Frankly Speaking:Oct 25-31, 2010

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Licence with little meaningLast week, the government granted Berjaya Corp Bhd (BCorp) a licence to manufacture vehicles. On the surface, it looks like a boon for the company as it is exploring a joint venture with China’s BYD Auto Co Ltd to assemble BYD cars here. However, the limitation of the licence is that it only allows the assembly or manufacture of commercial vehicles, hybrid and electric cars, and luxury petrol-powered passenger cars, meaning vehicles with an engine capacity of 1,800cc and above, or an on-the-road price of RM150,000 and above.

The joint venture will not be able to manufacture or assemble mid or small petrol-powered passenger cars. Unfortunately, this segment — which offers the best potential in terms of volume and commercial returns both in the domestic as well as Asean market — won’t be part of the BCorp-BYD plan.

The limitations imposed on licences such as the one issued to BCorp-BYD will inherently limit the potential investments that companies are willing to commit as the returns are limited. Such limitations are imposed not only on the BCorp-BYD joint venture but on other foreign car manufacturers too.

The government’s reasoning is that there is already a glut in manufacturing capacity locally. Its view is that approving additional capacity to build mid-sized to small cars won’t help solve over-capacity issues, especially those faced by government-linked automobile assemblers. Also, such products may end up competing with the national car, Proton, in an already crowded market.

Having said that, shouldn’t the government look at the big picture and realise that the industry isn’t made up of only a few players?

Thailand is already a manufacturing hub of commercial vehicles for global carmakers. It is increasingly becoming a base for passenger vehicles as well. Indonesia has also seen more foreign investments in the automotive sector.

Neither of these two countries have a national car industry and are free to woo foreign car manufacturers. Perhaps we should borrow a leaf from their book, or we may lose out on being part of the global automotive industry supply chain.

Let’s not confuse the issuePolitically, there could not have been a better stage than the Budget 2011 speech to announce that there would not be any toll rate hikes for all the highways managed by PLUS Expressways Bhd. But as far as corporate manoeuvering is concerned, it would have been better if it had not been said in public.

By announcing that there would not be any toll rate hikes for the next five years, Prime Minister Datuk Seri Najib Razak has effectively sidestepped the reasons behind the takeover of the toll road concessionaire by UEM Group and the Employees Provident Fund (EPF).

The compensation to toll road operators for not raising toll rates is estimated at RM5 billion. Some senior government officials have already come out to say that there is no guarantee a toll rate hike or compensation will be heading PLUS’ way.

But what happens if the privatisation is not successful for some reason or other?

Only after PLUS is taken private — behind closed doors — will the UEM-EPF joint venture be able to discuss terms with the government. Until then, the directors of the concessionaire have to pursue the matter of compensation with the government in the name of fulfilling their fiduciary duties. This is because compensation in lieu of a toll rate hike is part of the concession agreement.

PLUS’ privatisation and compensation in lieu of a toll rate hike should not be complicated.  The fact that it is not getting a toll rate hike for the next five years cannot be used as a reason for taking it private. The privatisation should be based solely on the strength of the offer.  

Spend more on innovationBudget 2011, which proposes to spend RM212 billion, has several sticking points that give room for pause. For one, the government is expected to incur a deficit of 5.4% of GDP in the coming year, a small decline from 5.6% in 2010. Although a deficit of 3% of GDP is considered the trigger point where we should be concerned about the country’s state of health, much depends on how the money is spent.

For instance, expenditure incurred to improve the country’s economic prospects will yield long-term benefits. Such a deficit budget is justified in a slowing economy, since private investment will be scarce when growth is lacklustre. Budget 2011, however, leans heavily on consumption to maintain the growth momentum at 7%. The impetus for this growth will come from an operating expenditure of RM162.8 billion, or 77% of the budget, and RM49.2 billion in development expenditure, making for a slimmer revenue allocation of 23%.
Large allocations for consumption expenditure will certainly circulate wealth in the economy, but their multiplier effects will not be sustainable; economic growth will lose steam eventually. Moreover, if the money is spent abroad, there will be an outflow as well. Thus, emoluments should not become an unmanageable burden. A weighty 21.5% of Budget 2011 is being spent on salaries, and another 13.3% on procuring supplies and services. Another hefty item is Malaysia’s debt servicing obligations, which form 8.7% of the RM212 billion budget — a sizeable RM18.4 billion.

Furthermore, the large headline-grabbing infrastructure projects featured in the budget potentially involve government-guaranteed fundraising, which will increase its gearing. Add to this the subsidies bill of RM23.7 billion, or 11.2% of the budget, for good measure.

Fiscal discipline and strategic spending on capacity building for innovation are two things that need to be demonstrated urgently. This is the need of the hour.

 
 
This article appeared in Corporate  page, The Edge Malaysia, Issue 829, Oct 25-31, 2010