How to settle ambiguity over nation’s debts

Why should Guan Eng and Najib keep arguing when we can put everything in the open to assess the extent of the federal government’s debt obligations?

By TK Chua

I think we have had enough polemic between Lim Guan Eng, the new finance minister, and Najib Razak, the former prime minister and finance minister.

Why keep arguing when we can put everything in the open to assess the extent of the federal government’s debt obligations?

The disagreement centres on how we treat government direct debts, those committed under Private Finance Initiative (PFI) and Public-Private Partnerships (PPP) and federal government’s guarantees on debts by government-linked companies (GLCs), government-linked investment companies (GLiCs), statutory bodies and other off-budget agencies.

In the past, public finance and fiscal management were relatively simple.

Government revenue and expenditure were estimated and its surplus or deficit worked out for the year.

The deficit was financed through borrowing and the occasional surplus was used to retire debts. The federal government’s financial position was “what you see is what you get”.

At present, there is no ambiguity in direct government debt, which both sides agree was RM687 billion, or at 50.8% of GDP in 2017.

However, the problem started when we tried to be clever and creative. The government wanted to do more projects even though it did not have enough money.

So it started the PFI and PPP projects — projects funded by private capital with the hope that these projects will generate incomes to pay for their own upkeep.

If PFI and PPP projects are income-generating (such as tolled roads) and implemented transparently and prudently, the impact on public finance may be minimal.

However, if these projects are “traditional” public infrastructure projects (such as schools and clinics), and therefore not income-generating, then the government must repay every sen with interest many years down the road.

These are essentially advanced expenditure which will impair the capacity of the government to incur operating and development expenditure going forward.

Therefore, all PFI and PPP projects, particularly those that are not income-generating, must be considered as part of government obligations because these are “unpaid” infrastructure projects.

To settle the ambiguity, the government should tabulate the list of PFI and PPP projects together with their annual lease payments. This should provide a clearer picture of government debt obligations, in addition to the direct government debt as stated above.

Next comes the government guarantees which to me is another baloney being abused in recent years.

When the federal government provides loan guarantees to all off-budget agencies such as GLCs and GLiCs, all caution is thrown to the wind. Both the lenders and the borrowers are not bothered with risk, feasibility and their ability to repay the loans. Is this not what PKFZ (Port Klang Free Zone) and 1MDB bonds were about?

It is true guarantees are contingent liabilities, not real obligations unless invoked. Again, to settle the ambiguity, the government should provide a list of guarantees and work out the likelihood of each of these guarantees being invoked.

As I understand, the federal government has already started paying for the debts of 1MDB. Hence, what contingency liability are we talking about here?

The government should quickly tabulate the lists of guarantees as well as all projects financed under PFI and PPP. The lists should include assessment of default to determine the extent of government debt obligations.

TK Chua is an FMT reader.

The views expressed are those of the author and do not necessarily reflect those of FMT.