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Guan Eng, Penang gov’t and the bumiputera agenda

The abstention by the five Penang PKR state assemblypersons in relation to an Umno motion to put on hold all reclamation projects pending a thorough process of environment impact assessments has provoked an outcry and attracted the opprobrium of Chief Minister Lim Guan Eng.

Detractors claimed that it was unbecoming of the chief minister to have reacted in such a ‘vehement’ manner towards what was a vote of conscience. The perspective of the chief minister on the issue was published by The Malaysian Insider. We are not only reminded of Umno’s sins but also equally important that no government worth its salt would contemplate a situation where it is forced to pay out compensation for broken contracts, especially through no fault of its own.

As such, the issue forces us to consider a more pertinent point, i.e. the constraints and pressures on state government finances.

As it is, the neo-centralisation trend in Malaysia whereby the balance of power between the federal and state governments has tilted in the former’s favour.

For example, the corporatisation or privatisation of state utilities has provided the federal government with the excuse to either overlap its jurisdiction via the legislative reconfiguration of the federal constitution vis-à-vis the concurrent list (as in the case of the Water Services Industry Act 2005) or ‘federalise’ the function via legislative enactment (as in the case of the Solid Waste and Public Cleansing Management Act 2007).

Ostensibly, such arrangement was supposed to relieve the state governments of financial burden thus contributing to its deficit reduction. Service providers were supposed to be asset-light - with having not to worry about the capital expenditure - and focussing only on the operational expenditure. The irony, of course, is that the service providers have access not only to government loans but also the private debt market backed by the government no less(!)

Such a privilege or rather right is denied the state government including Penang. On top of this, the Penang state government has to endure the ‘ignominy’ of being marginalised in terms of federal funding (both in terms of block grants and per capitation), i.e. the non-revenue receipts have been on a steady decline for the past decade.

There was nothing substantial in Budget 2016 for the Penang state government despite being the top three tax contributors. Penang contributed RM6.5 billion in 2015 and will only be receiving back a minuscule 2 percent in the year after.

Redressing the imbalance

Such a disadvantage threatens to pull Penang back from its potential as a logistics and multi-modal communications hub in the country and region, amongst others; and at the same time forces the state government to rely on land reclamation and land swaps as one of the very few viable options of public finance. To redress the inequality, injustice and imbalance, and not least, the critical gap, an appeal is made to the federal government to:

- To allow the Penang state government to set up a state-owned bank (with ownership flexibility, including foreign, and to be capitalised by equity and debt). The state-owned bank shall have access to liquidity from Bank Negara and the Kuala Lumpur Inter-Offered Rate (KLIBOR) as well as the capability to issue financial notes where relevant (i.e. participating in the forward markets) and engaging as an intermediary for interest rate swaps.

Monetary policy (i.e. the setting of interest rates) continues to be under Bank Negara. The primary function of the state-owned bank shall be to provide funding to the Penang state government for its development and infrastructural projects alongside providing employment (e.g. in the form of the Work Brigade for public works either on a permanent basis or as a transition to the private jobs market).

In addition, the state bank shall provide seed funding for a state-based sovereign wealth fund for domestic and international investments.

- To allow for the Penang state government and by inclusion, the local government authorities to issue bonds. Local government authorities shall also have expanded capacity to make investments to yield returns on surplus or earnings. Prudential supervision shall come under the purview of the state bank.

- To allow the Penang state government a share in the corporate tax with a separate payments stream (i.e. the state government will be able to ‘take a cut’ of the corporate tax, perhaps about a third of the rate).

The benefits to the federal include reducing the burden on the federal budget and helping to sustain the deficit reduction, thus rebalancing the shift and going to some extent towards restoring the ‘equilibrium’ in transfer of powers.

In addition, with the role and participation of the Penang state government, the ‘multiplier effect’ will be much more intense and at the same time evenly spread, e.g. in boosting the development of the Northern Corridor Economic Region (NCER).

Penang as a creative and innovation hub should also be regarded as critical for the next leap in the nation’s journey to be fully developed and attain first world status. The federal government must understand that Penang is essential in the bumiputera agenda for the move from the ‘commercial and industrial community’ (BCIC) to the ‘scientific and technology community’ given its manufacturing and knowledge base.

One of the means by which this leap is going to happen is by the development of a home grown military industry focussing on a projectile- or missile-centric defence system. Upgrading, procurement and maintenance of fighter jets is prohibitively expensive and not cost effective for our country.

This is why the recent statement by our armed forces chief, Jeneral Zulkefli Md Zain, that China’s construction and installation works in the South China Sea constituted an “unwarranted provocation” was “unhelpful.” Thankfully the government quickly made amends by giving access of the Kota Kinabalu port to the PLA Navy.

De-escalation and de-militarisation

The thing to remember in the South China Sea situation is first and foremost de-escalation and de-militarisation. Taking sides in any potential conflict is simply unwise. Malaysia should take advantage of the just concluded signing of the defence memorandum of understanding (MOU) with China by tapping into latter’s technology and strategic expertise.

The Titiwangsa Range provides an eminently suitable site for the positioning of the missile system as the first and third tier of air defence. In the long run, this will also contribute towards savings in the outflow of billions of ringgit in defence procurement.

But to achieve all this there must be the political will - to root out the source and centre of gravity of the political and economic problems in the country and that is ‘money politics’. At the risk of over-simplification, crony capitalism is king: Economic and public policies in Malaysia revolve around it.

Crony capitalism is determined by the nature of the political system which in turn is determined by the party system, and hence ‘money politics’. Whoever wants to govern Malaysia must have the iron in them or give it up(!) This is not a game of cards, but your life and mine. And as long as there is the political will, nobody is going to wreck Malaysia the name of vested interests.

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