Budget 2024 – new financing models

Fiscal consolidation and sustainability necessitates indirect/secondary fiscal injection not only via PPP but also fiscal decentralisation.

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In view of the government’s commitment to fiscal consolidation by reducing the level of the deficit to 3% (as the typical target), there’s a critical need to not only widen the revenue base but also to seek out new financing models. Indeed, under the Ministry of Economy’s 12th Malaysia Plan Mid-Term Review (12MP MTR), one of the 17 policy shifts (anjakan besar) includes strengthening fiscal sustainability which calls for exploring new sources of revenue and expanding public-private partnerships (PPPs) which in turn entails embarking on new financial models – something that EMIR Research has been championing earlier on (e.g., “The 12th Malaysia Plan and new ways of raising funding sources”, 30 September 2021).

Allied with this is the government’s desire to increase the purchasing power of the rakyat via the progressive wage scheme (PWS), again a policy idea mooted by EMIR Research a while back (“Combine statutory minimum wage with progressive wage model too”, March 23, 2022), and constituting one of the economic and socio-economic floors under the Madani Economy Framework as complemented and supplemented by social protection and welfare assistance.

In addition, EMIR Research also calls for the re-regulation of the market for rice alongside food imports via the re-establishment of the National Padi and Rice Board (Lembaga Padi dan Beras Negara/LPN) under the Lembaga Padi dan Beras Negara Act (which would correspondingly honour the memory of Allahyarham Salahuddin Ayub) as well as the setting up of a Malaysia Food Security Agency/MFSA (“Budget 2024 – the battle against food inflation isn’t over yet”, October 27, 2023).

The return of the LPN can start with supporting the Single Gatekeeping Mechanism (SGM) for rice imports – currently under the sole custodianship and monopoly of Bernas (Padiberas Nasional Berhad). Basically, the LPN (under the auspices of the Ministry of Agriculture and Food Security) will enhance the SGM by operating a parallel import system (offshore) which will be re-channelled/re-diverted (onshore) to Bernas at the domestic level in terms of sale and distribution. This will enable Bernas’s concession to run its course until 2031 – after which LPN will fully and completely takeover the SGM as the sole custodian and monopoly player.

However, concessions can be given to the East Malaysian territories of Sabah and Sarawak in view of their autonomous status so that the SGM need apply only to the Peninsular. Sabah’s Deputy Chief Minister (DCM) Datuk Seri Panglima Jeffrey Kitingan has called for such a decentralisation. To ease the transition, the DCM proposed that at least 50% of rice imports should be managed by Sabah as “this would give [the state government] a chance to prove the effectiveness of having localised control over [the] food supply, without completely dismantling the existing system. It [also] serves as a middle ground that allows for evaluation and adjustments as needed (“Sabah has right to manage its rice imports and production, says deputy CM”, Malay Mail, November 7, 2023). 

Alternatively, should the idea of Bernas to be reversed corporatised is explored, there could be acquisition or merger in the works. That is, by way of the Ministry of Finance (MOF) via Khazanah Nasional Berhad, for example, becoming the majority shareholder or otherwise combining an existing government-linked company (GLC) with Bernas to form a new State trading enterprise that’s wholly-owned by the Ministry of Agriculture and Food Security, respectively. None of these avenues would entail the overriding of the ten-year concession.

Re-regulation doesn’t merely mean the imposition of legal and regulatory mechanisms but also institutional power to ensure the market functions in a more orderly and stable manner, i.e., to minimise or mitigate against possible future disruptions arising from external shocks. Re-regulation can also help to promote a more equitable (re)redistribution/(re)allocation of profits under what’s a monopolistic system (artificial in terms of imports and natural in terms of domestic distribution) in the mid-stream supply chain set in the context of thin margins due to pre-existing price controls – floor and ceiling.

The formation of a joint-venture (JV) or consortium for mid-stream players as proposed by EMIR Research can be conceptualised as a form of PPP since LPN would be actively involved as co-coordinator (supported and backed up by the Federal Agricultural Marketing Authority/FAMA as and when needed in terms of the warehousing and logistical facilities). 

This PPP arrangement can later expand into a bigger scheme involving regional cross-border flow of rice supply under geographically seamless production networks where there can be sharing of irrigation, processing and storage facilities under a common agricultural area/CAA (under the Indonesia-Malaysia-Thailand Growth Triangle/IMT-GT) – analogous to the proposed special economic zone (SEZ) between Johor and Singapore. This can help to reduce rice import dependence from outside the region (e.g., India) and sub-region whilst ensuring lower prices at the same time. 

As new sources of funding under the PPP, a strategic investment fund (based on the Input-Output-Outcome-Impact/IOOI model) could be established comprising seed and revolving funds from the federal government (e.g., 30%) with the rest of the contributions coming from the private sector (70%) in the form of:

  • selected GLCs (both federal and state) and government-linked investment companies (GLICs) such as the Malaysia Venture Capital Management Bhd (MAVCAP);
  • industry players such as the Malaysia Semiconductor Industry Association (MSIA), Federation of Malaysian Manufacturers (FMM), Malaysian Photovoltaic Industry Association (MPIA), etc. or even a newly established consortium;
  • private equity (PE) and venture capitalist (VC) players – individually (e.g., Scale-Up Malaysia Accelerator) or institutionally (pooled via the Malaysian Venture Capital and Private Equity Association (MVCA), etc.
  • Other players such as the Asean Industrial Growth Fund – a private equity growth expansion fund – managed by Mitsubishi and CIMB Group Holdings.
  • Foreign participants (e.g., multinational companies/MNCs, sovereign wealth funds).

Such a strategic investment fund can not only help boost the Malaysia Co-investment Fund (MyCIF) as administered by the Securities Commission (SC) at a later stage but might even transform the financing of model of the latter. This is where government co-investment becomes investment guarantees (analogous to the role played by Syarikat Jaminan Pembiayaan Perniagaan (SJPP), instead.

The specific purpose of this financing model could be towards investments in training and development (T&D) alongside research and development (R&D) centres – e.g., encompassing the four strategic clusters of maintenance, repair and overhaul (MRO), aerospace manufacturing, systems integration, and engineering and design services dedicated to the aerospace sector and related industries (under the New industrial Master Plan/NIMP) alongside the green economy (under the National Energy Transition Roadmap/NETR (with MRANTI as the lead agency for incubation and marketisation of innovation).

Returns for the fund (e.g., in the medium-term) – vis-à-vis the private sector investors – would in turn come from the contributions levied on participating start-ups and SMEs, including the workforce, which have benefitted from the T&D (levy) and R&D (levy) as well as revenue from commercialisation of innovation projects.

This serves to “repurpose” the use and role of concessions.

The strategic investment fund will complement the Budget 2024 allocations for a) NIMP 2030 Industrial Development Fund of RM100 million and; b) NIMP 2030 Strategic Co-Investment Fund of another RM100 million; c) Domestic Investment Strategic Fund under the Malaysian Investment Development Authority (MIDA) of also RM100 million; and the d) RM1.5 billion provided by GLCs and GLICs to encourage startups.

The ultimate aim is to increase the high growth and high value (HGHV) economy – by SME manufacturing players moving/scaling up the value chain and catalysing or deepening supply chain integration domestically, regionally and globally on top of the creation of (new) startups (in the initial stage).

In turn, it’ll provide the impetus for the creation of more high-skilled and other employment opportunities, directly and indirectly, in the SME manufacturing sector– in line with the NIMP, NTER (alongside past national policies such as the Malaysia Digital Economy Blueprint/MyDIGITAL), New Investment Policy/NIP, Hydrogen Economy and Technology Roadmap/HETR, etc.).

Other financing models under Budget 2024 and in the wider context/framework of the 12th Malaysia Plan (12MP) include tax increment financing (TIF). It can be an innovative method of taxation that particularly applies to local governments.

TIF would also encourage and incentivise fiscal decentralisation – where the fiscal burden could increasingly be shared with state governments.

Basically, it’s an “invest first, recoup later” by the public sector. The infrastructure (hard and soft) investment in a designated or ear-marked zone/area by the public sector will lead to an increase of the gross development value (GDV) of the land (i.e., the proposed investment by the private sector).

TIF works in various ways and can be integrated with public-private partnership (PPP) contracts – whether in the form of build-operate-transfer (BOT), build-lease-transfer (BLT), build-operate-own (BOO), build-lease-maintain-transfer (BLMT), etc. Hence, TIF has the flexibility to be adapted and suited to our context.

Other methods include deploying the proceeds of the present revenue collection specifically for the designated area to pay for the investment in upgrading and expanding the infrastructure. In turn, this leads to higher charges and, therefore, revenue collection.

This necessitates amendments to the Federal Constitution (Article 111) and legislation (for example, sections 41 & 42 of the Local Government Act, 1976). So as to allow state governments and local governments to raise funding via bond issuance (and other financial notes/ instruments).

Accessing and tapping the international markets should be considered (EMIR Research article, “Trio of reforms: Fiscal, administrative and housing industry, March 10, 2020).

For green financing, the government should also consider setting up a Green Investment Bank (GIB) which could be wholly-owned by Bank Negara – with either the Ministry of Finance (MOF) or Ministry of Natural Resources, Environment and Climate Change (MNRECC) or both holding “golden shares” to drive financing of the transition to green and renewable energy.

There’s a critical need for a dedicated and specialist financial institution formed specifically to underwrite the investments of long-term heavy industrial projects in the green economy (especially during transition phase/stage).

The GIB would be open to both the public and private sector as well as foreign participants.

For example, the MNRECC as a public sector entity can raise funds by issuing green bonds to GIB which can be traded on the secondary market by way private placement. This can be the foundation/template for a wider green bond market (as benchmarked by the Asean Green Bond Standards, Asean Social Bond Standards and Asean Sustainability Bond Standards) – and paralleling the Bursa Carbon Exchange (BCX) in terms of carbon credits.

Interest rates offered by the GIB should be lower than the conventional markets, i.e., below market rate.

Finally, but not least, as part of shifting the burden from direct to indirect/secondary fiscal injection, the government should look into promoting the setting up of state government-owned banks in the Peninsular.

The state-owned bank shall have access to liquidity from Bank Negara, the Kuala Lumpur Inter-Offered Rate (KLIBOR) and money markets as well as the capability to issue financial notes where relevant (e.g., participating in the forward markets) and engaging as an intermediary for interest rate swaps.

The primary function of the state-owned bank shall be to provide funding to the state government for its development and infrastructural projects alongside indirectly providing employment. Monetary policy (the setting of interest rates) continues to be under Bank Negara.

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

Advanced industrialised states such as Penang and Selangor should be allowed to share in corporate tax collections, e.g., perhaps with a separate payments stream.

In conclusion, in embarking on fiscal consolidation and sustainability, the government must look for ways in indirect/secondary fiscal injection not only via PPP but also fiscal decentralisation. Jason Loh Seong Wei is Head of Social, Law & Human Rights at EMIR Research, an independent think tank focussed on strategic policy recommendations based on rigorous research.

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