 per cent of Malaysia's market capitalisation, and employ five per cent of its workforce. Some of the major GLCs include Malayan Banking, Telekom Malaysia, Malaysia Airlines, Tenaga Nasional, and Sime Darby. As GLCs are key players in the economy, accounting for about one-third of total market capitalisation of Bursa Malaysia, the GLCs' performance are expected not only to improve their efficiency and profitability to compete in the global environment but also set the benchmark for other companies to follow.

This unfortunate and irresponsible tendency to continue to reward executives who do not perform has spread to some publicly-listed companies such as Rashid Hussain which paid out its top executive Datuk Sri Sulaiman Abdul Rahman Taib more than RM 13.5 million despite the company's losses of RM 21.5 million in 2004. Datuk Sri Sulaiman is the son of Sarawak Chief Minister Tan Sri Taib Mahmud. Datuk Sri Sulaiman's pay rose by 214% from RM 4.3 million in 2003 to RM 13.5 million in 2004 despite Rashid Hussain's RM 21.5 million losses.

Investors and shareholders should question why so much is paid out when the company is losing money unlike profitable companies such as Genting and Resort World which paid out RM 63.9 million and RM 32.2 million respectively to its top executive, Tan Sri Lim Kok Thay. Shareholders will not begrudge the RM 7.8 million to Datuk Steven Tan or RM 9,142,000 paid to all its directors or even any other additional bonuses paid to reporters for the good performance in The Star newspaper that earned a net profit of RM 141.3 million in 2004.

However, for top executives who gets a 214% pay rise to RM 13.5 million when the company is losing money requires a full explanation in the interests of accountability and transparency. The time has come for GLCs to set a good example of rewarding its top executives who perform.