The Edge: There is a view that the second plan is too little (direct stimulus is only RM15 billion over two years) and maybe even too late.
Tan Sri Nor Mohamed Yakcop: We don’t think it is late. Because in November, [when] we came up with a stimulus package of RM7 billion, at that time the world was a completely different place than it is today. The world took a turn for the worse in December, January, and we are here now with a programme for RM60 billion, and that is big by any definition, 9% of GDP is big over two years and that is the optimal time frame. The 9% is the second highest in the world, the only country with higher spending is China with 13.3%. We believe that we have to overdo it rather than under-do it because of the downside risks. I remember reading (Paul) Krugman’s article a couple of months ago where he said the way to do it is to calculate how much you have to spend to kickstart the economy or to reduce the pain, and add 50% to that. Err on the side of more rather than less because the risk is on the downside.

And this is what we did. We gave RM60 billion although people were talking about RM10 billion to RM15 billion. But in coming up with the second package, one has to do it cleverly because the simple way to do it is take the whole amount and borrow it and spend it. But it will increase the budget deficit to over 10%.

Given the urgency of the problem, the deficit is not a primary concern? Of the RM60 billion, only RM15 billion is actual direct stimulus and this, over two years.
Although people say that deficit is not an issue now, that it is not today’s problem, maybe it is the day after tomorrow’s problem. But you still have to be prudent and careful, you don’t want the future generations to be burdened with too much debt. So we said okay, we will borrow some, spend some, because liquidity is still excellent, at RM150 billion or what; we cannot solve all the problems, it’s not a silver bullet; this problem is a world problem. So we have to reduce the pain, and take advantage of this time to restructure the economy on a higher value chain. We cannot borrow and spend, but at the same time we need to use all the resources that we have to increase aggregate demand and restructure the economy going forward, so that when the blue skies return, and ultimately they will, we will be ready with a better quality structure of the economy, better quality staff, higher skilled, and less dependent on foreign labour.

So out of the RM60 billion, RM15 billion is our own real direct spending, another RM3 billion is also direct because it is the tax foregone, and RM2 billion is the PFI (private finance initiative) fund, and that is a combined RM20 billion.

We also have the off-budget projects of RM5 billion, we say it is off budget because it does not come directly from the consolidated funds of the government but it is as real as any — the low-cost carrier terminal, RM2 billion it is real, the Penang airport extension, RM250 million is real, the RM2.4 billion for the Malaysian Communications and Multimedia Commission is real, and RM100 million for covered walkways is real. The RM10 billion to be spent by Khazanah (Nasional) is also as real as can be.

So the issue is the balance of RM25 billion that we give as guarantee. People ask, is that real? It is also real, because although in this case we are not out of pocket today, there is contingent liability on the government. We are saying that we believe that good firms will get financing and the banks will be incentivised to lend. If we do not have the guarantee funds, there will be RM25 billion worth of opportunities in the economy that will not be undertaken, possibly. We think it is not too late because since December, January, the world is falling off the cliff. We were proactive in November, and now we have taken a bigger and more comprehensive package.

Quick implementation is key because of the depth of the crisis. Yet we don’t have a good track record in implementation?
 The taste of the pudding is in the implementation, and implement it well. If we fail in the implementation, then we would have missed a major opportunity… I agree that even as we speak, things are getting worse every day… unemployment, and I just read that total loss of wealth in the world is US$50 trillion, and this will wipe out 3% of GDP. We basically see how lending in the US has dried up. First and second quarters will be really bad, so we will have to implement things very quickly.

So what we decided today is that we will have an extra mechanism to troubleshoot and find out where the constraints are, to ensure that we leave no stone unturned in making sure that things are implemented fast, transparently, and we just have to put bureaucracy aside.

What we have decided is to have a Technical Committee for Implementation chaired by KSP (Treasury Secretary General), consisting of the head of Project Management Unit and the Implementation and Coordination Unit. It will have a secretariat, and that committee will report to us, the steering committee chaired by the DPM and Finance Minister Datuk Seri Najib Razak, myself, the Economic Planning Unit minister Tan Sri Amirsham (Abdul Aziz) and the KSP. We will meet very regularly and we will have a mechanism to make sure that every­one in the chain has a deadline and a KPI. We are confident that we will be able to push through the implementation of the projects. And we will do it transparently, and for every ringgit spent, we want to get as much as possible.

What is the boost to GDP from the latest plan? The government is saying that even with the stimulus, the economy may still contract 1%.
There is no official figure, but if you ask me, as a ballpark figure, I think it will add between 2.5% to 3% to the economy. So without the spending, we will contract by at least 2.5%.

Citi has come up with a report that for the first two months of the year, the Malaysian economy has contracted 3%.
That is possible; the first two quarters are going to be bad.

Plugging the leakages

The projects, apart from a handful, are very small, unlike past pump-priming efforts. The concern with so many small projects is that the people will not know who is getting what, and hence there will be more leakages.
We want the people to benefit directly. Some of these iconic projects take a long gestation period, and by the time we take them up, it is already 18 months gone. One can even argue that the advantage to the people immediately is debatable even though infrastructure is still key for a nation to take off.
But at times like these, we must spend on projects that must be able to take off tomorrow, small projects throughout the country, that is very much faster, you can bring many contractors on board, and the effects will be felt by many people.

How will the rakyat know that these projects are given out, and more importantly, carried out?
By September, we would have implemented all the projects. The committee that I talked about earlier, we will look into every project, where it is, who is doing it.

Will that be disclosed to the public? In the US, for example, Obama is setting up a website to show where the money is going. How about something like that here?
We will inform the people, but whether or not we will have a website — it is not a bad idea — but it is a decision the government will make but we are open to informing everyone about where we are. We want to be open on this, what is the harm?

There is this view that in terms of leakages of past projects, the quantum is about 20%.
How do you define leakages? So, the way we are going to do it, to prevent this, and the deputy prime minister has said it many times, it will be by tender. So with the tender, there is a price discovery, and such leakages will be eliminated. Leakages happen only when there is no price discovery, so as long as we do everything by tender, there shouldn’t be these leakages anymore.

But projects of less than a million ringgit, they do not need to be tendered.
No, there is a policy of getting quotations of at least three or five companies. And for some of these small projects, there are standard rates. You cannot cheat very much because we know the cost. It is only the big projects, the design and build that you really don’t know. So we are not doing design and build anymore. The EPU will prepare a standard cost, and the contractors come up with the lowest bid. So this issue of leakages, hopefully, will be an issue of yesterday.

The question the people are asking is, when there is a proposal to build the LCCT at RM1.6 billion, why is MAHB doing it at RM2 billion?
It is very complicated, but it is not an apple to apple comparison. The LCCT has another runway, there is a third runway… the scale of the project is different. We will make sure that MAHB does it in a very transparent manner, and that there will be value for money.
 
There are some special projects that will be exempted from open tenders. What are these?
Security projects, but these are few and far between.

Why is the government providing the initial funding for PFI projects?
We believe that the private sector can undertake a lot of projects on its own — strategic and specific projects, where the multiplier effect is very high — these can be undertaken on their own, they don’t have to come to us. But some projects are very good for the nation but the viability is at the margin. With a little bit of help from the government, the project becomes viable. Projects that would not have taken off can now take off and the multiplier effect on the country is high. So we set up this fund, RM2 billion, and if you can convince us your project is strategic but viability is at the margin, we will help. We will create that tipping point.

If you look at the UK, the government initiates projects and calls for bids.
We also do that; we have competitive bids. If we can fund it through our consolidated funds, we call for competitive bids. It need not be for construction of a building, but also for maintenance. Maybe if we think of a project, we will have to think beyond construction, get the party to maintain it, because then they will build it in such a way that the maintenance cost is low. We have to think of that. This is different, we think that the private sector knows best in certain areas, and let them use the resources, we just hold their hand and get the projects off the ground.

In the previous budget, the government set aside RM20 billion for PFIs, but that did not take off.
That is a slightly different model. This one we let the private sector bid for it, it is slightly more transparent. Like if the private sector has a RM2 billion project… basically, we give you free money — the private sector comes and says, can you help me, like if we are building this, can you take one lot for your bomba, etc, and we say, okay, we will buy it. That gives them enhanced revenue and the project becomes viable. We can actually help in many ways.

Not enough boost for consumers?

A criticism of the mini-budget is that there are inadequate efforts to boost immediate consumer spending, unlike what Singapore did. Many people were expecting some form of cash (for the very poor) and tax incentives, including maybe even a tax-free year. Is it because the government feels that there is no need to stimulate consumer spending yet?
If we have a government that faces no financial constraints, we can do many things. We can write a cheque for every Malaysian, we can build that road that Sabah, Sarawak have been asking for, and we can build big infrastructure projects; we can provide funds for plenty of training.

But we start on the basis that money is limited, and for every ringgit that we spend, there is of course growth, but there is also the deficit. However, the needs are unlimited, so there is the issue of how do you get the best bang for your ringgit.
One way is to give as much as you can — cut taxes and do direct transfers, people will spend and that is fine. You may even spend RM60 billion doing that. And the budget deficit is still 7.6%. But will we get less or more?

We think we have done right, because at the end of it, these opportunities must be used, more importantly to create aggregate demand, the economy basically will move away from a vicious cycle to a virtuous cycle. On direct transfers, there are problems — one, the bureaucracy involved is very complicated, two, if you give a transfer to all and sundry, not everyone will spend.

In any case, only 1.2 million people pay taxes. In terms of corporate tax, we are not the lowest in the world but we are quite low at 25%. There are only two countries lower than us, that is Hong Kong and Singapore and around 17%, 16.5%. Indonesia, Thailand 30% and others 28%. But interestingly, because we have grants and other forms of tax relief, in some industries, manufacturing in particular, the effective tax rate is only 3% to 7%, and we don’t have GST. So while we have some measures on the supply side, we cannot go overboard.

Does a 7.6% budget deficit take into consideration the RM3 billion in tax revenue foregone?
Yes, RM1.5 billion each year, over two years.

An opportunity for restructuring

On the small and medium enterprises (SMEs), while ensuring access to credit is well and good, there is also concern that the plan does not tackle the root problem — at the end of the supply chain, there is no demand; exports have collapsed. So even if SMEs have access to funds to utilise capacity, they will still be in distress because there is no demand for the final products. How do we deal with this?
Beyond efforts to ameliorate the pain, in the longer run, we have to see whether this whole supply chain that we have built up, very successfully over the years, is still relevant going forward, especially when the supply chain ends up in the US. At one time we thought there was decoupling, now it does not work at all. We are linked to the US either through trade or finance. So we have to think, going forward, how we can have a supply chain that is less dependent on the US, we have to build a more resilient supply chain.

So current measures don’t quite help all SMEs?
For some SMEs, it may not. But SMEs may want to take this opportunity to look into their business plans and restructure themselves, and make investments. Wherever they think they want to do something, we say the funds are available. We cannot solve the problem for them but if they think they can solve problems in the long or short term, we say the funds are available.

How do you monitor the disbursements?
We have a mechanism for that… there are people identified to monitor, undertake that.

The mini-budget talks about capacity building, restructuring the economy. What are the measures to encourage restructuring?
Take the simplest of examples, foreign labour. We are so dependent on cheap foreign labour we cannot create a high-income society, and you need to be high income to be on the road to achieve Vision 2020. It’s a small measure, but very significant. We increase the levy, except for construction, services and maids, and we say that the levy must be paid by the employer. If an employer wants to terminate the employee, you can do so and we will return the levy, proportionately. We want to create a high-income society but it is very difficult to do that when you have three million foreign workers in this country.

On the bond guarantee agency, is RM15 billion the government’s contingent liability?
Not RM15 billion. We will not allow junk bonds, but allow companies that are not blue chips to issue papers that are still investable grades, just a notch or two below the highest grade. Normally, during such times, the banking pendulum, when it swings, it makes a long arc. It happens all over the world. So here we are saying we will take 80% of the risks, but we are confident that many of these ventures will be successful. It’s not a 100% risk. Even if these fail, there are assets. The companies we help will be quite big, because to go to the capital markets, you need size.

There is talk that GLCs will benefit from this.
Take it from me, that is not true at all. We will open up to all companies, in fact mainly to non-GLCs because GLCs already have some sort of an implicit guarantee.

Prices are coming down now but with the budget deficit, lower rates and a weakening ringgit, some time down the line, inflation can become a problem. Do you see this as a worry?
I think inflation is yesterday’s problem, for the next three to four years, at least, inflation is not a problem. It is the other way round, disinflation. Eventually yes, if we look beyond the immediate, inflation can return but we will have to be careful but it is something that is not on our radar screen right now.

Going forward, if the economic environment deteriorates further, and there is need for more pump priming, has the government run out of bullets?
Not yet. That’s why we say this is not the silver bullet, not the last bullet.

So, what options do we still have?
We will cross the bridge when we come to it. At this point in time, we feel comfortable with what we have done. Are there downside risks and are we prepared for it? Yes, we are. Our RM60 billion has already discounted further deterioration in the world situation.

This article appeared in the Cover Story page, The Edge Malaysia, Issue 746, March 16-22, 2009