Is SL1M panacea to youth unemployment?

The purpose of this post is to highlight the true objective , potential cost of SL1M or Skim Latihan 1Malaysia

SL1M is an expensive endeavor and merely a band aid solution. It is at best a peripheral solution , although some politicians tend to over sell it as some sort of silver bullet to graduate underemployment & youth unemployment.

Firstly , lets be clear. SL1M is merely an education program mainly at aimed providing soft skill training to graduate. It also include other modules such as organizational adaptability, grooming & etiquette, creative & analytical thinking which are adapted to organizations. This are areas which should have been addressed in school itself.

Source :  Pn Norashikin Datuk Haji Ismail , Secretariat for SL1M , EPU

It doesn't do the following :
1) reduce youth unemployment ( 10.5% youth unemployed which is 3x national rate)
2) reduce graduate underemployment ( some account put 45% of graduates cld be underemployed)

In order to achieve the objective above, the government has to induce new job creation.
The elephant in the room remains that Malaysia simply haven't created enough jobs esp skilled job.

The low hanging fruit would be government stop indulging in prestige projects such as TRX , MRT3 and ECRL , and redirect them to expand the social sector as shown below :
1) double/triple our public hospitals in next 10 years
2) Smaller class size, halve teacher's workload, build more schools
3) expand police & fire fighting force

Anyway , SL1M target group are graduates who are unemployable or currently underemployed.  These group mainly come from the lower income families. Our education system have failed in ensuring a level playing field. Among others, the public education promotes elitism via SBPs, MRSM & Cluster schools. SL1M is proof in the pudding.

Source :  Pn Norashikin Datuk Haji Ismail , Secretariat for SL1M , EPU

The chart above shows that graduates from families in B40 are twice more likely to be unemployed then graduates from M40 families

I am not convinced SL1M is even effective intermediate solution. This is because that companies tht take on SL1M trainees get a double tax deduction. The rakyat is therefore effectively subsidizing 48% of RM2000 monthly allowance for a SL1M trainee via tax deduction. (The govt provides same double deduction incentives for firms that hire people with disabilities)

Assuming 15,000 trainees. This could cost govt up to RM180mil in subsidy allowances from govt. On top that, companies can claim double deduction on training expenses capped at RM5000 per trainee. For 15k trainee, that would mean Rm36mil. Govt spends RM40mil on promotions, roadshows, open interviews. We looking at annual cost of RM250mil.

This is almost like the operating expenditure of running a full fledged university like UPSI. However, spending money on this is definitely better than hundreds of millions tax incentives for returning experts. By some account, this could be RM100mil a year.

But money is not the issue here. Thie issue is SL1M would displace the existing 1st year executive cohorts that firm take on yearly.

One possible adverse effect of SL1M is that, firms will start replacing their 1st year executive cohorts with SL1M trainees. This would mean the program will not benefit the most vulnerable group which is graduate youth from B40 families that SL1M claims to address. Those who remain unemployed & underemployed would remain so as firms take advantage of the double tax deduction.

From firm's point of view, they will able to obtain a first year executive with wages of minimum RM2000 per month but only cost the firm roughly RM1000 per month.

Lastly, We have to be more critical on govt programs. There is only 2 solution here.
1) address inadequacies in education system
2) induce more job creation in the economy with much needed expansion of public health & public education sector.

Here is a another article about SL1M which I recommend.

MRT 1 vs LRT3

The purpose of this post is to demonstrate how overpriced is MRT 1 when benchmarked against LRT3 despite both systems were build to carry same amount of passengers.

A MRT 1 train & LRT3 train can both accommodate 1200 passengers & 1207 passengers respectively. If LRT3 were to emulate MRT1's frequency , both would be able to carry 20,400pphpd

Therefore, apart from construction cost, only difference btwn both appears to be L & M in the acronym.

We start with the official costing :

• MRT1- 41km elavated & 10km underground - RM21bil 
•  LRT3 - 37km elevated & 2km underground - RM9bil

Then we 'normalize' both. Basically we assume both MRT 1 & LRT3 consist only of elevated portion. This enable us to do an apple to apple comparison.

To do that, we assume that both underground portions are 2x the cost of elevated portion.

• MRT1- 61km(41+20) elevated line - RM21bil 
• LRT3 - 39km(35+4) elevated -RM9bil

So now we can calcuate cost per km for both MRT 1 & LRT3. 

•  MRT1-RM344mil/km 
•  LRT3- RM230mil/km

Therefore , MRT1 would have cost RM14billion using LRT3 as benchmark. That is RM7billion of wastage. Using a 20 year govt bond at 5% interest, RM7billion savings at project outlay means we save RM700million(coupon+principles sequestered) every year for next 20 years.

Lastly ,MRT shldn't be build in the first place. Govt shld have opted for BRTs which cost 10%-20% of cost of an MRT, provides sufficient capacity & connectivity as MRTs.

We better off using the savings here to expand public healthcare , public education & put more cops on the streets. This are areas we desperately need to expand, plus it creates the jobs we desperately need to induce wage increase & reduce youth unemployment & graduate underemployment. I intend to explore this later on.

Privatisation of public higher education

Between 2013 and 2016 , govt have systematically reduced enrollment(via lower intakes compare to graduates) in public universities by 1.7% per year.  Enrollment fell from 560k in 2013 to 532k students in 2016.

That means approximate 28,000 students for 2018 alone will be deprived of access to public universities and have to pursue studies in IPTS thus incurring excessive study loan. At least 70% to 80% of them  would be bumiputra

Souce : MoHE Statistics 

Source: Mohe Statistics

 The largest decline happened to UITM which saw enrollment drop by 25,000k students over 3 years. 

This is conscious policy choice by the govt under pretext of necessary budget cuts. The actual reason is government wants to spur IPTS growth. Its consistent with govt policy as highlighted in Higher Education Blueprint 2015-25. Govt aim for 5.1% of growth in IPTS enrollment compared to 2.6% growth in IPTA enrollment per year between 2015 to 2025. 

In effect, this is privatization of public higher education. 

Source : Higher Education Blueprint 2015-2025

Govt owns substantial interest in private higher education such as IMU, Uniten , MMU, UTP, UniKL etc. Besides that, govt pumped in RM5billion to Ekuinas which end up owning Unitar, APIIT & KL Metropolitan Uni. Ekuinas parked all these under ILMU group & was suppose to public listed it but aborted the idea last year due to market conditions.

In my opinion , this presents conflict of interest in govt's role in guaranteeing access to higher education in tandem to the spirit of Article 5(1) of the Federal constitution. 

Privatization is fair if students are guaranteed access to financing & that IPTS offer much more competitive pricing then IPTA.

Unfortunately & fortunately , IPTAs are much more cost efficient since they have much lower cost of capital(govt debt's at risk free rate), cheaper land cost(campus construction cost). Therefore, IPTS have to compensate with lower operating cost in order to provide better pricing. However that is at best inconclusive & even if that was the case, no reason why public universities can not emulate same level of OPEX efficiency without compromising quality.

Lets look at UiTM. It was allocated RM1.67bil for OPEX for 2018 & aim to host approx 165k students which brings average operating cost per student approx RM11k per year(including 11% student contribution or fees).

In fact, at least 10% of UITM's RM1.67billion is excess spending on rents & maintenance for the UITM Campuses that was build via PFI instead of conventional govt debt. This means that there are ample of money to be saved from possible wastage & to be redirected to areas that improve graduate outcome.

Lastly , privatization of higher education in Malaysia has little to do with cost efficiency.It presents undue burden among Malaysians who wishes to pursue tertiary education. Double whammy for tax paying parents if you consider PTPTN's mortgage loan type model (instead of the much progressive income contingent loan) 

At this point, PTPTN loan repayment effectively is an over inflated regressive tax. Its time to provide the best service money can buy by prioritizing IPTAs & improving quality & equity via financing reform on higher education.

Malaysia in 1970s & 1980s

This article attempts to provide some context to a high debt cost
when Mahathir lead the BN govt,esp during the 1970s & the following 1980s. The operative word here is attempt.

Recently I came across a tweet from Rahman Dahlan whom is the Minister at Prime Minister's Department in charge of EPU.

I believe It was in response to Rais Hussin(Bersatu Strategic Director) article to Malaysia Kini entitled Debt spiral signals death of fiscal Malaysia and the likes of those article.

Rais Hussin article is largely misplaced. In fact his article where he demonizes govt debt is counterproductive to Pakatan's reform agenda. Govt debt is one of the most important tool to uplift quality of life for ordinary Malaysians.

Debt/Govt revenue %

Rahman Dahlan on other hand failed  to provide context to higher level of debt charges during Mahathir's time.

Hence this post attempts to give some background to high level of govt debt cost in the 1980s & early 1990s when Mahathir was leading BN's govt. 

1970s 

One of the more pivotal events in 1970s was the 1973 oil shock or First Oil Shock. It began when Arab Oil producing countries via OAPEC instituted an embargo on nations perceived to support Israel in the Yom Kippum War. Countries targeted were the USA, UK, Japan, Canada, Netherlands.

Global oil price quadrupled. Initially, Malaysia experience windfall gains since it was an oil producing nation by then. Although inflation rate in Malaysia was 18% in 1975. 

Source : Malaysia@50 by Jomo KS & Wee CH 2014

Eventually, this had an adverse effect to Malaysia. Higher oil prices lead to stagflation(high inflation, recessionary growth) in developed countries. This reduced direct foreign investments in developing countries like Malaysia. Direct foreign investments fell 40% btwn 1974 & 1975 & did not reach 1974 level until 1979.

Declining foreign investment was exacerbated with decline in private investments by Malaysian Chinese businessmen as they respond to the uncertainty created by the NEP policy. Malaysia.

Its not just investment that was affected by the oil shock, other commodities such as rubber were adversely affected. 

Malaysia's real GDP declined from over 8% in 1974 to 1% in 1975 (Bowie & Unger , 1997) . Thus sliding into a recession in 1975.

Hence this naturally lead to significant govt debt build up as tax revenue fell & govt picked up the slack in private investment spending.

The Impact of Global Financial Crisis: The Case of Malaysia

Then came the 2nd Oil shock in 1978. The collapsed of Shah of Iran which lead to decline in Iran's oil output & resulting uncertainty from that lead to speculative hoarding. This and surging global demand lead to doubling of oil price btwn 1979 & 1980. The resulting shock tripled cost of oil in USA. This exacerbated inflation in the USA which was already bad.




 When Volker became Federal Reserve Chairman in 1979,inflation in USA was above 11%(with unemployment at 6%). By this time, fighting inflation was seen as pivot in achieving Feds dual mandate of price stability & full employment.

Similar scenario was happening in UK & Canada too. UK had one of the worst inflation records in 1970s. Retail price inflation averaged 12.6% & peaked at 26.9% in 1975. Thatcher's first administration took power in May 1979.They were convinced that inflation can only be controlled via growth of money supply , that income & price policies used previously would be futile. The idea was simple,control the rate of growth in money supply and growth in prices wld remain under control too. However,that didn't work & I hope to explore this some other day.

1980s 

Besides targeting reserves growth rate, Volker increased federal funds rate from 11% to 19% in 1981. This combined with the oil shock sent the USA economy into the worst recession since Great Depreciation. It lasted from 3rd quarter of 1981 until October 1982. This recession perpetuated a global slowdown. Global commodity prices took a hit which adversely affected Malaysia's current account surplus.

Mahathir assumed PM-ship in mid 1981. Evidently, there was significant govt debt build up in the 1970s already. The govt also had  accumulated significant foreign borrowings despite the higher real interest rate from 1980s.

Malaysia avoided sliding into a 1982  recession by spending its way out of it i.e counter-cyclic spending. Budget deficit for 1982 for instance was 16% of GDP.

However, the global slowdown due to Volker's rate hikes continue do drag on. Soon, the economy finally succumbed to recession in 1985/86.(Jomo KS 2014) This particular recession was particularly damning one. Malaysia entered the 1980s being a richer country then South Korea on per capita GDP basics. By end of 1980s, South Korea was richer country then us and Singapore raced ahead

Mahathir-Daim shld have continued the counter-cyclic spending instead of opting for selective austerity measures after 1982. Soon after winning the April 1982 elections, govt announced austerity drive which cut back earlier public spending & rolling back earlier job creation commitment.

In Daim's maiden 1985 budget speech(October 1984) , govt forecast-ed Malaysian economy would grow by 6.7% in 1985, yet actual growth in real terms declined by 1%. Per capita Income declined by 5.7% in 1985 to $4581 and was expected to decline to $3993 in 1987. By end of 1986, unemployment rate hit 8.7%. 

The NEP policy was partly to be blamed in the debt build up here.Its discriminatory practices discouraged private investment from the Chinese business class.Mahathir sort to reverse some of this.

Mahathir responded to the 1985 recession with greater deregulation , tax incentives to prop up private investments.  Govt's ability to spend here was limited as oil price plummeted to under USD10 a barrel in early 1986. Major primary commodity price , palm oil & tin had also collapsed while the electronics industry hit bottom.

The economy rebounded in 1988. GDP growth remained above 8% until the Asian financial crisis in 1998. Govt budget recorded a surplus between 1993 and 1998 which largely attributed to the positive external conditions from late 1980 onward.

Lastly,

The recessions in 1970s & 1980s and weak recovery all entailed lower tax revenue & higher govt spending which meant greater cost of debt. Externalities that wasn't induced by Mahathir.

Comparison has to be within context. It is time to Najib to provide context for the rapid build of debt build up as well. According to KS Jomo , debt/gdp ratio increased significantly from 41% in 2008 to 53% in 2009. While that rapid increase can be attributed to revenue shortfall & stimulus during the GFC.

For it to persist at that rate after 10 years , shouldn't there should be a more compelling justification such as (much needed) significant expansion in  public healthcare & education social sector.

Inheritance Tax in Malaysia

This post focuses on taxing wealth particularly generational transfer of wealth via inheritance tax.

"Without the estate tax, you will in effect have an aristocracy of wealth, which means you pass down the ability to command the resources of the nation based on heredity rather than merit" -Warren Buffet-

"Abolishing estate taxes would remove one of the main incentives for charitable giving" -George Soros-

"..great sums bequeathed oftener work more for the injury than for the good of the recipients. Wise men will soon conclude that, for the best interests of the members of their families and of the state, such bequests are an improper use of their means", Andrew Carnigie

Wealth inequality is a lot of worst than Income Inequality. One of the most powerful tools to tackle wealth inequality is through taxes.

Besides direct annual wealth taxes, other ways of taxing wealth is by taxing the capital income generated by that wealth , and its transfer between generation. The earlier is capital gain tax while the later is inheritance tax

 According to The Edge dated Sept 18 2017, inheritance tax is usually found in developed nations.

Source : The Edge, Sept 18th 2017

Not many people know that Malaysia used to have an inheritance tax. It was abolished by the BN government 26 years ago or in 1991. Perhaps it has to do with the prevailing Thatcher-Reagan doctrine at that time which called for limited taxes on the rich. Or perhaps it has to do with the unprecedented crony capitalism class that is about to emerge.

But the official narrative was that only a few actually paid inheritance tax, therefore the collection was low. However, Jomo K.S & Wee Chong Hui in Malaysia@50 argued that there wasn't a need to abolish it since the administrative mechanisms & arrangement had long existed , therefore no additional burden if the estate duty continued.

Inheritance tax in Malaysia was known as estate duty back then. It was levied on transfer of property from deceased person to beneficiary. Prior to 1984, estate duties of 12-45% were levied on property with a minimum value of RM100k for deaths in Malaysia & 5-60% on property with minimum value of RM40k for deaths outside Malaysia. (Jomo KS et al 2014)

After 1984, that threshold was increased to RM2 million for deaths in Malaysia & RM500k for deaths outside Malaysia while the rates were reduced to 5-10%. Basically it was charged at a scaled rate of 0%, 5% & 10%. The highest rate 10% was applicable to estates valued at RM4million & above. (Jomo KS et al 2014 ; Esther Lee 2017)

When it was abolished in 1991, the gross monthly household income was RM1563. Which means beneficiaries earned an amount equivalent to 106 years & 53 years of wealth tax free.( Jomo KS 2014)

In fact , before it was abolished, estate duty collection prior to its repeal in 1991 peaked at RM40million which in today's term could amount to almost RM150 million at 5% inflation rate. (Estimated tax revenue for Malaysia in 2018 is RM240billion)

Evidently, revenue from inheritance tax is not as large as some would think. In fact , estate tax in the USA brought in less than 1% of tax revenue. However , the point of inheritance tax is about equity & redistribution & not so much of trying to raise revenue for government.

Since we already have real property gain tax, it seems natural to extend RPGT to include property inheritance tax regime. This is because inheritance tax is basically taxing unrealized capital gain on those property when the aforementioned property changes hands between generation.

Currently, transfer as gift betwn family members is exempted from RPGT under schedule 4 of RPGT Act 1976. Besides that RPGT rate for properties held beyond 5 years is 0% for Malaysian citizens.

Hence, property inheritance tax is needed to compliment the existing real property gain tax. Maybe similiar one time exemption from RPGT can be extended to Property Inheritance tax. Indeed, even OECD acknowledge property related taxes as the more growth friendly taxes.

But to have a broader estate tax that goes beyond real property scope in RPGT would require greater level of public discourse. Esp so in the absence of capital gain tax(except property). Example of a broader estate tax is UK's estate tax.

This is important as property doesn't form bulk of wealth for the super rich. Therefore inheritance tax limited to property doesn't reach the super rich wealth effectively.

Reference :
1) Malaysia@50: Economic Development, Distribution & Disparities by Jomo KS & Wee Choong Hui
2) Game Changer & Whistle blowers : Taxing Wealth by James Brumby & Michael Keen
3) Question of inheritance tax resurfaces in Malaysia by Ester Lee published in The Edge dated 18th September 2017

Malaysia's Education Import from Australia

Malaysia's education import from Australia apparently is worth around RM3.7billion. There are roughly 19k Malaysian students studying in Australia.

Source : Financial Times

This shows tremendous potential in government attracting our own students to study in Malaysia. 

FYI, operating budget for all our public universities is just RM6.7billion(2018) and they host around   532,000 students. (this excludes the extra RM1bil MoHE as a whole spends on emoluments & 600k on Supplies). 

Best way is for govt to flex its ability to borrow at the cheapest rate, access to free land to expand our IPTA capacity to lure our own students to study locally. Hire the best academics from around the globe if we must. 

This is just Australia btw. Excluding UK, New Zealand , United states and 3rd world countries like India, Egypt & Indonesia etc.

On a smaller note , I still don't understand why likes of MARA send students to 3rd world countries for medicine when there is ample of free capacity within our own IPTAs.

Anyway, best way to incentivize parents to send their students to local university is through higher education financing reform. Free higher education increases opportunity cost of sending your own kid abroad. When both rich & poor send their kids to the same public universities, then only we can hope to rival NUS, NTU down south.

If Malaysia can spend RM3.7billion educating just 19k students in Australia. That means we surely can spend same amount expanding & providing good quality tertiary education via general taxation for all.

Government Debt

The purpose of this post is to show how government debt can be a powerful tool to build the necessary & much needed public infrastructure in this country. That govt debt is essentially asset to rakyat and govt debt cost is outcome of conscious policy choice by the govt.

Firstly, govt's debt in Malaysia largely involves govt borrowing from the rakyat via their proxies such as EPF, Banks, KWAP etc. This is an essential asset and often oversubscribe. Last year it was oversubscribe by 2.3x.  Whenever government pays interest on their debt, it ends up as rakyat's income. If government were to pay off its debt ,which it can to do if chooses. EPF, Banks, KWAP wld have to find other investment assets which is not easy.Prior to 1985, all of EPF funds were held in form govt bonds. It provided arguably robust returns,and EPF has no issues in paying its pension annuity to its pensioners. This effectively makes EPF contribution payroll tax sequestered for old age pension purpose.

Lets look at Singapore. Their govt debt level is more then 100% of its GDP. Singapore govt issue debt for two reasons. Firstly its to provide a risk free benchmark to price other assets such as corporate debt& equity. Secondly, it satisfy the investment needs of its pension fund, the CPF. The Singapore govt than invests the proceeds of these bonds. The income derived from these bonds is used to pay off debt cost. In fact, bulk of CPF Assets is held in form of Sg govt bonds unlike EPF these days who has substantial stakes in equity & real estate.

This is similiar to us , we issue govt debts to satisfy investment needs of banks, EPF, insurance firm. Malaysian govt then invest it by building much needed public infrastructure. My point is that all this is conscious choice of public policy.

The cost of govt borrowing is basically the govt's bond yield. The govt bond yield is largely a policy choice. For instance Japan which is one of the largest economy in the world. Govt bond yield there is basically 0%. So is Germany. In fact, on some days yield drop to negative region. A while back FT reported that $9 trillion is held in negative yield bonds.

Negative yield bonds basically are debt whereby the lender is guaranteed to lose money. The lender(Bond holder) have to pay the borrower(Bond issuer).  Yield has an inverse relationship to price. Price is consequences of supply & demand. We know that supply wasn't not curtailed to push price up except maybe in German. So, price increase is largely demand induced. Higher levels of demand push price up which push yield down. So question is why & who is buying govt debts which they are certain to loose money especially to the tune of $9 trillion. The answer is that government have been flexing its legislative muscle to induce demand.

In Japan for instance , its been part of quantitative easing policy to spur lending & therefore inflation. Its been rather unsuccessful.  The Japanese govt also have been flexing its muscle to require commercial banks to hold higher levels of govt bonds. For the past few years, the Bank of Japan have pledged to buy $80trillion or USD712billion of govt bonds every year. For 2018, its said that BoJ will reduce its purchase to 44trillion yen or USD392billion. This push yield to negative region.
The purpose of this is to spur inflation which to date have been rather unsuccessful which I like to explore in some other blog-post. Anyway as of 2017, Japanese central bank held 40% of Japanese govt bond.

This is the case in China as well but its mainly as a respond to write off the bad loans from govt owned Chinese commercial banks. The consequences of this policy is that it pushes bank saving rate to really low levels. Low interest rate is effectively tax. In china's case, it is used to pay of the massive bad loans Chinese banks have accumulated. 

I probably elaborate more on this later. But my point is this govt debt is not a problem per se. In fact its the cheapest therefore most efficient form of financing public infrastructure.  Not only govt's can use policy levers as above to keep cost of public debt low. It also can choose to never repay its debt by rolling over to perpetuity. For instance, roughly 10% of govt debt is due in a given year which can be refinanced by issuing new bonds.

MoF(Govt) can also literally choose to issue 0% perpetual bonds to Bank Negara Msia(govt). This is basically govt borrowing from itself. In effect, its govt printing money. The flipside of this is of coz inflation.When too much money goes after little real goods such as raw materials, labor ; it creates runaway inflation the likes of Venezuela etc.

The caveat here being that to ensure govt debt is denominated in ringgit and to ensure it is use efficiently. We shouldn't build super expensive MRT when we can opt for BRT which is so much cheaper & provide us with better connectivity. Neither can we build roads to everywhere because apart from making congestion worst, it also deprive raw construction materials and labor away from other public infrastructure such as schools, hospitals etc.  This means we get less hospitals , schools for the same ringgit(inflation).  We also need to look at value add. For instance investing in an Iphone factory has much more value add to GDP than drilling oil.

Weaponizing fiscal policy has to be done effectively & efficiently to ensure productivity gain , thus boosting GDP & keeping debt/gdp ratio static 

Income Contigent Loan (ICL)

Income Contingent loan is a form of loan proposed for public higher education fund that departs from more conventional mortgage type loan. It is argued as more efficient because govt ends up collecting more than otherwise while it is less burdensome for graduates.

This post aims to show just how efficient is Income contingent loan model for tertiary education purpose. It uses the Mara overseas loan program below as an example.

Basically MARA offers 85% discount on their overseas loan. As a cited above , an overseas medical student will get RM850,000 paid for by general taxation. This is equivalent to average annual cost of 42 students in govt tertiary institutions. In fact, you probably can educate 3-4 extra doctors in govt institutions in Malaysia with that same RM850,000.

I understand why the discount is there. If wasn't for that discount, it wld be burdensome for these students to pay off that loan within stipulated 35 years. We don't want to burden this student especially in early stage of her career. We want her to up-skill herself and become a medical specialist therefore adding more value to the society. Drowning her in debt esp in early stage of her career is not going to do the trick

Hence an income contingent loan whereby u maximize loan collection without burdening fresh graduates.

Here is an example(right). So basically if your annual assessable income hits above RM36,000 , then you have to start paying for your higher education loan. The repayment rate starts at 4% & increase as your income increases. That means if you reported RM36,0001 of assessable income, you have to pay 4% of that income for your loan. This is equal to RM120 per month.  If you making more than RM76,001, than your monthly repayment wld be RM506. This assessable income threshold will be adjusted at an appropriate inflation rate.

So imagine the aforementioned medical graduate earlier earning an average RM200,000 in the last 10 years of her career. That would entail collection of RM160,000 just for that last 10 years alone. Note that MARA only aims to collect RM150,000 for the entire 35 years of her career.
So clearly evident that we able to collect more via this scheme without burdening her.

The point is we don't want to burden her with repayment of higher education debt in the early stage of her career. We want her to up-skill herself. This would move her up the income tax bracket. Its not in our interest as a society to stifle her career progression especially when we as a society paid RM850k for her to have a medical degree.

On the flip-side, she could be an high flying medical specialist one day. Perhaps making millions. So its unfair for other Malaysians to give her an outright RM850k discount in the beginning 

There is few caveats in order for ICL to truly work :

•  Administered via a single fund under MoHE(Education Assist Fund) 
•  Entirely funded from govt's consolidated fund(instead of borrowing from private banks).
•  Implement robust fee cap for IPTS
•  Rpayment collection is done by Tax Office(Important!).  

Other few suggestions in regards to public higher education

• Increase student co-contribution amount from 11% currently to 25% so that we can expand IPTA from 50% to 75% in next 10 years. 
• Put a stop to PFI schemes in building new higher education facilities.
• Education Assist Fund is demand based. it is automatic to anyone who secure a seat in IPTA/IPTS. Guaranteed up to degree level. 

lastly I must emphasize I actually disagree with using public funds(whether its a ICL loan or out right grant/scholarship) in sending students abroad especially for first degree. If one wants to experience UK, Australia etc as a student, one should opt to do it on their own dime especially at a masters degree level which is shorter thus more affordable. 

Private Finance Initiatives in Malaysia

This article attempts to explore the purported benefits of PFI schemes. I argue PFI schemes is unnecessary , and in fact lead to wastage.

PFI basically means a private company will finance construction of public infrastructure such as public university , hospitals etc. In return, it will obtain a concession whereby govt pays a fixed amount of lease on annual basics throughout the term of the concession which is usually between 20 to 30 years. Conventional financing methods involve govt financing it directly through public debt.

Examples of recent & notable PFIs in Malaysia includes among others, some of UITM campuses & IIUM Medical Center. So far govt have opted for PFI scheme for 13 UITM campuses , IIUM Medical center.

Allegation of cronyism in awarding PFI concessions aside, the merit of PFI deserve serious consideration. Firstly, cost public debt is substantially lower than private debt.

For instance when UITM Puncak Alam(Satelite C) campus concession was given. Govt's 20 year yield in 2012 hovered at 3.9%. Yet, the concession agreement appeared to effectively locked interest at 10% (annual lease at RM39million. If RM13mil is sequestered for debt principle, than RM26mil is effectively annual interest). Govt could have saved RM15mil annually here if it chosen the conventional way of financing it via public debt.

In fact,govt provides soft loan via govt owned Bank Pembangunan ,access to facilitation grant & govt grant for land acquisition. So much for "Private Finance". This indicates that PFI in Malaysia is not abt optimizing cost but to keep debt away from govt balance sheet & to enrich political cronies.

Beside the annual lease (availability charge), the gross profit margin on the maintenance charges could be as high 30%. It be lot cheaper for UITM Puncak Alam to do it in-house & save approx RM2.6million a year

When Rafizi Ramli, did the expose on the alleged wastage due to cronyism to build some of those UITM campuses using PFI method, govt responded claiming the aforementioned PFI scheme actually lowered construction cost by RM100mil per campus. That is rather absurd, how does using private finance as oppose to public finance per se lowers construction cost esp at RM100mil per campus or 25%. original cost.

Even if construction cost is lower due to PFI, govt could opt for shorter financing contract that only covers construction to achieve the same cost reduction.

Construction cost is not necessarily lower under PFI. Private sector usually charges govt for unforeseen cost.

The IIUM Medical Center in Kuantan(right) cost wasn't exactly in the lower end.It cost RM1.18million per bed compare to multi-specialty KPJ Pahang (left) apparently cost RM550k per bed.

This is how cost of higher education in govt institutions have increased by whopping 8% btwn 2004 to 2014. In fact, we spend almost the same level as UK in PPP terms.

Yet, when funding for public university is cut, it hits areas such as research, academia, number of student enrolment as opposed to potentially inflated lease on PFI campuses such as this.

Cost of Free Higher Education in Malaysia

Recently, TS Annuar Musa made this outlandish claim that Pakatan's free higher education idea would an extra RM60billion. 

Firstly,there are roughly 700,000 students in Private Higher Education Institutions(IPTS).
This consist of students from certificate level all the way to PhD.

Enrollment in 2016(MOHE, 2017)

Source : Msian Higher Edu Blueprint 2015-25

Most sensible mechanism would be a voucher system with cost per student bench-marked against IPTA.  Average operating cost per full time student in public institution(public uni, polytechnic,community college) was RM18,100 in 2014. Using CAGR of 3.7%(based 2006-14),the cost per per full time student in 2018 wld be RM21,000.

This brings it to RM14.7billion for 700,000 students from Certificate to Phd level in private institutions.

For students in govt institutions, 89% of their cost is already covered via general taxation.
In 2014, students contribution(fees) was an average RM2000. Using 3.7% CAGR , that wld be RM2300 in 2018.  There was approx 652,000 enrolled in govt institutions which means an extra RM1.5billion here.

This would bring total additional cost RM16billion p.a as opposed to RM60billion.

There are few additional points I like to make in regards to this.  

• Mechanism for this should be via a single fund under MoHE(allow flexing of buyer power to set fee cap to ensure efficient pricing).
• Pakatan also should pledge reversing the growth in IPTS by pledging to build more IPTA(BN  pledge to underinvest in IPTA, ensuring IPTS share from 45% to 53% in 2025.BN targeting annual growth in IPTS students at 5.1% compare to measly 2.6% for IPTA)
• Putting an end to PFI as means to build higher education infrastructure. (The UITM campus lease for instance might cost an extra RM200million every year. Not to mention UIA Hospital).
• Be receptive to a student co-payment scheme albeit with automatic access to a robust Income Contingent Loan scheme like Australia. Administered by MoF. Repayment via tax office. 

There is one particular caveat here. The scope of this costing actually broader than what Pakatan  have in mind. I believe they only promising free higher education up to degree level.

Privatisation of Msian Public Healthcare Part 3

Due to higher public health expenditure btwn 1990-95 which was to compensate for lack of public investment in new hospitals in the 5 years prior to 1990. Public bed per 1000 populations improve from 1.7 to 1.8 as indicated below

Source : RMK 7

Health inequality continue to worsen. Public sector that served more than 85% of Malaysians had 40% of medical specialists(as of 1994) . Instead of advocating for more robust public healthcare, govt was more keen in using the exodus of talent from public to private as part of a narrative for a more comprehensive privatization of public health via a public insurance/health fund that cover both public & private hospitals. The issue is of course the price of treatment in private hospital which was so much higher than public hospital.

Private hospital saw 34% increase in bed from 4675 beds in 1990 to 6492 beds in 1994. As of 1994, private beds comprised 15% of total hospital beds in the country (RMK 7)


Partial Privatization of Public Healthcare 

1) Privatization of General Medicine Store(medicine procurement unit) in 1993.

Govt claim it ensures efficiency of in provision of medical supply. In a preliminary study cited here. Izham et al reported increase in drug price by 3.3x without any justification.  Privatisation of GMS was first identified in 1991 privatization master plan. Initially the privatized GMS was given to Southern Task Sdn Bhd(later known as Remedi) which was subsidiary of Renong. Later , remedi was acquired by Pharmaniaga . Based on this 2005 article(above) , Pharmaniaga is just mere intermediary & received 17% service charge.

2) Privatization of Hospital Support Service.

The hospital support service consist of laundry, biomedical equipment & facility engineering maintenance services. It was privatized in 1995. It was a 15 year concession given to 3 consortium. Kasturi Sen cited MoH(right) in claiming that price increase 3.2 folk without justification.


The above example of partial privatization provides compelling case that privatization of healthcare probably has little to do with cost efficiency.  There are few announcement recently esp on provision for hospital maintenance that on a cursory glance indicate little has changed

Privatisation of Msian Public Healthcare Part 2

The mid 1980 recession meant healthcare privatization esp the setting up of NSHF was put on hold. The mid 1980 recession was particularly damning one because its largely induced by domestic policy. Mahathir adopted selective austerity measures prior to 1985/86 recession. The recession was pretty damning. Probably gave a lot of traction in Ku Li almost unseating Mahathir's UMNO Presidency.

Anyway , the proposed National Health Security Fund(NHSF) did not take off as expected despite the 1989 $450mil loan by Asian Development Bank for that fund. The govt contended that viability of the fund need to be further reviewed.

A new study, National Health Plan study was undertaken in 1990. It basically wanted to help identify areas of public healthcare that can be privatized. Govt was still adamant in under-spending on public healthcare. Adamant in fixing something that is not broken, exacerbating healthcare inequality. The govt also begin looking into privatizing the National Health Institute in KL despite the fact there won't be a govt Cardio unit to cater for entire klang valley if IJN was privatized.

Public bed per 1000 population plummeted from 1.7 in 1985 to 1.5 1990 due to sever under-investment in new hospitals. We fail to keep up with population growth. However , Mahathir proposed to increase spending to build new hospital from $319million(btwn 1985-90) to $1352million(1990-95). Govt also expanded manpower capacity of Ministry of health by expanding nursing college, building teaching hospital like HUKM etc.

Clearly , the recession which culminated in the 1987 UMNO presidential challenge which lead to 1988 constitutional crisis all provided the political impetus for expansion of public healthcare service relative to late 1980s.

Privatisation of Msian Public Healthcare Part 1

The privatization of public healthcare narrative took full swing after Mahathir lead BN won the April 1982 General Elections.

In 1983, an Health Service Financing Study was commission by the govt. It was concluded in 1985. Objective of the study is to look into financing methods & ways to "optimize utilization of health resources". Apparently, the study look into various factor such as rising public expectations & demand for high cost medicine & technology.

Its recommendation were as following:
1) Setting up of National Health Security Fund(NSHF) (which Msia got a ADB $450mil soft loan)
2) Establishing National Health Council for inter-agency cooperation btwn Public & Private
3) Development of group medical services & HMOs
4) Selective privatization of medical & non medical services.
5) Decentralization & leasing of some district & general hospitals

In 1981, there were 2021 private hospital beds. By 1984, there were 3750 private hospital beds. Private share of bed of total hospital beds went from 8.6% to 12.4%(approximate). Today, private sector account for 25% of bed.

Public hospital ratio for 1980 & 1985 account for 1.7 beds per 1000 population which is lot higher than now which is approx 1.5 bed per 1000 folks. (RMK5, EPU)

Govt allocation for new hospitals decrease from $471mil btwn 1980-85 to $378mil for 1986-1990 which was clearly inadequate by its own admission. Allocation for public clinics(family health was halved from $46.7mil to $12.5mil in the same period.

Healthcare spending over govt budget decreased from 7% in 1980s to 5.1% in 1986 to 5.5% in 1990

This is also how govt consciously choose to prop up private hospitals by under-investing in public healthcare.

VHI(Msia) vs Medicare(Aus)

In budget 2018 , the govt announced RM50million to initiate the Voluntary Health Insurance or VHI.  It is a policy solution to reduce the out of pocket(OOP) healthcare spending.

I admit ,VHI is a decent solution when comes to reducing out of pocket spending. In principle, it is a smarter idea than Selangor's Skim Peduli Sihat in terms of reducing OOP

However, it is also unnecessary. There is already an existing Social/Public Health Insurance in place. Its called the General Taxation administered by LHDN.

VHI is only effective if govt manage to entice Malaysians to subscribe to it en-masses. This allows VHI to pool risk, to cross subsidize. Insurance are basically healthy ones paying for those who sick. Otherwise, govt will have to pay for the VHI claims directly from general taxation.

VHI wld provide coverage for private hospitals. Is private hospital truly cost efficient? Private hospital have higher cost of capital than govt(govt borrows at risk free rate), so they must compensate with higher operating cost efficiency in order to be cheaper than public hospital. Why wld govt pay for treatment in private hospital when same treatment cost a fraction in govt hospital?

There is no conclusive evidence that private hospital have lower operating cost than govt. In fact , its govt that is trying to rein in private sector cost by enforcing bundling of services indicative tht govt hospitals are more cost efficient than private. Any extra cost in treatment outside of the package wld need to be borne by the hospital , which means private hospital wld compensate that with higher package cost.

Its lot easier for govt to focus on expanding & running public hospital. Why bother trying to micro manage private hospitals which it doesn't own. Even if private hospital achieve operating cost efficiency, would it compensate for the higher cost of capital than govt. Besides cost of capital , private hospitals also have to factor in higher land cost than public hospitals. Govt not only own land & can flex legislative muscle to acquire private land for public use at more competitive price.

With VHI, you also need to set up an entire new bureaucracy to collect payment, dispense them. So the added bureaucracy cost, also potential abuse in funds will now lead to might lead to govt paying claims at inflated price directly from the govt consolidated fund(general tax).
 
Alternative to VHI
We can either increase income tax or corporate tax back to pre GST levels. Or we can have an dedicated health tax like Australia. Australian public healthcare is paid via the Medicare levy. Medicare levy is basically a flat tax sequestered for healthcare in Australia. Then we simply use this extra tax revenue to expand our public healthcare. Providing quality care on need basics.

Medicare Levy 
Basically the medicare levy is  2% flat tax on taxable income for those who earn above the income threshold. 
A single resident with no dependent pays Medicare levy if he/she earns above AUD27,069 or family pay medicare levy if family income is above AUD36,451(increase AUD3356 for every dependent/student). Higher threshold applies for pensioners/senior which is AUD47,670.

Medicare levy surcharge. 
On top of Medicare levy , there is also Australian Medicare Levy Surcharge. Basically , if your income for surcharge purpose exceed certain threshold , you pay up to 1.5% flat tax on top existing Medicare Levy

Private Insurance Rebate. 
The Aussie Tax Office also provide you with tax rebate if you already have private insurance.  It is tested which means if your income is above a certain threshold, you don't receive a rebate.

source : Australian Tax Office (ATO)

Australian public spend on healthcare(Medicare) is at an healthy 67.3% unlike Malaysia's 52%. Out of Pocket expenditure in Australia consist of 17.3% compare to Malaysia's 39% (AIHW)

Conclusion

My point is this. there is no need for an expensive VHI when all you need is tax reform. Tax reform should make the system more progressive either by increasing income & corporate tax to pre GST levels to pay for better . more robust public healthcare. Why bother creating a voluntary scheme, spending millions in administrative cost which doesn't result in better care.

I must emphasize, Aussie Medicare is just an example of dedicated health tax to fund public healthcare.

Taxes are most cost efficient way to pay for healthcare,education etc. I don't know why folks balk at more taxes. its either taxes or you pay inflated private insurance premium.

Our healthcare is at crisis level, we need to spend more to rapidly expand it. Ideally, govt spending on healthcare shld be RM72billion, right now it is approx RM25billion. More on this later.

Healthcare Spending

There is two aspects of healthcare. The financing part and the delivery part. I tend to focus on the financing part.

 There is two main yardstick on healthcare financing that I wish to delve on. 
1) Total healthcare spending as per GDP
2) Public-Private share of healthcare spending.

For now, I like to comment on the public-private share of spending. In Malaysia, public spending is 52% vs private which is 48%( 7% private Insurance , 39% Out of Pocket spending 2% others).

Public Spending(via general taxation): 
Ideally, I would prefer public share to be north of 80% similiar to Scandinavian countries like Denmark , Finland, Norway and even Netherlands. Higher public spending means,every Malaysian regardless of income class get almost equal access.This is used to be the case in Malaysia prior to 1980s.

Private Spending
Out of Pocket(OOP) spending here is a source of concern. For most part, out of pocket here refers to lump sum money you pay when u use private hospitals(do not have insurance coverage), 39% is one of the highest in the world & WHO has told Malaysia to rein in our Out of Pocket spending & bring it down to an healthy 20%. Out of Pocket spending leads to medical debt. 9.3% of almost 200k folks enrolled in AKPK's debt management program are due to medical debt.

Govt proposed voluntary private healthcare insurance. RM50million was allocated to come up with one under budget 2018. Admittedly , its does reduce Out of Pocket spending.

However, there is already an existing public insurance scheme in place. and it cost nothing to initiate. Its cost sharing , risk pooling not profit scheme. its called the General taxation.

Healthcare Intro

Healthcare is a necessity. In my opinion , its is a fundamental right enshrined in the Malaysian constitution via Article 5 codifies right to life and liberty

Healthcare in Malaysia used to be largely public. Prior to 1980s, public spending on healthcare used to almost 90%. In fact, private share of health expenditure in 1981 was 5.8%, 7.6% in 1982. Currently it is 48%.

Basically this means, healthcare in Malaysia prior to 1980s was overwhelmingly paid by the government via general taxation. Meaning whether you rich or poor , you went to the same hospital.

According to World Bank , Malaysia had twice as many hospital beds in 1960s compare to now. Today, Malaysia is one of the worst countries in the world in terms of number of hospital beds.

This changed when after Mahathir became Prime Minister. Then a robust two tier healthcare began to emerge. This exacerbated healthcare inequality in Malaysia. Govt prioritizing private healthcare has lead to under-investment in public hospital.