MALAYSIA is still none the wiser about when parliament will make way for the 15th general election (GE15) or whether Prime Minister Datuk Seri Ismail Sabri Yaakob — who just brought forward Budget 2023 by three weeks to Oct 7 — will be tabling it in parliament. He is clearly dishing out the “good news” ahead of the budget announcement.
The RM100 added to the annual salary increment (KGT) for the 1.28 million civil servants Grade 11 to 56 alone from January next year will reportedly cost RM1.5 billion. Some RM2.8 billion, however, have been allocated for all six pieces of “good news” announced on Aug 30. That includes a RM700 special financial assistance (BKK) to be paid in January 2023, an increment for officers who have hit a salary ceiling, as well as additional leave days, the Ministry of Finance said in its Laksana report dated Sept 2. There was no mention of longer-term costs to the public pension bill.
According to Ismail Sabri, civil servants can now accumulate a maximum of 180 days of leave under the cash in lieu of accumulated leave (Gantian Cuti Rehat, or GCR) scheme, up from 160 days previously. This means that those who choose to make the one-time redemption of up to half of their GCR cash award ahead of their retirement can redeem up to 90 days instead of 80 days.
GCR had already been raised to 160 days from 150 days when Budget 2022 was tabled under the current administration, allowing a one-time early cash redemption for up to 80 days of GCR starting January 2022 for those with at least 15 years of service. It is understood that civil servants who accumulate more than the maximum days of leave under GCR will be able to use those extra days as (paid) rest days in the year they retire.
A leaf from the old playbook
Before that, GCR was last raised from 120 days to 150 days effective January 2009, when a maximum of 15 days could be accumulated into the GCR scheme per year. Early redemption of GCR of up to 75 days (half of 150) had been allowed for those with at least 15 years of service when Budget 2020 was tabled.
Whether the announcements will result in a substantial jump in the bill the government needs to foot for GCR next year remains to be seen. Government data show that cash paid for GCR redemption was RM111.1 million, or 1.3% of the pension bill, in 2009 but had increased to RM667.8 million, or 2.7% of the pension bill, by 2019. There was no significant year-on-year increase in 2020. It is not immediately known whether it is because civil servants who choose to redeem the amount earlier stand to lose out as payments are calculated based on his or her existing salary instead of the last drawn pay upon retirement, which is likely to be higher.
The civil service is an expected beneficiary of Budget 2023. Key to electoral success, the previously 1.6 million-strong civil service made up 10% to 12% of the total eligible voters in GE13 (2013) and GE14 (2018) and possibly up to 14% of turnout, our back-of-the-envelope calculations show.
While the number of eligible voters will expand above 21 million for GE15, compared with 14.96 million in GE14 and 13.27 million in GE13, with the voting age lowered to 18 and automatic registration of voters from late 2021, support from the civil service should still make up at least 6% of eligible voters — likely more if overall voter turnout is low. That’s comparable to some 1.2 million Federal Land Development Authority (FELDA) settlers and families, reportedly spread over 52 parliamentary seats (20 of which are in Peninsular Malaysia).
What budgeted figures show
If the civil service emoluments and pension bill rises further because of the latest round of “good news”, it would not be the first time they go up significantly around the time of the country’s general election.
According to federal government data between 2000 and 2020, the civil service emolument bill ends up being higher than budgeted almost every year (see Chart 1).
The highest jump in the actual amount spent on civil service emoluments a year compared to what was budgeted took place in 2012, when the RM60 billion actually spent on salaries was RM8 billion more than the RM52 billion budgeted.
When tabling Budget 2012, then prime minister Datuk Seri Najib Razak, who was also finance minister, announced a new civil service salary scheme that not only raised annual increment rates by 80% to 320% but also salary scales. The change raised the maximum salary of a teacher in Grade DG48 from RM6,325.39 a month by 37.7% to RM8,710. A non-graduate teacher at grade DG34, meanwhile, saw the maximum salary raised 39% to RM5,370 from RM3,860, according to the Budget 2012 tabled on Oct 7, 2011.
GE13 was held on May 5, 2013.
The second most sizeable variance between the amount of emolument budgeted versus the actual (over)spending was the RM6.8 billion in 2007. Ahead of the tabling of Budget 2008 on Sept 7, 2007, Tun Abdullah Ahmad Badawi had announced that civil service wages would be raised between 7.5% and 42% on top of additional cost of living aid (COLA), a move that he said would cost the federal government an additional RM8 billion a year. GE12 was held on March 8, 2008.
Official data between 2000 and 2020 also show the pension bill being RM2.9 billion higher than budgeted in 2009, the highest in the past two decades. That’s likely not because of the change in GCR as numbers were still relatively low at only RM111.1 million in 2009 (see Chart 3).
The actual pension and gratuities bill was also at least RM2 billion more than what was budgeted in 2012, 2014 and 2015, official data show (see Chart 2).
Excluding gratuities and perks like GCR, pension payments alone — which make up between 70% and 87% of total retirement charges — have grown at a compound annual growth rate (CAGR) of 9.2% a year between 2009 and 2020 (see Chart 4).
Can Putrajaya afford the bill?
What’s certain is that civil service emoluments as well as the pension and gratuities bill already account for nearly half of the federal government’s annual revenue.
The Edge previously calculated that if emoluments as well as the pension and gratuities bill continue to grow at the rate they have grown on average over the past decade, these two expenses could make up 60% and 70% of revenue by 2031 and 2038 respectively.
Including debt service charges — another bill that is hard to reduce without a massive overhaul — the tally together with civil service emoluments as well as pension and gratuities would hit 80% of government revenue by 2029, 90% of revenue by 2034 and exceed 100% of government revenue by 2038 if these overhead expenses continue to grow faster than the growth in revenue, as they have in the past decade, our back-of-envelope calculations show.
To help with the rising expenses in recent years, drawdowns are already being made from Kumpulan Wang Persaraan (Diperbadankan) (KWAP), which hopes to grow its fund size from RM159 billion at end-2021 to RM200 billion by 2025, Finance Minister Tengku Datuk Seri Zafrul Aziz said recently. Created with an injection of RM41.9 billion in 2007, KWAP was supposed to grow big enough to be able to take over the government’s public pension obligations one day.
It is not immediately certain how much had been withdrawn from KWAP, which had yet to release its 2020 annual report at the time of writing. The RM159 billion as at end-2021, however, would only cover six years of public pension obligations, going by the budgeted amount of RM28.1 billion for 2022.
To be sure, good performance should be rewarded. Blanket cash aid and additional incentives for civil servants, including those earning more than RM10,000 a month, ahead of the general election, however, would not only be seen as a bid to gain political mileage but also add to an already hefty public pension bill. Already, the blanket subsidy bill of RM80 billion is causing a strain on the cash flows of public-listed government-linked corporations such as Tenaga Nasional Bhd and Petronas Dagangan Bhd.
As higher operating expenses mean less money left for development, all Malaysians will have to foot the bill in one way or another for decades to come.
Huge receivables at Tenaga and PetDag show up government’s limited fiscal options
By Kathy Fong
As the government’s subsidies balloon to almost RM80 billion, the highest ever, the receivable accounts of both Tenaga Nasional Bhd and Petronas Dagangan Bhd (PetDag) are climbing to new peaks too.
The quantum leap in the receivables of PetDag, which operates the nation’s largest petrol station chain, has caught attention — the amount shot up to RM10.3 billion as at June 30, almost triple the RM3.49 billion six months ago.
The 63.92%-owned subsidiary of Petroliam Nasional Bhd (Petronas) warned that the prolonged impact of “the outstanding subsidy receivable will pose a challenge to the group’s profitability and liquidity position”.
Nevertheless, PetDag said it was working towards resolving the situation “in due course”.
PetDag is probably in a better situation compared with fellow utility giant, Tenaga. Its main supplier, which is its parent Petronas, has extended credit terms, so PetDag is not cash-strapped despite the delay in subsidy payment by the government.
However, Tenaga, whose single largest shareholder is Khazanah Nasional Bhd with a 25.46% stake, does not seem to be as lucky, judging by its tight cash flow.
In a span of six months, its receivables went up by RM8.62 billion to RM19.17 billion as at June 30, from RM10.55 billion. The utility group’s receivables started creeping up from Sept 30 last year, when the amount was RM4.97 billion.
The receivables of RM19.17 billion is almost on a par with Tenaga’s revenue of RM19.14 billion for the second quarter ended June 30, 2022 (2QFY2022).
Because of the rising receivables, its cash flow is getting tight, to say the least.
Although it is making reasonably good profits, the group has to raise debts to meet its cash flow requirements as it needs to spend a lot more to buy fuel to produce electricity while a significant portion of its sale revenues is not paid promptly. Furthermore, it continues to reward shareholders with dividends.
To put things in perspective, Tenaga’s net cash generated from operations shrank sharply to RM1.88 billion in 2QFY2022 compared with RM9 billion a year ago.
It drew down borrowings of RM14.8 billion in 2QFY2022. Its short-term borrowings soared 71% to RM11.98 billion as at June 30, compared with RM6.99 billion six months ago.
In view of the situation, the government has stepped in to guarantee Tenaga’s financing of up to RM6 billion to fund the additional generation costs, which have doubled since the start of the year.
Fuel costs are not expected to fall sharply as demand will increase substantially when the northern hemisphere enters winter in two months’ time, on top of the sanctions against Russia, a major producer of natural gas and coal.
Who is financially stressed?
Given the economic uncertainties, it is not surprising that Tenaga is encountering collection problems. Indeed, it booked an allowance for bad debts of RM714.5 million for the financial year ended Dec 31, 2021 (FY2021).
That said, few would have anticipated that the government would emerge as its largest debtor.
Likewise, it is not often that analysts expect the government’s petrol subsidy, which is estimated to be at RM41.7 billion, would add to PetDag’s receivables.
Tenaga says in its latest quarterly results announcement that it is in discussions with the government on the timing of the full recovery of RM5.8 billion, which has inflated the utility group’s receivables.
The RM5.8 billion outstanding is the result of the government’s decision to maintain the tariff and surcharge at 3.7 sen/kWh for non-domestic customers and give a rebate of two sen/kWh to domestic customers, even though fuel costs have escalated.
Bluntly put, the government has made public-listed companies Tenaga and PetDag help shoulder the growing subsidy burden.
“We expect the government to ‘utilise’ Tenaga’s balance sheet to undertake electricity tariff subsidies for Malaysians.
“While this is a good off-balance sheet financing option for the government, Tenaga’s investability and autonomy as a purely profit-driven entity with a resemblance of decent corporate governance could be at risk. We remain cautious on the stock,” UOB KayHian’s analyst Chong Lee Len comments in the latest quarter’s results review.
Chong downgraded Tenaga to a “sell” as she foresees that the market will discount the autonomy of the imbalance cost pass through (ICPT) mechanism as the government is seen to be taking longer than expected to repay Tenaga.
Petronas’ RM50 bil dividend timely
Petronas will top up its dividends by RM25 billion, bringing the total to RM50 billion for FY2022. The addition must be a relief to the Ministry of Finance. Most agree that it is a critical time for the national oil firm to serve the public interest as it is making handsome profits from the high oil prices.
The federal government has spent way beyond the national budget for more than 10 years.
Fiscal consolidation, a narrowing budget deficit, prudent spending and capping of national debt have all gone out of the window for more than two years. This is regarded as necessary because of the Covid-19 pandemic, which broke out in 2020.
Like other governments, Malaysia raised public expenditure to prevent the unprecedented pandemic from pulling the domestic economy into recession, in addition to undertaking extra healthcare spending.
Following the pandemic was the rally in the price of commodities, ranging from metals and minerals to grains and edible oils. Most parts of the world are currently paying sky-high prices for energy, to the extent that manufacturers are considering shutting down their businesses.
There is growing concern about an energy crunch in Europe as winter approaches.
Malaysia is among the exceptions. RON95 price is heavily subsidised and households are given rebates on their electricity tariff. In short, the further you drive and the longer you switch on your air-conditioner, the higher the subsidy you will enjoy.
The government is allowing the subsidy bill to grow, the reason being to tame inflation and ensure economic growth. But this could also be seen as goodies given by the government to gain support as it prepares for the next polls.
Subsidies are addictive. How long can the government afford them?
It is true that subsidies will fall once the commodity boom ends. Indeed, prices have already come off their peak due to recession fears, plus there are signs of a slowdown in manufacturing activities partly due to China’s zero-Covid policy.
Should commodity prices collapse because of an economic slowdown, the need for higher government expenditure to drive growth will arise again. On top of that, the government will incur higher operating expenditure caused by whopping emoluments and pensions, and debt service charges, among other things.
The tight fiscal position will come back to bite the government. Be prepared, whoever takes over Putrajaya in the next election!