Cover Story: Need to loosen purse strings without losing prudence

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SELANGOR’S budget for 2015, which will be tabled when the state assembly sits in November, will be closely watched as an indicator of how far newly minted Menteri Besar Mohamed Azmin Ali is prepared to loosen its purse strings.

His predecessor Tan Sri Abdul Khalid Ibrahim’s strategy to solidify Selangor’s position as the country’s richest state with a strong bottom line was criticised as penny-pinching. While the state’s finances improved significantly during Khalid’s tenure, as evidenced by the accumulated reserves of nearly RM3 billion in its coffers, many slammed Khalid for being answerable only to himself instead of the “shareholders”, in this case the people of Selangor and members of his political party Parti Keadilan Rakyat (PKR) and its Pakatan Rakyat coalition partners Pas and DAP.

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As at Oct 31 last year, the reserves stood at RM2.71 billion, almost double the RM1.4 billion in 2008, when Pakatan came into power in Selangor with Khalid at the helm.

He had previously said the growth in the state’s reserves was largely due to improved efficiency in tax collection and various cost-cutting measures implemented by his administration.

The state has also greatly benefited from a property market boom over the past decade. Its government has recently been consolidating its land assets under its economic development arm, Kumpulan Darul Ehsan Bhd, which took Bursa Malaysia-listed Kumpulan Darul Ehsan Bhd private late last year.

Additionally, the Selangor State Development Corporation has moved into developing high-rise properties via multiple joint ventures to offset losses incurred by subsidising the state’s affordable housing schemes.

A clue to how Selangor’s finances are being managed can be found in its annual budgets. A check of the budgets for the past three years reveals a vast improvement in non-tax revenue that is forecast to grow from RM654.6 million in 2012 to RM1.07 billion by the end of this year (see chart), thanks largely to dividends from the state’s government-linked companies and royalties from sand-mining operations.

On the other hand, the tax revenue forecast for this year does not point to strong year-on-year growth, suggesting the efficiency of tax collection has not improved or is not optimal. The state is projecting tax revenue of RM587.6 million this year, which is a 0.54% increase from the RM584.44 million recorded last year.

Between January 2008 and August last year, approved investments in Selangor totalled 1,560 projects worth RM53.25 billion, outpacing other economic powerhouses such as Johor and Sarawak.

However, the state has fallen behind since because Johor and Sarawak have benefitted from massive investments in Iskandar Malaysia and the Sarawak Corridor of Renewable Energy respectively.

More worryingly, Selangor’s budget allocations have increasingly been for management expenses — a whopping RM1.23 billion in the 2014 budget or an extra RM228 million from the previous year — instead of development expenditure. A separate proposal to increase the salaries of state representatives by up to 400% in November last year, which would come from the additional expenses, was met with strong opposition from the public. Last Friday, PKR chief Datuk Seri Anwar Ibrahim said Azmin’s administration will be reviewing the proposal.

Meanwhile, development expenditure fell to RM625 million from RM633 million last year, implying that the state government prioritised operating expenses over initiatives that would benefit the rakyat directly and economic growth.

To allay public concern, the state decided to tap its accumulated reserves. In its 2014 budget, it set aside RM430 million from the reserves for various developments, including RM100 million for affordable housing projects and RM50 million for the construction of schools.

But Khalid did not utilise the reserves in the year before in spite of an allocation of RM500 million in the 2013 budget for similar development initiatives.

Some say Khalid was pressured to loosen the purse strings in the 2014 budget after coming under heavy criticism last year, most notably from PKR stalwarts Anwar and Azmin.

Apart from being excessive, the salary hike for the state representatives would have been financed by the allocation for management expenses to the detriment of new people-centric developments, some of which had been delayed for years.

Others observe that in the final years of Khalid’s tenure as menteri besar, bureaucratic inefficiencies, a lack of transparency as well as non-allocation of resources prevented the rakyat from enjoying the state’s vast wealth, even for such services as garbage collection and road maintenance. Selangor folk had to put up with roads full of potholes and uncollected garbage.

To be fair, Khalid had to face infighting in his party while trying to practise fiscal prudence. There were also numerous legacy issues from the previous Barisan Nasional administration, such as Talam Bhd’s debt controversy, which had a huge impact on the state’s finances.

While Khalid has expanded the state’s coffers, it is now up to Azmin to make good use of the accumulated wealth for the benefit of Selangor’s economy and people. The new menteri besar needs to demonstrate that he can move away from Khalid’s frugal style without losing financial prudence.

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This article first appeared in The Edge Malaysia Weekly, on September 29-October 5, 2014.