— Ong Kian Ming and Teh Chi-Chang | August 02, 2012
The Malaysian Insider

AUG 2 — Is asking for a few more facts and some additional background too much? Pemandu has accused us of “nit-picking” and not providing alternatives. That conveniently shifts the focus to other issues while Pemandu ignores our very pertinent questions and suggestions. We summarise here three recommendations, and remind Pemandu of the positive outcomes of our nit-picking.

Recommendation #1: Be clear about targets, data and methodology.

Pemandu now has three different targets for national income by 2020. Please be clear, so we can all work towards the same ultimate target. Also, Pemandu should declare now its GNI, investment and job creation targets for 2012 and 2013. This is to prevent a repeat of the discrepancies surrounding 2011, when its `targets’ were declared only after the actual numbers were out.

Recommendation #2: Remove doubtful EPPs.

Acolytes of Pemandu might believe success is assured. But the reality is that some businesses, even EPPs, will fail. These EPPs must be removed and the impact on GNI (Gross National Income), investment and job creation targets quantified. If the targets are not revised down, then Pemandu must explain how it will fill the gaps caused by the failed EPPs.

Recommendation #3: Show clear examples of transformation.

The impressive investment and GNI numbers trumpeted by Pemandu do not show how the EPPs are transformative in nature. For example, a proper evaluation of the TUKAR initiative under the Wholesale and Retail NKEA would go a long way in convincing Malaysians that this EPP has transformed the operations of the small retailers that participated.

Recommendations for Pemandu:

• Pemandu now has three different national income targets for 2020. Please be clear, so that we can all work together towards the same goal.

• Some EPPs will fail. These must be removed and their impact on income, job creation and investments quantified.

• Show us examples of transformation. Dazzling headline GNI and investment numbers in the billions do not illuminate how our lives are being transformed for the better.

Previously, in our dissection of the 2011 Annual Report of the ETP …

1. Part 1 (The ‘D’ata in our DEEDS framework) highlighted how Pemandu very adroitly masked the fact that real national income growth last year was below its target;

2. Part 2 (‘E’xecution) unearthed the shocking case of Pemandu lying and taking “100 per cent” credit in its Annual Report for a RM1.9 billion wafer fab plant that was never built;

3. Part 3 (‘E’nterprise) uncovered the startling gap between committed and actual investments. The RM12.9 billion of actual investments is a mere 7 per cent of the RM179 billion committed investments that Pemandu prefers to emphasise;

4. Part 4 (‘D’iversity) revealed that Pemandu’s ‘recalibration’ of the ETP figures is better described as a massive collapse. The incremental GNI (Gross National Income) and job creation numbers were slashed by 45 per cent and nearly 20 per cent respectively. Were some EPPs selected based on grossly exaggerated forecasts?

5. Part 5 (‘S’ Socio-economic impact) showed that capital investment per employee (CIPE), an indicator of the quality of jobs created, is very low under the ETP. We see this as reflecting the fact that many ETP projects are ‘recycled projects’ that are not fundamentally transformative.

Why is it so hard for Pemandu to furnish a few more facts and some additional background?

Today, in our series critiquing the 2011 ETP Annual Report, we respond to Pemandu’s accusations of “nit-picking” and not providing alternatives. Those are unfair and unconstructive accusations. Doing so allows Pemandu to shift the focus to other issues while it ignores the very pertinent questions Refsa asked.

Pemandu had presented, in its own words, a very “ambitious” programme to transform Malaysia. As loyal citizens, we took it upon ourselves to delve in detail into the Economic Transformation Programme Roadmap and related material to understand what this powerful unit in the Prime Minister’s Department had planned for us.

We found numbers that did not add up, projects that looked dubious and decisions, which made little economic sense. However, we did not call for the ETP to be trashed. We asked for clarifications of fact and additional background to help us understand Pemandu’s process and the targets.

In addition, we also made various recommendations, which Pemandu seems not to have noticed. For Pemandu’s benefit, we summarise here our recommendations, as well as remind it of the positive outcomes of our “nit-picking”.

Three recommendations for Pemandu and the ETP

Here are three recommendations as to how Pemandu can be more credible and effective in its attempts to convince us that the ETP is indeed transforming the nation’s economy and not a glossy publicity initiative.

We hope Pemandu will respond constructively and address our suggestions clearly and directly instead of obfuscating and questioning our motives as it has tended to do in its lengthy and often convoluted responses to our critiques.

Recommendation 1: Be clear and transparent about targets, data and methodology

If Pemandu is confident of its investment, GNI (Gross National Income) and job creation figures that have been validated by PricewaterhouseCoopers, then it should not have any problem whatsoever making known the following information:

1. Be clear about its ultimate target. Right now, Pemandu has communicated three different targets for GNI per capita by 2020 – US$15,000, US$16,500 and US$17,138 . This is a huge range, and begs the question, Can we aim if don’t even know our target?

2. Release key data for each and every EPP, before and after “recalibration”. As a result of our critique, Pemandu admitted to erroneous assumptions that forced it to slash its forecast for GNI impact by 45 per cent. In addition, the job creation forecast was cut by nearly 20 per cent. These massive changes warrant greater explanation and must not be glossed away as “recalibration”.

Were Entry Point Projects (EPPs) with exaggerated forecasts chosen instead of other projects which were more realistic and honest? To clear such doubts, Pemandu should release the original and revised investment, GNI and job creation figures for each EPP, in order that analysts can clearly see which EPPs were most over-optimistic in their original projections.

3. Declare clearly now its GNI, investment and job creation targets for 2012 and 2013 as well as the methodology and key assumptions underlying the targets. This will help prevent a repeat of the doubts cast on Pemandu’s claims of overachievement of economic growth and investment targets for 2011 as these targets were only declared after the actual numbers were already out, and were also low .

Particularly pertinent at this point is whether Pemandu will increase its overall GNI and private investment targets, as it should, following the revisions made in May 2012 by the Department of Statistics to the historical GDP and GNI figures. For example, GNI in 2011 was revised upwards by 3.4 per cent, from RM830.7 billion to RM859.1 billion. If it does not increase its targets accordingly, at the stroke of a pen, Pemandu is already closer to overachievement.

We also recommend that Pemandu set GNI, GDP and per capita targets in RM rather than US$ to avoid misleading changes arising from exchange rate movements . As we have previously noted, increases in our GNI per capita in US$ terms merely because the US$ weakened against the Ringgit do not benefit the majority of Malaysians.

4. Show the details of actual performance relative to its annual targets. For a start, give us the breakdown of the actual investments in 2011 by EPP. Going forward into 2012 and 2013, provide the actual GNI, investment and job creation numbers for each EPP and not just the headline total numbers.

Such data and disclosure would go a long way to validate the progress of the ETP, in addition to the traffic light methodology used in the ETP Annual Report 2011.

Recommendation 2: Create a mechanism to remove doubtful EPPs

Followers of Pemandu can be forgiven for believing success is assured. New EPPs are announced with much fanfare, and the various updates by Pemandu crow about investments, GNI and job creation with barely a hint of difficulties.

The reality is that some businesses, even EPPs, will fail. Pemandu must establish guidelines on how it will deal with EPPs that are floundering. It must have a mechanism to remove doubtful projects such as the LFoundry wafer plant and perhaps even the Karambunai Integrated Resort City and Tanjong Agas Oil & Gas hub if these are found to be ‘dud’ projects which may end up wasting taxpayer funds in addition to not being transformative.

Pemandu must also be clear about the impact of the removal of these EPPs on its GNI, investment and job creation targets. If the targets are not revised down, then Pemandu must articulate how it intends to fill the gaps caused by the failed EPPs.

In the words of one of its directors, Pemandu must “keep it real” and not live in a fantasy world where achievements and professed overachievements are trumpeted while underachievements are glossed over or ignored completely.

Recommendation 3: Show clear examples of transformation

Pemandu’s voluminous communiqués focus on headline numbers ― particularly investments and GNI. While impressive on the surface, these numbers do not show how the EPPs are truly transformative in nature, either at the high or lower end of the economic value chain.

For example, Pemandu highlights a handful of successes to buttress its claims that the TUKAR initiative under the Wholesale and Retail NKEA is a game-changer. A few swallows do not a summer make. What is needed is a proper evaluation of ALL the outlets which have undergone this initiative to determine what percentage of outlet owners enjoy higher profit margins after deducting for the costs of renovation and upgrading as part of TUKAR, and if the positive results can be sustained over time.

Another initiative which Pemandu can and should use as an example of a game-changer is the River of Life EPP under the Greater KL/Klang Valley NKEA. This could be a textbook example of how an agency like Pemandu can deliver significant value-add by coordinating the various government agencies and departments whose approval and cooperation are needed to develop considerable stretches of real estate along the Klang River and convert the currently non-productive land into economically vibrant areas.

The positive outcomes of “nit-picking”

Refsa’s “nit-picking” and harping on issues like “an old broken record” has been very useful. It has forced Pemandu to admit to data errors and omissions and highlighted fundamental problems with the ETP and some of its EPPs. We set out here three positive outcomes of our tenacity.

Nit-picking Benefit #1: Pemandu’s GNI target becomes a little more real

We pointed out way back in January 2012 that:

a .Pemandu’s ‘True North’ of RM48,000 GNI per capita by 2020 is a nominal target that would have been reached even without the presence of the ETP, based on growth rates historically achieved when Pemandu was not in existence. We said the ‘True North’ should be higher if Pemandu is adding value;

b. Pemandu’s GNI target was inconsistent with its own underlying assumptions. Based on its 6.0 per cent and 2.8 per cent per year real growth rate and inflation assumptions, the GNI per capita target for 2020 should be RM54,145, not RM48,000.

Following our “nit-picking”, there has been a subtle shift in Pemandu’s emphasis:

a. In a June communiqué, it focused on achieving RM1.7 trillion total GNI by 2020 , which translates into RM53,800 GNI per capita using Pemandu’s population projection of 31.6 million;

b. Pemandu CEO Datuk Seri Idris Jala in his Transformation Blues column in July referred to US$16,500 GNI per capita which translates into RM52,800 GNI per capita .

We shall ignore the fact that Pemandu now has three different GNI targets. What is more significant is that following our exposure of how easy it was to achieve the RM48,000 target which was initially much reported and repeated as the ‘True North’ figure, Pemandu has subtly moved its bar a little higher.

Nit-picking Benefit #2: Questionable target-setting and EPPs brought to light

Our “nit-picking” and questioning of why Pemandu’s RM797 billion GNI target for 2011 was lower than that of the Ministry of Finance forced Pemandu to reveal its linear approach in absolute terms in setting that target.

This linear approach in absolute terms makes poor economic sense, as illustrated in our infographic ― Is Pemandu’s True North Taking Our Economy South? A linear approach in percentage terms is more sensible.

Our analysis has also caused Pemandu to admit to errors in its targets, which had the effect of making its ‘outperformance’ appear better:

a. Firstly, it understated its professed private investment target for 2011. “We acknowledge that the figure should be RM86 billion and not RM83 billion,” it said;

b. Secondly, Pemandu conceded that it wrongly compared the nominal growth of private investments achieved in 2011 to the real growth rate targeted in the 10MP which again resulted in its performance appearing to be better than it really was. “We could have been clearer that 19.4 per cent is a nominal figure for private investment growth.”

We also revealed issues with some EPPs. For example, the group which is developing the RM9.6 billion Karambunai Integrated Resort City EPP is currently being sued by investors in another project. The sum in litigation is a mere RM18 million, which begs the question as to the group’s ability to undertake a project of nearly RM10 billion in investment value, for which taxpayers are providing RM600 million of support funding.

Nit-picking Benefit #3: Misdirection and untruths brought to light

Most importantly, we revealed that Pemandu was not being truthful about its progress. The most serious was the case where Pemandu claimed that the construction of a 200mm wafer fabrication was 100 per cent complete in Dec 2011 when in actual fact the company that was supposed to build and operate this RM1.9 billion wafer fab, LFoundry, had already pulled out of the project because it was in the process of being declared insolvent!
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* Dr Ong Kian Ming holds a PhD in Political Science from Duke University and Economics degrees from the University of Cambridge and the London School of Economics. He is attached to UCSI University, which has been named as the project owner of two entry point projects (EPPs). To avoid any potential conflict of interest, he will not make references to or analyse these two EPPs. He can be reached at [email protected].

* REFSA (Research for Social Advancement) executive director Teh Chi-Chang holds a first-class degree in Accounting & Financial Analysis from the University of Warwick, an MBA from the University of Cambridge and the CFA (Chartered Financial Analyst) charter. Prior to joining REFSA, he headed highly-regarded investment research teams covering Malaysia, and was himself highly-ranked as an analyst. He can be reached at [email protected].