Malaysia's Finance Minister II on the Government In Business
Datuk Johari Abdul Ghani, Finance Minister II
The Ministry of Finance (MOF) is entrenched in Malaysian business. The agencies within the MOF includes EPF, KWAP, LTAT, Malaysian Debt Ventures (MDV), Cradle, and more. Listen to newly-appointed Finance Minister II, Datuk Johari Abdul Ghani, explain where the direction of MOF will head to under his tenure.
On the breakfast grille this morning is Datuk Johari Abdul Ghani, the minister of finance 2, or MK 2, of the ministry of finance. Datuk Joe, you have recently been appointed to this portfolio, congratulations. Let’s start off with this cabinet reshuffling that happened a few weeks ago. This is a surprise because you’ve just been appointed deputy cabinet minister about eleven months ago. There are many others more senior than you in the cabinet, but they were overlooked for this appointment.
Well, I think when you talk about the appointment of ministers in the cabinet, that is the prerogative of the YAB Perdana Menteri. And I suppose that he has a lot of time to think about this, there you are, I think they have made that decision, and everybody has to accept it.
And about your predecessor, was his departure expected?
Well, it was a surprise to me in fact.
Have you spoken to him recently?
Well I tried to get him in the past but I couldn’t. I have passed messages to his assistant. Well, maybe one of these days I will meet him.
Let’s talk about corporate governance, Datuk. Why is it that the Malaysian PM is also the Finance Minister? Could you go through with us the history, and also why we have it as such?
Well, I am not in the position to comment this. But what I can tell you is that when we look at Tun Mahathir’s time, he also occupied that FM role, and Tun Abdullah Badawi too. Obviously, I think when Dato’ Seri Najib came in, he also did the the same thing. If you look at the state level too, in Sarawak for example, the Chief Minister is also occupying the finance portfolio. So, my question is not the issue of whether you are the PM or FM occupying the post, it is the question of whether you have the right people to do it.
Do you think we have the people to do it? Because there are examples that I will now quote, the Public Accounts Committee PAC did mention that because of the 1MDB episode, the PAC have pointed out various governance issues, including simple things like naming the Prime Minister instead of the Finance Minister in the PAC report.
Ok, let me explain to you a bit on the 1MDB issue. I’m sure you know about ‘Section 117’. The section originated from TIA Terengganu Investment Authority. You see at that time when the TIA was incorporated, and they wanted to raise a RM5 bil bond, they needed a guarantee from the government. So what happened, the government said that if we, the government gives you the guarantee, the government needs some kind of a security. So that anything TIA needs to invest using the RM 5bil, TIA needs the clearance from the government. So, this is when section 117 comes in at the TIA-level. So at that particular time, it was the PM was also the FM, so that particular time when the clause was introduced we used it. But nevertheless, I want to stress here, section 117 is applicable only to the appointment of the Board members and the CEO. The rest follows the Companies Act.
Speaking of which, the Board of Advisors of 1MDB has been dissolved. The Board of Directors of 1MDB has been changed, it’s now down to just three individuals as directors. You’ve been quoted in the press that the 1MDB is not sustainable, do you still stand by the statement?
Yes I stand by it. 1MDB business model is not sustainable. Wrong business model. Weak management. Poor governance. These are all I have summarized it from what I have read from the PAC report. That is the reason why we have decided that we have to stop 1MDB. We run off the business. We take back some of the valuable assets, so we joint-venture with some other investors. Hopefully we can develop these lands like Bandar Malaysia and TRX, and in 2023 or 2024, we hopefully will see the value of these assets.
There is also the need to speak about Lembaga Tabung Haji (LTH), as well as KWAP, as well as LTAT (Lembaga Tabung Angkatan Tentera), these entities holds billions of dollars of investments. And everything resides within the MOF, is there an overleveraging of concentration of power in terms of investments here.
Well all those entities that you’ve mentioned, also including EPF, KWAP, LTH, PNB, all these have proper governance at the respective agencies. They have a proper board. Proper management. All that, like EPF, doesn’t interfere on that. Look at Bursa Malaysia, there are proper procedures. Look at KWAP, we don’t interfere on that. Basically the MOF is just a governing entity to ensure that they follow the act that we have put in place for them to follow.
The two entities that have a stellar record in investments includes the EPF and KWAP. But the other two entities embroiled in the 1MDB story, namely LTH and LTAT, while they do have proper governance in place, they have been implicated. Not by me, but by the PAC, by the parliament in their involvement in 1MDB. Clearly governance is an issue with these two entities.
Well, I’ve looked in detail about what this is all about. In the case of Tabung Haji, when they bought the land of 1MDB, of course I think people were trying to question about why 1MDB bought the plot of land. The way I look at it, they 1MDB want to have agencies like Tabung Haji to have a proper property in TRX. These are future places that everybody will benefit from their development. But unfortunately you know when politics comes in , even if you have a good thing, it will be turned upside down by the political powers. So, at the end of the day, when you go for business, you has to stick to business. You cannot blend it with politics. The moment you blend it the business aspect with politics, you’re going to have problems.
Well, MOF is politics.
Well to me, MOF is not politics. We are not politics. Anyway, we shouldn’t talk about politics. You should look at the government servants working at MOF, they are not politicians. They are people who work there, and follow the rules and the law just like the people outside there.
Pulling back to fiscal policy, at the end of last year in December, you said that the government debt of RM 630 billion is manageable.
If you look at the debts, and to compare the RM 630 billion, this amount represents about 54.5% of our GDP. And when you do some comparison with some of the other countries. Japan has over 200% of their GDP in terms of debt. US has 120% debt to their GDP. Singapore has 89% debt to GDP. My point is, this gives us comfort that we have lower figures. But you must also look at the ability for us to pay. Even though our percentage debt to GDP is low, and not as high as the earlier mentioned three countries, we have to look at the ability for us to pay. If you come to a stage where we have a problem in servicing this loan, then we have something to really look at it. Secondly, when we take this loan, what do we do with this loan? Do we use this loan to grow our economy? To multiply the economic activities in the country? To build our infrastructures? So these are the things that we must look at the objective of borrowing and what do we do with this RM630 billion money? Will this money spin off in terms of a multiplier effect into the economy…
I’m speaking to the Menteri Kewangan 2 MK2 Datuk Johari Ghani. Datuk Joe, let’s talk about the subsidies the government has been pouring in the country since between 2006 to 2013. About RM 120 billion has been pumped in for subsidising petrol. Do you think that because the government is unwinding subsidies, not just for petrol, many other stuff as well, including sugar, including basic necessities, we could create extra money so we can pump into and subsidise other projects.
The reason we took out these subsidies is largely because it is no longer sustainable. Imagine this, we need to build schools, we need to build hospitals, and now we need to spend money for our defence, and certainly if we continue allowing these subsidies to happen without control, we will reach a stage where the government will not be able to sustain this expenditure. So I think over time, we need to reduce these subsidies. And as we reduce this, all the money we saved, we can plough this back into the economy to benefit the people.
Now with these subsidy policy is being renewed, it will hurt the consumer more. Because essential items like cooking oil, electricity and more will go up - How do you synchronize these items?
If you look at our inflation rate. You take, say 20 years ago, every year since that date every year we face a normal inflation rate of 2% to 2.5%. If you multiply that by 20 years, you will see the inflation rate creep up into the system. But at the same time, if you look at the salary structure, it is in trouble. Our salary structure doesn’t grow as fast as what you see today in terms of cost of living. So, this is where I think that one of the factor that I want to stress is that of housing. If you can manage that housing situation, instead of people spending 50% of their salary on their house, if we can reduce it to 20% or 25% you have a buffer of another 25% to take care of some of these incremental costs of living.
BFM 89.9 I am with the FM 2 Datuk Joe. Still on 1MDB, do you believe that 1MDB for whatever it’s worth, it is going through a good restructuring process right now?
If you ask me frankly, I think this is the best that we can do in restructuring it. By making sure that we do not draw any more loans and no more loans are being disbursed for 1MDB. We want 1MDB to stop their business. Run off their companies, and hopefully by the time we clear all this, there are no more additional business. And as far as asset is concerned, like Bandar Malaysia and TRX, we want to maximise the value of these assets. For example, Bandar Malaysia, we have just concluded the joint venture between IWH Iskandar Waterfront Holdings and CREC China Railway Engineering Company. And we are looking at investments of about RM50 billion of development.
Datuk, you have been quite a vocal exponent opponent of 1MDB. And I know personally that you were not involved in the ongoings of 1MDB thus far, but now 1MDB has fallen quite squarely on your lap. It seems that the government is undertaking a lot of these measures on restructuring because of the need to rectify their actions. However, the public has yet to hear an apology on the mismanagement of 1MDB. Is the government going to offer one?
Well I think at this moment, there’s a lot of things that we are unable to resolve. We have to wait for the process to take place. I think with any other business that we have seen in the past, for example how we defended our forex, where we lost RM 30 bil, and how we lost almost close to RM 15 bil as far as Perwaja steel is concerned. These are part of the strategic investment that we thought that of, at the origination of these ideas. It didn’t turn out to be what it supposed to be.
This seems like a recurring theme, throughout the generations. Not just about 1MDB, you rightly pointed out Perwaja Steel, Malaysia Airlines, in fact many of these companies were jointly held by MOF Incorporated, or Ministry of Finance, not many of them are doing too well. Why is that?
You must understand, that some of the industries that we MOF went in, is because of the strategic nature in has. Malaysia Airlines for example, it is strategic in nature. Because we Malaysia needs to have a proper airline being run. But along the way, we get management that are not efficient enough to execute what we want, that is where we get to face these kinds of problems. Number two, if you look at Khazanah for example, you know Khazanah, the government set up this outfit, we gave them a guarantee of RM 20 bil but today Khazanah is actually one of the successful investment that the government has made. Today they have a value of over RM 150 bil. With just a guarantee of RM 20 bil, today they are RM 150 bil. While you look at the negative side of it, some of the strategic investment that the government has done didn’t turn out well, there are other investments that the government has done well. What I’m trying to say is that while we have done well in some areas, it doesn’t mean that we have the space to lose money elsewhere, that’s not right either. But again, some of the strategic investment, as long as you are in business, you have to take on risk, you have to take on uncertainty on what lies ahead, this is where I think that in order for us to mitigate these risks, from now on we have to make sure that these three things must be in place for MOF to invest in. One, you must have a sustainable business model. Two, you must have tip top management. Three, you must have proper governance in place. These are the three things that will be made mandatory for every company under MOF, I think we would be able to reduce these kinds of issues losing money in the future.
It seems elementary to have these elements. In fact, a startup trying to source for a RM 100 thousand seed fund, would perhaps have a more fleshed out detail in terms of the three items you mentioned. Why would billion dollars investments not have it? For instance, the Sepang International Circuit doesn’t have these inside their plans?
You see, you have to look at the Sepang International Circuit, the objective of having this, every year, we have the brand value that we created, it has made an impression on 65 million viewers.
But this doesn’t translate into money
But you must remember some investments doesn’t translate into profit. But it translates into the goodwill of the country. You translate this into the tourism industry. When you have 65 million viewers, and we have calculated, you get a minimum 200 - 300 million tourists as a result of this. So what if the company SIC loses about RM 1.4 mil a year? Some investments, like example: IWK (Indah Water Konsortium), you cannot make money because we provide sewerage. We made the MRT, we spent RM 50, 60, 70 billion. You can’t expect to make money there. But this is for the future generation. 30 to 40 years into the future. These are all the infrastructure companies that we spend money for a different reason national growth.
The utility of IWK, everybody in Malaysia will have to use the toilet at some time in a day, utility of roads and MRT, everybody has used them. I cannot imagine even 5% of the population of Malaysia has ever attended anything at the Sepang International Circuit though.
In our country, our economy is very diversified. So, part of the diversification is to also look into other sources of revenue. You imagine, if a tourist comes to Malaysia, they know about Malaysia, 65 million people know where Malaysia is. With this Sepang Circuit, certainly with F1 (Formula 1 racing), it will give us a good income in as far as tourism is concerned. We are able to increase our tourism figures we are able to increase up to 200 to 300 million people coming into our country. So, if you calculate, everybody spends, say, RM 1000? That kind of revenue, is what we can bring into foreign exchange, we can benefit more.
The three items that you mentioned just now, good business model, good management team, as well as sustainable cash flow, is one of the core components of MOF’s funding of new companies. Does it mean that the MOF will continue to fund more companies in the future?
Well I think that this is something that I would want to look in detail during my time as the new FM. Because it’ll be good if some of these companies can be funded by the private sector. We want the private sector to drive these funding. We the government will go into an industry that is strategic in nature. Heavy capital is required. And no private sector is willing to start investing in that. So, the government can look into these businesses. Today, my mission is on having three types of companies within MOF. One, where businesses are running at a profit, continuously giving dividends to us the government. This one we have to keep. Then we have another group of companies, that provides the social benefits to the public. For example, I mentioned earlier, IWK, Perbadanan Pengurusan Air, MRT, Prasarana, KTM Komuter; these are all not making money, but we have to keep them because for the public good it does. And then the third group is continuously losing money. We need to try to revamp these companies. If revamping them cost a lot of money to the government, we may decide to close it.
The running of the government cannot be divorced from the political party that is dominating the cabinet right now. And I’m referring to UMNO of course. Do you think that MOF is the true custodian of the bumiputra agenda? Because of the fact that MOF holds the purse, you MOF basically dictate what can be done, and what cannot be done.
Well I think that this bumiputra agenda is not only in the MOF. I think the bumiputra agenda is already listed in our constitution. It’s there in the constitution.
I’m not talking about the need for it bumiputra agenda. I’m talking about the execution of the bumi agenda.
Well to speak about the execution of the bumi agenda, it’s not just the MOF. The Kementerian of Luar Bandar for example, where MARA is under that kementerian. It’s not just at the MOF. You look at the some of the ministries like MITI, ministry of trade, where they also have the bumiputra agenda. So you have to look at not just MOF. The agenda of this, is to execute something that is already decided in our constitution. And we have to make sure that we protect the constitution. And everybody can have a fair share of the economy.
The social contract that the bumiputras had back then when we developed this country. Do you think that it is still applicable today?
It depends on which sectors we are looking at. Certain sectors we can liberalize. But some other sectors we have to look into the details. For example, the auto industry, there is still something that we need to relook at liberalizing it. But all this requires a detailed study that needs to be done to make sure that it is still relevant or otherwise.
One of the biggest slogans, or mantra is to get out of the middle income trap. I know you’ve been newly appointed as the FM, but you have been the deputy FM for eleven months. Can you share with us, the problem with this income trap. What is besetting us from getting out of the middle income trap. Why is our salary not catching up with the inflation rate?
For the last one and a half years, the government has lost possibly about RM 30 bil revenue from the oil the gas sector. Now, this is something that’s beyond us. It is beyond our control. This is due to the external factors. So, when you lose RM 30 bil of revenue that the government can plough back into the system to implement all these social agendas, this is where the the constraint comes. Number two, if you are talking about salary structures. For as long as we rely heavily on foreign workers, and the industries out there keep employing foreign workers, there is no way we will be able to re-balance salary requirements. If you employ a foreign worker, and you pay them RM 900, locals cannot accept as a salary, that RM 900 because housing rental costs that amount. So, there is no economic value for locals to take up these kinds of job. Now at the same time, if you look at the industries, and you want them to pay them the same as a general worker, RM 1,800 a month, then they will say they are not prepared to pay at level because they say “I can’t sell my product, because my product won’t be competitive”. This is a chicken and egg situation. Again, I still think that this system needs a revamp. We need to be focused. Whichever industry that wants to use and employ foreign workers, it has to be in an industry that really locals really can’t do. For example, the plantation industry. The foreign workers can be allowed into that, also, in construction. But if you want to talk about workers in hotels, shopping malls, and all these service sectors where we cannot allow foreign workers. If you look at the hotel rates, we are the cheapest in the region. If you pay local workers RM 2,500, the hotels for example can raise the prices. Even today in Jakarta, one night in Hilton can cost USD 300. But in Mandarin KL, it’ll only cost USD 100. There’s a lot of gap in prices, because we rely a lot on foreign workers. And at the end of the day, everyone wants cheap, cheap, cheap, it doesn’t work for Malaysia.
So, the correlation between the salary of the local graduates, the reason that you think it’s not catching fast enough, is because of the over reliance of foreign workers?
The Deputy PM/Home Minister, Datuk Seri Zahid Hamidi, has made several announcements, some of which is contradictory with one another, on the foreign workers levy. In the latest statement, he said that the plantation, construction sectors will be taken off the moratorium on foreign worker hiring. But there’s a lot of scepticism on the employer's’ end. They just have a work around it.
This is where at the end of the day, it is all about enforcement. We need to make sure that our enforcement is tip top. If we want to do that, I’ve been to many countries that employ foreign workers, Abu Dhabi, Dubai, they employ a lot of foreign workers. The way they enforce it is good. If the enforce it poorly, it will distort the policy. I’ll give you a real life example. If an investor comes in and wants to invest in two companies. One company employs foreign workers, and the other employs local worker. Same industry. So, definitely, the company that employs foreign workers will be more competitive. The one that employ local workers: it won’t be competitive. One will get the permit and the other won’t get the permit. So, this is where we have to put all companies on the same level playing field. If we don’t have a level playing field, we can’t make people compete equally.
Datuk Joe, Brexit happened very surprisingly in the UK. The Chinese economy is slowing down. Our ringgit is fluctuating but mostly it is above the RM 4 mark to the US dollar for the past one year. Things are not looking good is it?
Well certainly, if you look into 2014, our GDP growth was about 6%. 2015, we are at 5%. And when we prepared the budget for 2016, we forecasted something like 4-4.5% and you know it is very much dependent on our external factors. For example, if you look at today, our oil price, it has dropped from USD 115 per barrel to USD30 per barrel. Now they have climbed back to maybe USD 50 per barrel. So, that alone takes RM 30 bil off our budget. And if you look at China, they represent 50% of Malaysia’s total trade. Say Malaysia’s total trade is about RM 1.4 trillion. Out of RM 1.4 trillion, 15% of trade is between us and China. So, when there’s something wrong with China, or their economy slows down, it will affect us. And number three, because China is the second biggest economy in the world, they also trade with the rest of the world, especially in the ASEAN region. So this will affect the ASEAN region and in turn, we will also be affected in our own dealings with our ASEAN neighbours. So, all this, if we add up, plus all the uncertainty that you’ve mentioned about brexit - all European countries, they represent about 10% of our trade. So, certainly this is something that is quite a challenge ahead.
So, the numbers that you mentioned, 6% growth, 4.5% growth this year, we all have budget deficits along the way. From -6%, -4%, -3%, are we even on track to equalize?
Well our budget deficit is on track to maintain at -3.1%. Looking at the current economic scenario, yes, I agree with you, it is quite uncertain out there. There are a lot of external factors out there. It really is beyond us. It is really difficult for me to tell you for sure. There’s a lot of uncertainty out there. It is totally outside our control
What is within your power is of course is investing in companies, or not investing in companies for that matter
If you look at the limited resources we have right now, certainly I think we will look at this in detail. We won’t go into ventures where we are not supposed to go. The government is supposed to stick to what we have on our plate now. And we need to relook at things that we need to improve.
So, one of the core thrusts of your administration is affordable housing. Let’s start with the core problem setting. Is there a need in Malaysia for a lot of homes, particularly in the lower and middle segment of the population?
Well, certainly, these affordable homes, are particularly the ones that we want to build within the urban areas, cities. Almost 50% of our salaries, as earned by the lower categories, are spent on housing. So in those days, I remember my late father working in Kuala Lumpur and earning, maybe, RM 1,000. But they paid 10-12% of their salary as rental. And now, if you earn RM 3,000 or RM 3,500, if you want to have a decent place to stay in Kuala Lumpur, you have to spend at least RM 1,500; it is almost 50% of your income. So, after you spend of the 50% what is left to you is the other 50%. So, that 50% is the only money you can spend on other costs of living. Because housing issues have taken 50% taken of purchasing power, this is where I think the younger generation feels the pressure of living in the city.
50% of disposable income being taken up for rental of repayment of loans didn’t happened overnight, it happened over three or four decades. What happened in between?
If you look at those days, we had the government come in and do some intervention on this housing prices. They built more rumah PPR, they built more perumahan awam, where people can rent at RM 124 per month. And they can live in the cities and they can take up jobs in the cities. And today, the same job that is available for them, they are not able to take this job because they have to stay in Semenyih, they have to stay in Bangi, in Puchong, and the have to commute to come into the city to work. And they spend about RM 600-700 a month for transportation costs. And you imagine, transportation costs when you rent a house in Puchong / Semenyih and if you have to pay RM 600, that works more than the 50-60% of the disposable income. What we have to do is that we have to make sure the ministry like KPKT, Kementerian Perumahan Kerajaan Tempatan, and then PR1MA, and then SPNB, so all these have to work together to ensure that we have to supply houses that are within the price range of people who stay in Kuala Lumpur. Then, they can afford to buy in KL. So,I give you an example, based on Bank Negara’s latest statistics. The estimated average range of prices of affordable loans that the average taxpayer can take from the bank is within the range of between RM 200,000 to RM 250,000. If you look at the affordable houses that is being built in KL or other cities, it is more than RM 350,000 - RM 400,000 how then do you get fresh graduates to pay 10 % of a down payment.
The two agencies you mentioned just now, Syarikat Perumahan Negara Berhad (SPNB), 1Malaysia Peoples Housing Scheme (PR1MA), on top of that there is the State Economic Development Corporation (SEDC). One such corporation is PKNS, and it was so interesting when we had the PKNS General Manager here on BFM; he says it’s not cheap building cheap houses.
So, this is where I think the state government or federal government has to intervene. The Government has to make it cheaper to build houses. For instance, the land premium, the government has to reduce the land premium. And development charges, we still charge normal charges. We have to charge nominal charges. Conversion of land premium. And also parking requirements, if you have land that is near to the MRT/LRT for example, perhaps we can exempt them from meeting the parking requirements So you want to force people to leave their cars and use public transport.
What is the end goal? Right now the average size of household size is 4.4 to every house. In Australia they have a household size of 2.6 people per household. Is there a quantitative target to bring down the household occupants in Malaysia, particularly in Kuala Lumpur?
Well, this is very difficult for you to impose. A situation where it depends on the individual. Because if they decide to have say 4 kids, you can’t stop them from having kids. The issue is that we can specify the minimum size of living, for example a minimum a size of 850 square feet with three rooms for example. We have to impose this ruling.
This puts the focus of MOF at a very broad level. This just spreads out across everything.
Well, I look at this. If you manage a conglomerate in a diversified company, you will have one CFO. So all will come and refer to you to make sure that your investments are in line with what we want to do. Likewise, the government is bigger than the biggest conglomerate.
Its interesting you used the term CFO. Because just now we just spoke about the PM being the FM, it is very rare, in fact I’ve never seen myself the CEO is also a CFO. Is there a problem here in terms of governance?
It’s not an issue of governance. It is a problem of whether we can observe the rules and procedures . Okay? So, I think that is what I want to stress. For example, most of these companies that are operating independently from us, they have the management, they have the board members, and they pass whatever requirements by their shareholders. So, my point is, it’s just like a public listed company. They have the management, the board, and the shareholders, to ensure checks and balances. Certain transactions can be done at the board, and if you reach a certain threshold, you have to go back to the shareholders for approval. Likewise, you have to apply to the same companies. Either they are privately or MOF owned.
When we still use the analogy of private companies on how they do things. When a subdivision grows too big, or becomes a little bit more profitable, a spin-off happens. Can we see that spin-off happening within that the government linked investment companies?
Yes, if you look at those investments where we have felt that was the time to privatize it - we did it. We have done so for a number of companies. In fact, if you look at some of the GLC companies under the MOF, I would look at TNB, T.M, Axiata, CIMB, in a way, we have privatized them. But the moment we put it up on Bursa, we have privatized them. We have to face all these governance issues placed by Bursa.
These are profitable companies. But what about investee companies? Including Cradle for example? Including Amanah Raya Berhad, PNB, Malaysian Debt Ventures, and of course Khazanah?
Should we look at all these, there is a social agenda to them. To develop entrepreneurship. Because if you want to finance all these start up companies, if they go to the commercial banks, they won’t be able to get the financing. They don’t have a track record, the banks won’t be willing to take on the risk, how do you bridge this financing need? So, in some countries in the world, they would have a certain segment of financing, to encourage people to be innovative. New products, new inventions. You need this capital, but you won’t get it from the commercial banks. But once these people are successful, then we transfer them to development finance bank, DFIs. Then from there, they go to the commercial banks.
But in the process of doing this, you are going to incur a lot of losses along the way. No DFI is profitable or as profitable as the commercial banks.
FYI, all these commercially banks and DFIs, some of them are profitable, some of them are losing money, but at the end of the day, today, all look quite okay. Only at the beginning stage, these companies have a problem because they cannot get their system in order. But today, they are all profitable. What I’m commenting on, is when venture capital is being set up, all this is necessary because even DFIs cannot fund that. Because this is something that we are creating outside the box. Where you need someone to come out with new ideas, and try out the ideas. The need to look at this segment of financing, if you can bring ten ideas, and one of this ten is successful and that one can become a global player, or can become regional player, and creating a 2,000 3,000 workforce, then there’s what we are looking at. So, unless and until you are willing to finance all this, you won’t be able to see this happening in our country.
In the US, as well as western European countries, they leave these risky investments with the private sector.
Agreed, but you must look at the economic size of them. Their GDP is USD 24 trillion. We are just RM 1.15 trillion (USD 287 million). These are basically developed nations. They don’t spend more money on infrastructure anymore. They have already fully developed. So what they do is access money, which they go and spend to encourage a lot of private sector investment. And they are looking for new avenues because their interest rate is very low.
Do you believe that a two tier structure in the financial system is creating more harm and more risk than good? I’m speaking about the commercial banks governed under Bank Negara against the four Development Financial Institutions or development banks including Bank Pembangunan Malaysia, Agrobank, Exim Bank, SME Bank. Is there a timeline to harmonize these two tiers?
No. Because both of them carry different objectives. Commercial banks are profit driven. Development banks have a social agenda. Nevertheless, the development banks still have a structure of governance. For example, if you want to appoint a CEO of that development bank, you must get clearance from Bank Negara. If you want to appoint directors, you must get Bank Negara approval. So, that is the same system with the commercial banks. So this has helped a lot in as far as governing this DFI.
Datuk Joe, one of the core companies that is consistently giving dividends, is of course Petronas. Oil and gas prices continue to be suppressed in the near foreseeable future. A lot of pundits are saying this can go on for two or three years, this 50 dollar oil per barrel. What are the plans for Petronas?
They want to reduce their capex. There’s no point in intensifying exploration. At this price you can’t even cover your cost. I think the consolidation phase is something that is one of factors that we need to pay attention to. We just hope the economy will come back. We have the capacity to produce and sell our oil so we can build back our reserve.
Does this mean that the government is giving up hope on this?
No we will never give up hope on oil and gas. Because the prices will come back. This is a commodity that is a must-have in the world. We need to have this commodity.
Why is it that Malaysia still hinges upon the government dictating oil prices at the oil pump. I’m speaking about PDAM and the petrol dealers. Why not leave it at the market price at the petrol pump for the consumers?
Well, there will be a lot of issues if we were to do that. Now, we want to harmonise the price. Today, all prices are reflective of the current price. Whatever the market price is, we will take the average, and then we will then put the price into the following month.
But you don’t do this to other prices including essential services and product. Why just petrol?
Because petrol is something that we need to govern. Otherwise, we will create havoc in the market. Imagine if we don’t manage this, and no mechanism to control this, then we would have a problem. For other items, like sugar, rice, flour, there is a mechanism to protect these prices. These are something the public wants. If we don’t control these prices, we could have a petrol station and if prices are low, then these dealers may not want to sell. And you have a car, then the petrol station doesn’t want to sell, because you say it is a free market. Imagine a situation like that, it’s dangerous for the economy.
And then you have the progressive tax, you have the GST. Do you think this is burdening the government more, or burdening the people more?
Let me give you a different perspective on why the government applied the GST. If you look at the GST, this is a system that as far as tax collection is concerned, it is very efficient. This is evident in 174 countries that have already implemented and used this system. And we realise that this is one of the best systems in order for us to reduce our black economy. Why black economy? If you look at the figures we have seen, since we have implemented the GST, you know in those days when people import goods, by the containers into the country, there’s no way we can be a 100% sure that these traders will declare their sales tax. But with the GST, whether they like it or not, they have to declare. Because the reason is that if they sell the product, they need to recover their input tax. Imagine if you sell the product, and you charge the GST, and you don’t claim your input tax, then people start asking why you are not claiming? Oh, we are not claiming because we are importing this? Then, when do you import? This is a system is very efficient. What you are asking is - what is happening to the poor? They have to pay GST? If you look at how we implemented this, we are the only country in this region, in fact in the world I would say, to have zero tax, GST exemptions on some products. Some countries they just charge 5%, 7% or 10% with no exemption on products. Here in Malaysia we give exemption on products where we know the lower category of people that have to use these products, and we exempt that. On top of that, we give them BR1M of RM 1,000. On average, if you earn RM 2,500, most of the earners is this income bracket will spend approximately about 70% to buy all these necessities And on these, there’s no GST. So, what is left is about 25% of disposable income. And 25% of RM 2,500 roughly calculated, gives on average about RM 60 GST. You multiply this by 12 months, so you basically spend RM 600-700 per month. But using BR1M, the government pays back RM 1,000 annually. This makes it possible that you are not worse off under the GST for the poor.
We are the rare 5% of the country around the world that is executing the GST under the customs department. Why is it not done under LHDN / Tax department?
The reason is because the with Sales Service Tax, SST, the Customs Department were doing it. They have the mechanism for executing the GST. Because they were already doing the SST. So when the switch over happened from the SST to GST, it was quite smooth for them to adopt it because they are already on that platform.
The core element of a market economy are the entrepreneurs. Do you think the government is paying attention to them?
Yes, if you look at most of the entrepreneurs, starting from zero to successful, along the way, they got a lot of help from the government.
The most successful Malaysian entrepreneur, one can easily argue is Tan Sri Tony Fernandes. He was on a rant on his instagram last week, where he was basically criticising MAHB CEO, Datuk Badlisham. On the LCCT terminal on one example I can quote Tony saying “the cost of KLIA is RM 4bil, and therefore MAHB has to justify the price.” Tony says you don’t have to incur a RM 4 bil cost, when an LCCT can be built with 1 or 2 bil cost.
Ibrahim, at the onset of these ideas, I don’t have the detailed discussion. Only once the airport is completed, this noise starts coming out. So, I don’t have the details with me, but I’m not privy to some of the information. But it’s not fair to give comments. But I think we can always have a dialogue on this. That means you can bring Tony, and MAHB and sit down and put their case forward. I’m willing to be a judge to hear this. What I’m trying to say is that we build this size of KLIA, because AA has to pay. Because we think of the future as well. We can’t continue to build airport every six seven years. My point is that Tony has a point, saying that they want operate into low cost regime business. And here you have an airport that is invested for the future but trying to recoup the big part of the investment. This is just something that I think I cannot decide at this particular point in time. We need to sit down and discuss this. I think both have a point, and we need to discuss but at the end of the day, we are talking about our country, Malaysia. And everybody wants to see this airport is fully utilised. We want to give image to our country. We cannot an airport where 60 million pass through the airport and having a bad experience about the airport. When they go back they will have a poor impression. But they will never see KLIA. They will see LCCT. This is something that we need to address. You look at Singapore where they address everything. But we never really see the difference between LCCT and also the premium airport in Singapore. So, I think this is something where we need to sit down and look at entrepreneur interest but also the overall interest of the country.
One question I want to ask is on the Panama Papers. You mentioned and I quote: “If any Malaysian companies are evading tax, they should be investigated”. Have you found any companies that have flouted the law? Does the Panama paper cast doubt into offshore financial holdings?
No Malaysian company is implicated. Also, Panama is just another BVI. All over the country, the world, they provide services to offshore companies. In our case, we have Labuan offshore. Nothing wrong to have these offshore companies. The question remains: if you have a company where there is malicious intent, then we need to look into it. But otherwise, it is okay, if legitimate money has flowed into the company, then there is no issue.
You’ve touched on Labuan, where Labuan Offshore started off with a noble idea. However, over the past two or three decades, it has not been rivalling many of the international offshore firms. Why is this the case? Is this a venture still worth pursuing?
Well, the makeup of Labuan, including the infrastructure that we have, maybe it is not enticing enough for the world ambassadors, for the foreign investors to come to set up their outfit. And if you notice, most of those people that went to Labuan basically have dealings in Malaysia. And they have an outfit in peninsular Malaysia. And they want to extend some benefit that can be enjoyed in the creation of the offshore company.
Is offshore going to be a core focus?
It was a core focus during Tun Mahathir’s time. It is basically trying to see if we can attract foreign money.
In May this year, you mentioned Islamic finance can fund long term projects. What was the reason for saying so. Do you think it’s because of the way Islamic finance is structured in a different way?
The reason why I said that is because if you look at the Islamic financing structure, they don’t finance paper. They finance assets. If you build toll roads, for example, or highways, where there is revenue flowing in. So you can securitize that, and sell that security, there are a lot of Islamic funds willing to finance these kinds of infrastructure. Number two, if you build ports where the infrastructure has an asset, you have revenue coming in, you can tap these Islamic funds. Whereas, if you look at conventional financing, they can even go to a hedge fund, go to a paper fund, go to commodities trading; where you won’t get a delivery of that commodity.
The largest development fund that we saw concerned the MRT project.
In fact, a lot of sukuk was for the funding the MRT. In fact, to put it in perspective, globally, we are the market leader for global sukuk. If I’m not mistaken, 54% of global sukuks originate from Malaysia.
This puts our trajectory on an interesting path. It means that Islamic finance is more on an investment/corporate banking level. Not so much retail banking kind of level.
Well I think that retail banking for Islamic finance is still there. A lot of Muslims still want personal banking to be Shariah compliant. So they have a lot of options out there to put their money. In fact, Bank Negara is very aggressive in promoting this. Most of the top eight banks, they have Islamic license banks and all those that don’t, have a window.
The private credit rating agencies. They cannot take it upon themselves to blacklist defaulters. This is the case right now where they take things unilaterally on blacklisting. Is the MOF doing anything on this?
We have given strict instructions to all FIs. They have to make sure that they do not victimise people. Just because their name is in CTOS. You know, some of the information in CTOS, is just someone who has served you a notice, and they’ve already recorded it in CTOS. So, I think if that if there is rejection by any FI, they can write to and inform Bank Negara But if their name is in CCRIS, then you can’t. Because CCRIS is an interbank credit that the banks share among themselves. But on CTOS, if you genuinely think that it shouldn’t be there, and have settled your case, then CTOS shouldn’t put it there, and you can sue them
This consumer right is not particularly known by many actually.
In fact Bank Negara has a special desk for this for you to lodge a complain. For example, if you want to apply for this, and you can apply for this, then you can tell them which part in CTOS is the problem. If they say someone have lodged a notice. You don’t pay my maxis bill, celcom bill, how can you bring that just because I have a dispute on the bill - how can you stop my financing when I’m qualified to get that loan. Because my income is enough to pay for that installment. So, you can sue them. So, this is where there are avenues to go to Bank Negara and write. I’m willing to help with this, no issue about it.