An ATM-Style EPF Account?

The proposal to introduce a third account in the EPF savings that can be withdrawn as and when the members want is nothing more than a populist move. The retirement fund officials have repeatedly warned of very low EPF savings among most of its members, especially those earning average or low wages.

The proposal calls for a percentage of the members’ contributions to be put into this new account which can then be withdrawn as and when they like. In other words, it will be like your personal ATM. You can take out any money left in the account.

It may not be surprising to see members applying to take out the money from their third account on the day the mandatory contributions are credited into it. Some may accumulate it and withdraw periodically even if they don’t need it badly.

Source: https://ms.wikipedia.org

Major retirement funds in the world don’t have this facility or feature because it defeats the whole purpose of having a retirement scheme. During Covid there were some retirement schemes in other countries that did allow withdrawals.

Currently 70% of EPF contributions goes into Account 1 and the rest into Account 2. The first account cannot be touched for other than investment in selected funds. That too only a percentage of an amount which is above a certain level of saving. Account 2 is strictly to help the members or their next of kin for education, health or housing purposes.

Under these circumstances, contributions to the proposed third account could be drawn from funds meant for the first or second account — or worse, the government may opt to increase the contribution rate, a move that will not go down well with both members and their employers.

The problem of low savings was not created by the government in the first place. It’s the people who wanted withdrawals because of financial problems brought about by Covid-19. As a result, their account balances have been reduced to alarming levels. Unfortunately, the governments in power have always caved into pressure as they had feared it would affect votes. Perikatan Nasional even included allowing special withdrawals in their manifesto at the general election in 2022. Total withdrawals by 7.4 million members (about 50% of total members) was RM101 billion. Now 6.1 million members have less than RM10,000 in the accounts. And of this, 3.6 million members have less than RM1,000.

Only 16.4% of EPF members between the age of 50 to 54 have achieved the basic savings threshold of more than RM240,000 in their savings. The country’s low-wage structure is another factor. More than 79% of EPF members earn a monthly salary of less than RM5,000, thus many of them have low EPF contributions, which means they have less money to manage their post-retirement living. This is compounded by the fact that around 40% of Malaysia’s labour force – equivalent to about 6.1 million individuals – are not covered by formal retirement schemes.

To solve the problem of nil or low savings (less than RM10,000), the Government must provide a new ‘safety-net’ which is basically a welfare support of RM200 p.m. or so to the B40 group. This is only available at age 60 (and beyond) and will follow certain defined criteria for implementation by EPF. How will EPF fund this? By a new issuance of Rakyat bonds subscribed by high net worth individuals, corporates institutions. This is to be issued by a Government entity or EPF. The quantum could be huge! If you assume there are two million members who qualify and each member gets RM2,400 a year, that works out to RM4.8 billion annually. How will EPF repay? Only through employer/employee contributions being raised.  The rate could mirror one-year fixed deposit rate plus one (percent). Isn’t this raising Government’s debt? That’s possible but will depend largely on who is the credible issuer! 

Covid-19 has caused severe issues for individuals and SMEs. Other ways may include extend retirement age to 65; staggered withdrawals in the future; and providing support in kind (vouchers or the like) for the very poor to purchase essential items. We need to find ways to assist the B40 or we are not really Madani!

References:

ATM-style EPF account an unnecessary populist move, K. Parkaran, FMT, 18 October 2023

8.1 mil EPF members see 50pc drop in median savings due to Covid-19 withdrawals, Hana Naz Harun, Teh Ahtira Yusof, Nor Ain Mohamed Radhi, New Straits Times, 16 February 2023

Malaysia’s Civil Service Going...?

Malaysia’s civil service is undergoing change. The civil service effectively runs the government. The civil service is also the prime developer of policy. If no executive government existed, the running of government would not be affected at all. This is why many ministers are able to spend an enormous amount of time on political engagements.

The Malaysian civil service consists of around 1.6 million employees across ministries and agencies. There are around 25-40 ministries, depending upon the government in power. They are often merged and broken apart. There is a hierarchy of rank spanning some 25 levels, from director general down to peons. Public service staff and military personnel are also civil servants.

Civil servants are usually on tenured employment, once they are confirmed as permanent staff. Once confirmed, they have a lifelong career and pension at retirement.

Source:www.https://en.wikipedia.org

The civil service doesn’t represent the ethnic demographics of Malaysia. It is weighted very strongly towards one race (90% are bumiputeras). Consequently, the predominant culture and related practices and customs practiced within the civil service are Malay. In addition, with most senior civil servants domiciled in Kuala Lumpur, Shah Alam, and Putra Jaya, they tend to be urban-centric.

In the 70s, 80s and 90s the civil service was run by the Baby Boomers. Before that was a crowd trained by the British. The Baby Boomer generation, at least the senior people, studied overseas, used English as their primary language, and had a strong bond with alumni from their respective elite secondary schools. Consequently, there was much lateral communication between ministries and agencies. They witnessed Merdeka as adolescents, and generally had strong work ethic to use their knowledge and experience to serve and develop the nation.

This group has all but left the service. However, they were the group that built up the service.

Most senior positions and upper middle management are now in the hands of Gen Xers. Gen Xers also have a strong work ethic and have kept the system intact. They have tended to be more pragmatic and thus political than their former bosses. Gen Xers also thought strongly about maintaining the so called ‘Malay agenda’ and protected the civil service from straying away from an ‘unspoken’ policy or cultural norm of ensuring the service always put Malay issues first. If any policy ever came down from the executive government that infringed the ‘Malay agenda’, it would be not acted upon.

Coming into the middle ranks of the civil service are now the Gen Yers, or Millennials. The Millennials are much more IT and cloud literate. Thus, they are at the forefront of bringing systems within the civil service into the internet age. Millennials see KPIs or key performance indexes as their objectives. As long as issues and objectives are clearly defined, Millennials will work towards those goals. Ambiguity is not liked. Millennials are also products of the local education system, which slants the way they see issues. The civil service is now much more a bastion of conformity and compliance. Outspokenness is not encouraged. Creative ideas, processes and outcomes are not welcome. 

The majority of Millennials have experienced a much more intense Islamic education. Thus, the ‘Malay agenda’ has to some extent transformed into a ‘Malay-Islamic agenda’. 

Moving into the lower positions of the civil service are now the Gen Zers, after graduating from local universities. They share the same Islam-centric view of the world that the Millennials have. Gen Zers are more flexible than the Millennials. However, their personal values are much more self-centred than the generations before them. They will tend to calculate whether particular jobs and tasks will lead to promotion. They tend to be more assertive for their best interests. Within the next 5 years, the civil service will consist of around 30 percent of Gen Z employees.

There are no prizes for guessing that the majority within the civil service tend to have political sympathies towards the Islamic side of politics. The federal seat of Putra Jaya is now in the hands of Perikatan Nasional.

The concept of Madani was created to appease this leaning to Islam. There must be an element of Islam in policy for civil servants to support and get behind it.

Throw in the language issue – Malay and/or English – and the PM wants only Malay even if the private sector were to communicate with the civil service. But he also wants FDIs. Do they learn Malay and write in Malay for approvals? Or, will the private sector engage good translators as an additional cost for companies? And as for research in universities, please present any of your papers in Malay at foreign or local forums? How about international conferences in Malaysia, will foreign speakers present in Malay? Where will this stop?

We are a small, trading nation (not Japan or China) and we want to impose a one language policy in all dealings – including private sector meetings or conversations.

Today’s civil service is far below the standard of the 70s and up to the 90s (just drop the 60s). Why? They are now monolingual, insular and fixed! If Madani or Reformasi was real, the PM will want to step-up quality not the other way around. So, I see no real future for the young Malaysians who are bi or trilingual and want to contribute to nation building.

Hit the road Jack!

References:

The changing of the guard in Malaysia’s civil service, Murray Hunter, 24 October 2024

Anwar tells companies, universities to correspond with govt in Malay, Lynelle Tham, FMT, 25 October 2023

Malaysia’s Fintech Landscape

Malaysia’s fintech scene continues to thrive with number of fintech firms steadily growing. In 2023, Malaysia’s first digital bank was launched. Digital insurance and takaful operator framework was also introduced. The utilisation of Artificial Intelligence (AI) technology significantly accelerated fintech innovation. Below are highlights from the Malaysia Fintech Report 2023:

Malaysia’s fintech companies at a glance

Banking landscape

In 2022, e-payment transactions grew by 31.5% to 9.5 billion from 7.2 billion in 2021. Averaged across the whole country, each Malaysian could have made 291 e-payment transactions in 2022, indicating cashless payment methods are gaining traction over cash-based.

For instance the annual growth rate of cash withdrawals from ATMs, typically used as a  proxy for the level of cash usage, grew moderately to 798.5 million transactions valued at RM404.7 billion (from 779.6 million transactions valued at RM386.3 billion in 2021), but remained below its pre-pandemic levels. Use of cheques continued to decline to 46.1 million in 2022 from 48.3 million the previous year. In the aftermath of COVID-19, over two-thirds (68.9%) of total credit and debit card-based transactions are now contactless, while various

industry-led initiatives to actively promote adoption of QR code payments as a cost-effective and convenient payment method have led to a higher number of merchants, particularly MSMEs, accepting DuitNow QR.

With growing innovation in the card space, cardholders can now also authenticate, a speedier alternative to entering the customers’ Personal Identification Number (PIN) on a payment terminal while still ensuring appropriate safeguards are in place that align with Bank Negara Malaysia prudential requirements.

And with increased collaborations between e-money issuers (EMIs) and other financial service providers, customers can now access more financial products on e-wallet applications or platforms such as remittance, micro-insurance, micro-financing and micro investments.

The key to all this is not just willingness and ease of payment but data integrity and cybersecurity. If for any reason the latter is compromised, all this hype of online banking/payments will disappear.

Reference:

Malaysia’s Fintech Report 2023, Fintech Malaysia/Trang

Arab “Beggars” in Malaysia?

Checking into hotels and shopping in the city's high streets, but otherwise begging for money? That's what some beggars claiming to be Syrian or Palestinian Arabs have been doing in Kuala Lumpur.

In a bid to appeal to the sympathies of the public, a number of "street beggars" who appear to be from the Middle East are increasingly seen lining the streets of some of Kuala Lumpur's tourist hotspots like Jalan Imbi and Bukit Bintang, asking for donations.

Based on a survey conducted around the capital, including locations at Jalan Imbi, Bukit Bintang, Jalan Hang Tuah, Masjid India, Pasar Seni and Jalan Petaling, it was found that the group was not controlled by any syndicate. When not out begging, these masters of disguise would pose as tourists, staying at nice hotels and eating at fast food restaurants with their families. The survey also found that the beggars would usually leave their hotels at around 4pm local time and return at about 2am in the morning. They have also been seen moving from one place to another, targeting locations like restaurants, crowded areas, and nightclubs.

Source: https://en.wiktionary.org

Beggars from the Middle East were believed to have entered the country as tourists before engaging in begging activities. Kuala Lumpur Social Welfare Department director said that the agency observed that most of these beggars first entered the country as tourists.

A total of 560 beggars were detained from January to August, with 380 foreigners and 180 locals. The total is higher than 234 beggars in 2022, with 98 non-citizens and 136 local beggars.

He said that joint operations would continue to be carried out by the Social Welfare Department together with the Kuala Lumpur City Hall, the Royal Malaysia Police and the Federal Territories Islamic Religious Department to curb such activities.

Advocacy campaigns such as "Give Wisely, Avoid Deception" are being conducted to raise awareness among the public not to be deceived by beggars.  The possibilities are there for more to turn-up on our shores with the war in the Middle-East. How do we differentiate a genuine tourist and those who are “tourist-beggars”?  It is not only from the Middle-East, we also have visitors from other countries like China doing the same. One way is to work closely with hotels where they usually stay and report if they are found on the streets of KL begging.

Reference:

Arab ‘beggars’ in Malaysia caught staying in hotels and eating at restaurants, https://www.todayonline.com, 27 September 2023

PTPTN: What’s Next?

 Perbadanan Tabung Pendidikan Tinggi Nasional (PTPTN) has been around for the past 25 years and it has assisted the needy to obtain student loans. PTPTN also runs a savings scheme, Skim Simpanan Pendidikan Nasional (SSPN), which allows parents to plan early via an education savings scheme that will benefit their children in their time of need.

As PTPTN was government-funded, much of the funds raised have been via the issuance of long-term debt papers, bank borrowings, and deposits derived from the SSPN scheme, which can then be used to provide student loans to the needy.

Source: https://online.sspn.my

Over the years, according to its 2021-2025 Strategic Plan, PTPTN has faced many challenges, which, among others, were zero payments received from those who have already completed their studies. Based on statistics for 2021, some 2.44 million student loan borrowers with some RM25.5bil in loans were supposed to repay their respective loans but only 32.2% have done so, while 17.8% are in some form of consistent repayment scheme.

But 29.3% of them are not consistently paying student loans. Worse, 504,311 or 20.7% of the borrowers with some RM5.04bil outstanding amount have not repaid a single sen.

Interest on student loans is subsidised by the government as student loans granted by PTPTN only carry a rate of interest of just 1%, calculated upfront, over the duration of the loan. Repayment starts one year after a student completes his or her studies but there have been exceptions to this rule as graduate unemployment and low starting wages have made it difficult for some to repay their loans.

The good news is that if a student achieves a first-class honours degree, the student will be exempted from having to pay back the loan, effectively converting the loan into a scholarship.

While PTPTN charges very low interest for its student loans, the same cannot be said for the source of its funds. Based on the latest audited accounts for the financial year ended 31 Dec, 2021, PTPTN had a total of RM40bil in the form of short and long-term borrowings. Of this, some RM16.9bil is via local financial institutions while sukuk government-guaranteed bonds amounted to RM23.1bil. PTPTN had also some RM8.35bil in the form of deposits under the SSPN scheme while its investment book had a total of RM13.4bil, of which some RM11.2bil were held-to-maturity and RM2.2bil in available-for-sale assets.

As at the same balance sheet date, PTPTN’s total student loan book totalled some RM44.06bil.

Based on the average student loan book for the year of RM43.5bil, PTPTN generated net service charge income of RM220.4mil in 2021 and another RM60.5mil in administrative income. Together, the revenue generated from its student loan book was approximately RM281mil in 2021, giving a yield of just 0.69%. PTPTN also generated an income of RM411.7bil from its investments, translating to a net yield of 3.22% based on the average investment book of RM12.8bil for the year. On a blended basis, PTPTN generates a total income of approximately RM693mil on the total average investment and loan book of RM56.3bil, translating into a yield of just 1.23%.

As for interest cost, PTPTN spent some RM1.6bil to service its borrowings, translating to an effective funding cost of 3.68%. In addition, PTPTN also paid RM206.4mil in the form of dividends to SSPN depositors in 2021 and this was based on its dividend rate of 3% for that year.

In essence, SSPN paid some RM1.81bil in total interest and dividends for its borrowings and to its depositors, translating to an effective funding cost of 3.84%. Hence, on a net basis, PTPTN has a deficit income margin of 2.61%, which is covered by the government’s grant of RM1.81bil in 2021 (2020: RM1.97bil).

With collection becoming an issue, PTPTN has introduced many incentives to borrowers to repay their loans early as well as encourage borrowers to obtain first-class degrees, which will allow them to convert the student loan into a scholarship.

Despite the incentives and cheap financing, PTPTN faces multiple challenges and in 2021, PTPTN provided some RM219.4mil as doubtful debts. In addition, PTPTN provided another RM921.2mil in the form of a waiver for those who obtained first-class degrees and another RM981.6mil in the form of a discount to borrowers. All in, some RM2.12bil alone was written off during the year, translating to a reduction of 4.7% in its net student loan book.

Education, just like healthcare, defence, national security, and to a certain extent, public housing and infrastructure, are deemed to be public goods. 

Public universities are funded by the government and the actual fees charged to students are bare minimum. Doing a Bachelor of Medicine and Bachelor of Surgery at the Universiti Malaya (UM) barely costs RM3,000 a year for a five-year programme for a local undergraduate while an overseas student pays approximately 45 times more. Some courses at UM only cost about RM1,200 per semester or less than RM9,000 over the seven to eight-semester course for local undergraduates.

As the government directly provides grants to PTPTN to the tune of RM1.8bil, the same funds can be used to provide 600,000 students free tuition fees per annum, based on an average of RM3,000 per year per student. This will in essence cover all the public universities and undergraduates will have little to worry about when it comes to paying for their education. Of course, this excludes living expenses and accommodation for those who are forced to stay off-campus.

As for private universities, which probably have the same number of students as public universities, the government is not obligated to provide free education, theoretically. However, as places in public universities are rather limited and difficult to obtain, most students opt for private higher education where fees can be at least 15 to 20 times more than public universities, depending on courses. If the government has the right data, the government could also focus on those who are clearly in need and not those who can very well afford the fees.

Based on data from PTPTN, the number of new student loan borrowers is less than 150,000 per year or less than 40% of total enrolment to the private and public universities per annum, while total active borrowers are probably about 1.2 million in total.

The government should relook at PTPTN’s role in providing student loans and perhaps provide direct assistance for the needy in the form of education grants. At least the students are not burdened by debt as they start their careers after completing their studies.

Otherwise, we are carrying a time bomb of RM40 billion or so. And that will continue to “balloon” in the years ahead. A new business model has to be drawn-up, not this negative interest scheme with annual government grant to cover the deficit. Look at a graduated loan scheme with priority courses at lower rates and student rating reviewed yearly – higher the risk, higher the rate.

Reference:

PTPTN: A boon and a bane, Pankaj C. Kumar, The Star, Insight, 30 September 2023

Wage Policies: How Could We Shape Them?

Malaysia continues to maintain its policy commitment to worker welfare, through its ongoing review of wage policies. In July 2023, Malaysia increased the minimum wage from RM1,200 to RM1,500, extending its applicability to micro-enterprises with a staff size of less than five. The minimum wage of RM1,500 was already in effect since May 2022 for companies with at least five employees. Minimum wages have progressed upwards over the last decade since the law was first implemented in 2013. The adoption of minimum wage policies, originally a practice in developed nations, has progressively gained traction in developing economies as they mature, underpinned by the core principle of ameliorating income inequality and ensuring that individuals attain an income level sufficient to meet basic needs.

Malaysia’s Gini coefficient, a measure of income inequality, improved from 0.431 to 0.401 between 2012 and 2014, a period soon after the initial implementation of the minimum wage law. The 7.0% improvement in the Gini coefficient between 2012 and 2014 was the second largest on record, with the largest at 9.3% between 1976 and 1979, a period marked by rising external demand, private investments, capital allowances, export incentivization, rising savings and foreign capital inflows. These two periods of time represent scenarios that imply the success of previous growth-oriented strategies over the recent wage regulation in promoting income distribution.

Consequently, economic growth and development priorities ought to remain an overarching aim despite short-term targets in driving income redistribution. It is the fundamental role of policy to reduce potential negative externalities and social costs, which had already been partly addressed by minimum wages to reduce poverty. However, excessive wage advocacy may have the unintended consequence of demoting the narrative of productivity, which risks the creation of populist regulations that may stifle the private sector. 

 

Of note, despite four successive minimum wage increases since its inception in 2013, diminishing marginal benefits in subsequent periods has become apparent, as indicated by the stagnating Gini coefficient at approximately 0.40 from 2014 to 2022. Additionally, the income spread, representing income inequality between the T20 and B40 income groups, has steadily increased despite the implementation of the minimum wage law. As such, there are inherent uncertainties regarding the efficacy of minimum wage policies or their extensions, such as the Progressive Wage Model (PWM), in stimulating productivity and employment. 

 

Regardless of its form, any wage-price rigidity or intervention introduces complexities that are likely to raise regulation costs by the government and compliance costs by businesses. Furthermore, the corporate sector may reduce employment opportunities as businesses make compensatory adjustments to maintain earnings. Such adjustments could include a reduction in hiring, the reduction of pecuniary benefits, the substitution of labor for technology, the substitution of lower-skilled workers for higher-skilled workers with multitasking requirements, the hiring of undocumented workers and illegal immigrants, diminished investments in training, and the imposition of disproportionately higher output targets. Companies functioning with thin margins may have to close down, thereby reducing the number of available jobs. Employment opportunities and job stability will also be further reduced for individuals with skills and productivity levels that are not envisaged to scale up over time. Hence, minimum wages could have negative effects on marginalized segments of society that are poverty stricken with the least opportunities for education and advancement in the labor market, the group that the government intends to help the most. While other factors could be at play, we note that higher minimum wages improved the labor share of income in the economy, although this was accompanied by rising unemployment, even after excluding the period of the pandemic.

 

 

Higher wages can trigger ripple effects, including higher inflation, further raising costs for both businesses and individuals alike. Consequently, the government should focus on policies that raise economic growth through real productivity gains, which will in turn increase wages, expand employment opportunities and strengthen the purchasing power of the ringgit. Policies should also address labor market mismatches and incorporate adjustment policies to assist in balancing the supply and demand of human capital. Productivity gains can be driven by a dynamic and competitive labor market, facilitated by market-driven and global benchmarking practices in the management of human capital.

Productivity gains can only emanate if we move rapidly into a technology-driven economy, and have workers up-skilled for managing new processes. The central argument here is that wage increases without productivity improvements only leads to inflation. We are in transition and it is good for government, labor and employers’ associations come together to find meaningful changes in wages.

Reference:

Recommendation on Malaysia’s ongoing development of wage policies, MARC Ratings Berhad (press announcement), 11 October 2023

National Brain Drain Above Global Average!

Brain drain is a slang term that indicates a substantial emigration or migration of individuals. A brain drain can result from turmoil within a nation, the existence of favourable professional opportunities in other countries, or a desire to seek a higher standard of living. In addition to occurring geographically, brain drain may also occur at the organizational or industrial levels when workers perceive better pay, benefits, or upward mobility within another company or industry.

Source: https://www.thestar.com.my

Brain drain causes countries, industries, and organizations to lose a core portion of valuable individuals. The term is often used to describe the departure of certain professionals, including groups of doctors, health care workers, scientists, engineers, or financial professionals. When these people leave, the places they leave are harmed in two main ways:

1. Expertise is lost with each emigrant, diminishing the supply of that profession.

2. The (country's) economy is harmed because each professional represents surplus spending units.

Professionals often earn good salaries, so their departure reduces consumer spending in that region or the country overall.

The Human Resources Ministry is drafting measures to tackle the brain drain phenomenon, which at 5.5 percent of its population is much higher than the global average of 3.3 percent. 

According to the United Nations Department of Economics and Social Affairs (Undesa) in 2020, the main destinations for the Malaysian diaspora were Singapore, Bangladesh, Australia, the United Kingdom, the United States and Brunei. Talent Corporation Malaysia Berhad has a heavy task to reverse this trend. Perhaps they will focus on people with high skill-sets, i.e. those with PhDs in the sciences, ICT, new technologies and other similar sectors.

While there isn't an easy fix for brain drain, there are some things that business and government leaders can do to reduce or minimize it. These include:

• Increase investments into certain areas of the economy

• Offer competitive wages

• Pave the way for legal and social reform

• Improve the quality of resources, such as housing and health care

• Provide affordable housing solutions

Khairy Jamaluddin claims that the brain drain Malaysia is facing is not only due to higher salaries being offered abroad but other factors including the feeling of being second class citizens, especially for the non-bumiputras.

Not many want to leave their homeland unless there are the “push” and “pull” factors. If you are considered a “pendatang” in your own country, why bother to stay; if you pursue a policy that does not value excellence, then why bother to stay?; if you have the best facilities but not the people to operate it, why bother to stay?; if you speak about R&R all the time, including in sports –why bother to stay?; if you have a grand vision but little else, why bother to stay? So, the brain drain will continue, because like water, it will find its own level!

References:

National brain drain rate of 5.5 percent is higher than global average, Bernama/Malaysiakini, 8 March 2023

Wages not the only reason behind brain drain, says Khairy, FMT Reporters, 29 September 2023

Brain drain: definition, causes, effects and examples, Julie Young, Investopedia, 30 April 2023

The US Spent $2 Trillion in Afghanistan!

Since 2001, the US has spent $2.26 trillion in Afghanistan, the Costs of War Project at Brown University calculates. The biggest chunk – nearly $1 trillion – was consumed by the Overseas Contingency Operations budget for the Department of Defence. The second biggest line item – $530bn – is the estimated interest payments on the money the US government borrowed to fund the war.

The illicit economy, meanwhile, has boomed. After US forces drove the Taliban from power in 2001, Afghanistan cemented its place as the leading global supplier of opium and heroin.

Since 2001, the US has appropriated more than $144bn to Afghan reconstruction. Much of that money went to private contractors and NGOs the US government tasked with implementing programmes and projects to build Afghanistan’s security forces, improve governance, aid economic and social development and combat illicit drugs.

The most critical failure of those reconstruction efforts – and the most expensive – was the $88.3bn spent training and equipping the Afghan army from May 2002 to March 2021.

American companies account for almost 60 percent of total arms sales by the world’s 100 largest defence contractors.

Many of them have been cashing in on huge checks from the Pentagon’s war budget for years, with a majority of the near $5 trillion spent on the wars in both Afghanistan and Iraq transferred to military contractors, whose workers outnumbered soldiers in Afghanistan three to one.

In addition to giants like Lockheed Martin, DynCorp, Academi (formerly Blackwater), Black & Veatch – and oil companies like ExxonMobil which shipped the fuel on which the army runs – are just some to have profited immensely from Washington’s lucrative contracts.

An investigation by the watchdog Project on Government Oversight found that between 2008-2018 around 380 high-ranking officials and officers had become government lobbyists, defence contractor consultants, or board members and executives within two years of leaving the military.

An investigation by the watchdog Project on Government Oversight found that between 2008-2018 around 380 high-ranking officials and officers had become government lobbyists, defence contractor consultants, or board members and executives within two years of leaving the military.

If the money spent on war was used for infrastructure, R&D, the homeless and the poor, America would be great again! But the sheer waste of lives and equipment is to enrich certain U.S. companies engaged in this madness called war!

References:

The US spent $2 trillion in Afghanistan – and for what? Patricia Sabga, Aljazeera, 16 August 2023

Ask not what the war cost the US, but who profited from the war, https://www.trtworld.com

Improved Life Expectancy for Malaysians!

Selangor folks have recorded the highest life expectancy at birth, according to the Department of Statistics (DOSM). In a publication, titled “Abridged Life Tables, Malaysia 2021-2023”, DOSM said the highest life expectancy at birth for males and females by state was recorded by Selangor, while Terengganu recorded the lowest life expectancy for the same period. Five states exceeded the national level life expectancy for 2021 to 2023 – Selangor, Kuala Lumpur, Putrajaya, Labuan and Sarawak.

https://wnyt.com

The highest life expectancy at birth for males and females by administrative districts for 2023 was recorded in Petaling, Selangor (80.5 years) while Samarahan in Sarawak recorded the highest life expectancy in 2022 (79.6 years) and 2021 (79.8 years). The life expectancy at birth was highest for males in Petaling, Selangor (78.9 years) and females in Kalabakan, Sabah (82.8 years).

DOSM also revealed that for the period of 2013 to 2019, the life expectancy at birth increased by 0.3 years, with males increasing by 0.2 years, and females 0.5 years. However, from 2020 to 2022, life expectancy at birth decreased by 0.9 years, with males dropping one year, and females by 0.8 year. In 2023, life expectancy at birth recorded an increase of one year as compared to the previous year. The increase in life expectancy in 2023 was attributed to the increase in the number of excess deaths during the Covid-19 pandemic in 2021 and 2022.

In terms of ethnicity, the Chinese continue to register the highest life expectancy at birth in 2023, with 77 years. In contrast, the lowest life expectancy at birth is recorded by Indians with 71.4 years for the same year. 

The increased life expectancy has implications in the provision of services, care-giving, property ownership and potential extended working life.

Reference:

Selangor folk expected to live longest, Terengganu records lowest life expectancy, FMT, 26 September 2023

Is Budget 2024 a “Cut and Paste” Exercise?

From a macro-economic point of view, the Finance Minster (FM) managed adroitly the fiscal deficit and borrowings going forward. Growth is within expectations, nothing spectacular; new taxes were neither here nor there; he skirted the issue of GST, used SST as his answer; didn’t talk of inequalities in the system; suggested some cash transfers; nothing on the informal sector; no mention of the “black” market economy which is reported to be 20% of GDP; and corruption or leakages – how will they plug it? Meanwhile, key highlights from PWC’s Budget 2024 Overview include:

Expanding revenue base

So, what’s new? Was this an inclusive budget? Did the FM address key issues? And what about PTPTN loans of M40 billion; EPF withdrawals and those with savings of less than RM10,000 in their accounts; infrastructure and maintenance of facilities; sufficient affordable housing and many others?

Of all the measures, I am unhappy as a small enterprise, the increase in Sales and Service Tax to 8% (from 6%) and the capital gains tax on unlisted shares – it’s usually on listed shares! How do you monitor this capital gains stuff on unlisted shares? Is he trying to “kill” the small entrepreneurs who may want to merge, scale-up or leave the industry? What about PLCs? Too big to tax?

Have you noticed that taxes are usually borne by the middle class and small companies – that’s a worldwide phenomenon. Large companies have lobby groups and have connected interests!

So, what could the FM do? Well, he could have increased the following:

• Tax on the top 1% (T1);

• Impose a wealth tax on assets exceeding RM100m;

• Tax on carbon emissions;

• Inheritance tax in excess of RM50 million; 

• Tax on financial/forex transactions (i.e. Tobin tax); and

• Widen the windfall tax.

SMEs need to move up in value though investments in R&D, and what’s the total for R&D? About RM510 million or 0.03% of forecasted GDP in 2024 (2023 budget: RM364 million or 0.02% of estimated GDP). Other countries are doing 3-5% and we ask ourselves why are we behind! The top ten countries with the highest R&D spending against proportion of GDP (%):

Then we have a whole lot of allocations, especially education and health. Both are led by inexperienced Ministers. Nothing will come of it – more money thrown at negative outcomes. Nothing on reforms or STEM (yes, there is a committee formed to coordinate this!)

I am disappointed, we have not addressed subsidies, inequality, productivity, APs, excise duties and the EV sector. Proton and Perodua are not leading the way even with their partnerships with foreign car companies. To me this was a “cut and paste” budget.

Reference:

Centre Stage: Budget 2024 Overview, PWC

Research and development expenditure as a proportion of GDP, https://w3.unece.org

WtE: The Next “Goldmine”?

YTL Power International Bhd announced recently that it is partnering with KDEB Waste Management Sdn Bhd to develop a 58 megawatt (MW) WtE plant on a 245-acre site in Rawang, Selangor. The proposed RM4.5bil plant will use municipal waste from six areas to generate electricity.

In late September, the country’s largest power generation plant using landfill gas began operations at Bukit Tagar Enviro Park (BTEP), Hulu Selangor. The plant, which will convert methane gas from solid waste into RE, is connected to the national grid and has the capacity to generate 12 MW of energy. This is enough to power 4,000 domestic homes.

https://en.wikipedia.org

The government plans to install a WtE energy plant in every state in line with Malaysia’s aim to be a RE powerhouse by 2035.

The country generates more than 40,000 tonnes of waste daily, which can be turned into RE and sold. Currently two big concessions to build WtE are in the offing – at Bukit Payong, Batu Pahat, Johor and Sungai Udang, Melaka. According to reports both plants are required to have a minimum capacity of treating and processing 800 tonnes of municipal solid waste (MSW) per day. Rumours has it that independent power producer Malakoff Corp Bhd has won the contract for the development of the Sungai Udang plant. Malakoff has a presence in waste management via Alam Flora Sdn Bhd, which it acquired from sister company DRB-Hicom Bhd in 2019.

The group intends to expand its RE growth by achieving an RE capacity of 1,400 MW by 2031 and a recycling rate of 15% to 20% from the waste collected by Alam Flora.

One listed company big into WtE is Cypark Resources Bhd. The company had received a 25-year concession agreement in 2015 to build and operate the 20 MW Ladang Tanah Merah plant in Negri Sembilan, which began operations on 14 Dec 2022. Although the WtE segment recorded a revenue of RM9.2mil in the quarter ended June 30, (6Q23 as Cypark changed its financial year end from Oct 31, 2022 to April 30, 2023), it is still loss-making due to impairments made in relation to the WtE plant.

Meanwhile, other listed players such as Citaglobal Bhd and reNIKOLA Holdings Bhd are vying for a piece of the action. In the case of Citaglobal, it is partnering with Shanghai-based SUS Environment Co Ltd, a developer and operator of WtE plants to explore the potential and feasibility of developing such power plants in Malaysia.

Currently, there are three main concession companies dealing with MSW, including Alam Flora that manages Kuala Lumpur, Putrajaya and Pahang. SWM Environment Sdn Bhd manages the southern region (Negri Sembilan, Melaka, Johor), while E-Idaman Sdn Bhd covers the northern region of Kedah and Perlis. 

Where unlisted companies go, Worldwide Holdings Bhd is undertaking the development of the Jeram Wte Project in Selangor. According to a recent press release from the company, this project will collectively process an impressive 3,000 tonnes per day of solid waste and generate about 50 MW of clean energy. WtE is widely in use in developed countries like Japan, South Korea and northern Europe.

The concept is making inroads in South-East Asia with Thailand planning to build 79 WtE plants in the coming years, while at least 17 such plants are being proposed for Indonesia.

No one mentions about the WtE plants that have folded. Some have lost more than RM100m for a plant. As in any project, the critical factors include: quality of input; technology that is robust; management of the revenue stream and operating costs that reflect the feasibility studies. Only when you get the ingredients right it becomes a goldmine.

Reference:

WtE’s space heats up, Gurmeet Kaur, The Star, 30 September 2023

Of APs, Import Duties and Red Tape

Approved permits - or APs - give its owners the ridiculous right to import goods in a restricted list such as cars, foods, construction materials, and others. AP was introduced in the 1970s to help promote trade and business, especially among bumiputera. But is has been a flawed mechanism. The favoured few gain from profiteering, raise the cost of doing business, and increase prices for a range of goods from cars to cement, concrete, steel, and food.

Then a system of import permits, bureaucracy, red tape, and outright corruption has augmented the problems caused by APs.

https://www.cabq.gov

The entire process of importing from overseas at minimal cost and hindrance has been compromised. It is estimated that some 60 percent of all food items are imported. This amounted to RM76 billion in 2022. If the current Madani government is keen to unshackle the economy, these obstacles must be removed.  

The government should also roll back duties, especially import and excise duties, which result in higher prices for many products far above their cost of production overseas. The prime examples are cars and motorcycles which are twice or more expensive because of the heavy protective duties imposed to “support” the national car and motorcycle projects such as Proton, Perodua and Modenas.

It’s time to establish a timeline to remove progressively these duties. Excessive bureaucracy always creates corruption.  One easy way of speeding processes up is to declare what is required for any approvals - if these requirements are met, approval is automatic. If the authorities want a proper handle on these, just talk to many of the small businesses such as restaurants, shops, traders, bars and pubs, health centres, etc., and find out from them the extent of constant harassment they face from authorities who are supposed to facilitate their businesses, not place obstacles.

If red tape and corruption are not cut to the bone, the economic cost to the country will be significant. If the Madani government could do some of these things, the future for Malaysia will be brighter. Otherwise, it will be the usual mere talk but no action. And that’s what happened with our Budget 2024—subject of a another blog.

Reference:

Comment: Removing APs, import duties, and red tape, P Gunasegaram, Malaysiakini, 26 September 2023

Will Targeted Subsidies Ease Rakyat’s Burden?

Many governments all over the world have their own social protection programmes to alleviate hardships faced by their citizens. Some examples of these social protection programmes are direct cash transfers, price control ceilings for essential goods, subsidies for fuel and electricity, and health and education sectors.

In Malaysia, subsidies have been part and parcel of the economy for many years. The rakyat expects the government to continue providing them. 

As the government grapples with getting its finances right, trying to balance its revenue and expenditure, there have been calls for the current subsidy system to be reformed. One of the key reforms is to move away from the current costly blanket mechanism that benefits everyone.

Subsidies do not actually make the cost of the items cheaper. What happens is the user only pays a fraction of the cost to purchase those items, while the rest is borne by the government. The portion that is borne by the government is what we refer to as subsidies.

Our subsidy bill, which includes social assistance, has been growing over the years. In 2008, our subsidy bill stood at RM35.2 billion. As of 2022, this had grown to RM67.4 billion. This is almost a two-fold increase.

Subsidies in 2022 accounted for nearly 4% of Malaysia’s gross domestic product (GDP) and made up approximately 23% of the government’s operating expenditure.  We could also be using this on development expenditure. 

From another perspective, if we consider that the government’s revenue in 2022 was RM234 billion, subsidies consumed almost one-third of that. The government has forecasted RM58.6 billion in subsidy payments for 2023. Despite being lower than the amount allocated for 2022, it is still a huge number.

Malaysia has been spending more than it earns in all but five years since 1970. That’s 48 years of deficits. Running a deficit budget means the government has to borrow. Hence, as at end 2022, the total government debt is RM1.08 trillion. And that’s excluding government guarantees provided to numerous government-owned entities, which if included would push the total government liabilities to almost RM1.5 trillion. The amount is equivalent to the size of the Malaysian economy. Or divide that by Malaysia’s population of 32 million, that’s equivalent to RM46,875 debt for each and every one of us.

In 2022, the cost to service government debt amounted to RM41.3 billion and exceeds what is spent on health, education, transport and housing put together. Moreover, nearly 30 percent of the interest payments ends up in foreign hands.

This (RM41.3 billion) is also equivalent to 20% of tax revenue. In other words, for every ringgit that the government collects, 20 sen goes towards paying the interest on the debt alone.

The government subsidises many goods and services - rice, which is being sold at RM2.60 per kg; hospital services will cost only RM1; primary and secondary education are free for citizens; studying a Bachelor in Medicine and Bachelor in Surgery (MBBS) degree in University Malaya will only cost RM 14,990 for the whole programme; Rancangan Makanan Tambahan (RMT), Bantuan Makanan Asrama, Bantuan Makanan Prasekolah, Skim Pinjaman Buku Teks, Bantuan Awal Persekolahan, Biasiswa Kecil Persekutuan to our children are others.

The biggest chunk of our subsidy expenditure comes from fuel and electricity subsidies. Together, these two items accounted for RM60.6 billion, or over 90%, of the total subsidy bill. Our subsidies for fuel (diesel, petrol and cooking gas) alone came up to about RM50.8 billion (or 77%), while our electricity subsidy amounted to RM9.8 billion (or 14.8%). 

After all that is said and done, targeted fuel subsidies could hit the middle-income group (M40s) the hardest. The top 20% income earners (T20) would be better able to absorb the higher fuel costs while the bottom 40% households (B40) will be eligible for handouts.

The rollout of targeted subsidies will be underpinned by the government’s Central Database System (Padu), which is 60% completed with a targeted launch date in January 2024. It takes into account a number of indicators beyond incomes, such as number of households, dependent children according to education levels, location, number of vehicles, records of assistance received from government departments and other information that can help determine the disposable income of each household.

The key is to implement this targeted subsidy scheme gradually, otherwise we may have a rapid rise in inflation!

References:

Targeted subsidies to ease rakyat’s burden, Dr Yeah Kim Leng, The Star, 27 September 2023

Targeted fuel subsidy could squeeze M40s hardest, says experts, Priyatharisiny Vasu, The Edge Malaysia, 28 September 2023

No Shorts Please, We are Malaysians!

The Tourism, Arts and Culture Minister has repeated his claim that non-Muslim tourists to Langkawi have complained of being prohibited from wearing shorts and drinking alcohol on the island.

The Minister claimed that there were tourists who complained to the ministry over the alleged abuse of power by government officials in Langkawi who harassed tourists about observing a dress code and alcohol consumption.

Source: https://en.wikipedia.org

It is very unfortunate when complaints of tourists, who contribute to the country's economy, are not taken seriously and even denied. Investigations should be conducted no matter whether the case is big or small. Why? Because every complaint raised by tourists, whether local or international, should be thoroughly researched. We are in competition with others like Bali and Phuket!

Some politicians are seen scrambling to make statements, including the PAS president who touched on how non-Muslims in PAS-ruled Kelantan should dress. Traders in the state being issued compounds over “indecent” dressing in their own business premises is an example.

Doesn't this reflect the practice of extremism and denying the rights and freedom of multi-racial Malaysians as enshrined in the Federal Constitution?

Doesn't this also affect the image of the country in the eyes of international tourists, when it comes to making Malaysia their destination of choice? asked the Tourism Minister.

We want tourists and yet we want them to dress to our requirements. If tourists are walking around stark naked, then yes it is obscene and haul them up. But if male or female tourists wear shorts (and I do not want to go into the length) then our morals are impacted? Yes, Kelantan does bar such shorts, but some do cross over to Golok for all sorts of action and that’s fine is it?

Reference: 

Moral policing in Langkawi: Tiong doubles down on tourists’ complaints, Malaysiakini, 28 September 2023

What is Wrong with the Current Blanket Subsidy Mechanism?

The problem with some of the subsidies in Malaysia, such as our fuel subsidy, is that they are blanket subsidies. This means everyone, regardless of socioeconomic background, benefits from these subsidies.

For example, RON 95 petrol costs RM2.05 per litre at the petrol stations, with the government subsidising about RM1.50 per litre of the actual cost. This simply means a motorcyclist or a delivery rider, from the lower income group, who consumes 100 litres a month will only get RM150 in subsidy while a well-to-do family with two to four cars consuming 1000 litres a month gets to enjoy RM1500 in subsidy.

Then there’s the problem of unwanted leakages. Foreign cars are coming into Malaysia to fill up on RON-95. This is because the petrol price in Malaysia is generally much cheaper than our neighbours. Therefore, not only are our subsidies inefficient, but we are also subsidising foreigners. 

In 2022, we spent six times more on blanket fuel and electricity subsidies (RM60.6 billion) than on education (RM10 billion) and a whopping 14 times more than on health (RM4.4 billion).

A good way to manage the impact of a possible fuel subsidy reform would be to maintain the Automatic Pricing Mechanism (APM), which has been in place since 1983. The APM helps to set a ceiling price at the petrol pumps regardless of the location, whether it be in Tanjung Malim or in Bangsar.

Therefore, should we proceed with fuel subsidy reform, the APM can be used to manage petrol pump prices in the event of global oil price volatility. This is essentially what we call a “managed float”.

For electricity, the government has already started to implement targeted subsidies to heavy users whereby domestic households who use more than 1,500 kWh a month, will be imposed a 10 sen per kWh surcharge.

The problem with targeted subsidies is enforcement. Leakages are going to happen, when Malaysians are ingenious people! For any scheme to work well it must be simple, easy to implement and flexible to changes. That may not be the case for this planned targeted subsidy. Other ways to resolve this problem is to:

• Levy a higher tax on the top 5% income earners (individuals/companies);

• Widen the windfall tax; and/or

• Widen the base for Sales and Services Tax

The resultant tax revenue is then used to cash transfer to the B40 group.

Reference:

Targeted subsidies to ease rakyat’s burden, Dr Yeah Kim Leng, The Star, 27 September 2023

Are Business Conditions Deteriorating?

Malaysian manufacturers reported demand weakness at the end of the third quarter of 2023, and this was evident across a range of indicators in the latest purchasing managers index (PMI) data. S&P Global Market Intelligence said output and new orders both moderated to a greater extent than in August. New export orders fell at the third-strongest pace. Moreover, it said employment levels fell for the fifth month running, while purchasing activity softened to the greatest degree since September 2021.

The weakness in demand for inputs also fed through into stocks of purchases. A degree of spare capacity in the sector was signalled, as the level of outstanding business was depleted at one of the strongest rates in the series history since July 2012.

The seasonally adjusted S&P Global Malaysia PMI posted 46.8 in September, down from 47.8 in August. The latest reading signalled further challenges for firms in the manufacturing sector, with business conditions moderating to the greatest extent since January.

S&P Global said that looking at the relationship between the PMI data and official gross domestic product (GDP) statistics, the figures for the third quarter suggest that year-on-year GDP growth eased further from that seen in the second quarter.

It said the data are also consistent with official manufacturing production remaining broadly stable on an annual basis.

Manufacturing new orders moderated for the 13th month running in September, with the latest slowdown the sharpest in eight months amid widespread reports of demand weakness.

The subdued demand environment was not limited to the domestic market, as new export orders softened to the greatest extent since May 2020. A lack of demand was also a key factor behind a further slowdown in production, which eased for the 14th month running and to the greatest extent since January.

S&P Global said employment moderated for the fifth month in a row in September. It said lower workloads and staff resignations were cited as the main reasons for reduced staffing levels.

Spare capacity was also evident, with backlogs of work reducing for the 16th consecutive month, and at the steepest rate since July 2017. Subdued demand conditions also fed through to weaker demand for inputs. Both input purchases and pre-production inventories were scaled back to the greatest extent for two years, while holdings of finished items were reduced at the quickest pace since July 2021.

Positively, supplier performance moved closer to stabilisation following a marginal deterioration in the previous survey period. Although input costs rose, the pace of inflation was muted in the context of the past three years.

Where input prices increased, this was linked to higher raw material costs. That said, output prices were raised at a sharper rate in September, with the rate of charge inflation the strongest seen for 10 months.

The latest figures are still representative of growth in official GDP numbers, the current soft patch looks set to continue over the coming months.

Remain cautious of the future, hold cash to cover six months and hope no repeat of another Covid-like pandemic in the immediate.

Reference:

M’sian business conditions deteriorates to greatest extent since January, manufacturing PMI shows, Surin Mugugiah, theedgemalaysia.com, 2 October 2023

Budget 2024: A Tough Balancing Act?

With few days before Budget 2024, the PM should avoid repeating the same mistake made by former Prime Minister Datuk Seri Najib Razak. The government should not bundle drastic subsidy cuts and tax hikes together in a hasty attempt to lower the country’s fiscal deficits that have prolonged for more than two decades.

The last time this was done under “Najibnomics”, which was implemented through a series of subsidy cuts and the introduction of the goods and services tax (GST), inflation surged to 5.1% and the then ruling Barisan Nasional was rejected by voters. Under Budget 2024, subsidy cuts should be gradual, without pushing up retail prices drastically.

Please refrain from imposing a blanket tax hike on all Top 20% (T20) income earners in the country.

Any effort to raise personal income tax should be focused on the Top 1% or Top 5% ultra-rich group. A T20 taxpayer is defined as anyone earning a minimum monthly income of RM11,000.

The T20 population, which already contributes 85% of the personal income taxes collected in 2022, would also be the first to be affected by subsidy removals. In May, the Deputy Finance Minister reportedly said that the T20 group would no longer enjoy RON95 petrol at RM2.05 per litre, following the implementation of targeted fuel subsidies 2024.

If a sole breadwinner earning RM11,000 in Kuala Lumpur should he or she be subjected to higher taxes and at the same time, no longer qualify for subsidies? What income range would be a better indicator of one’s wealth?

It may be more logical to expect the country’s growing middle class to shoulder more tax responsibilities like in other advanced economies. Malaysia’s low salary levels across various industries would make it difficult to implement. Low salaries are evident even among multinational companies (MNCs) operating in the country.

The low salary dilemma is expected to be remedied with the government’s much-anticipated Progressive Wage Policy and details are expected be announced in the upcoming budget. While the impact of the policy would only be seen in the medium to long-term, it is crucial in the move to raise Malaysians’ purchasing power and their ability to pay higher taxes.

The World Bank and rating agencies have consistently called for a more diversified income base in Malaysia, including the reintroduction of the GST. According to reports, there are slightly more than 1.3 million individual taxpayers out of a population of 33.5 million, representing a mere 4% of the people.

Higher taxes would allow the government to reduce its high dependency on petroleum-related revenue. In 2023, petroleum-related revenue is expected to contribute RM65.2bil or 22.4% of the government’s total revenue (see chart).The fact that a huge chunk of the government’s annual revenue goes towards the payment of debt interest also necessitates higher tax collection. In 2022, the country’s debt service ratio stood at 14% of the national revenue (see chart). This means that for every RM1 government revenue, 14 sen was spent on paying the country’s debt interest – not inclusive of the principal debt amount.

In Asia-Pacific, on average, indirect tax represents 26% of total tax revenue, but in Malaysia, the share is lower at 16% via the sales and service tax (SST). Widening the tax (SST) base is one possibility.

In 2022, the country’s fiscal deficit to GDP was recorded at 5.6%. The government aims to reduce the deficit to a range of 3% to 3.5% by 2025.

Under Budget 2024, the government should ramp up its spending to facilitate greater investments from the private sector, especially domestic investments. The savings from a more prudent expenditure should be channelled to funding important development projects. The recent Mid-Term Review of the 12th Malaysia Plan has raised the expenditure ceiling by RM15bil to RM415bil, to be spent from 2021 to 2025.

Previous governments had spent RM64.3bil in 2021 and RM71.6bil in 2022. This means the government must spend at least RM90bil per year from 2023 to 2025.

Budget 2024 must give importance to states with relatively lower development levels. Increased allocations are needed in building or refurbishing basic infrastructures such as schools and hospitals, as well as in strengthening physical and digital accessibility for the population.

There are several competing forces at work, the PM/FM has to set a clear picture of revenue sources and funding allocations that will best benefit a targeted growth of 4.5-5.0% of GDP.

For 2023, the World Bank estimates for Malaysia is GDP growth of 3.9%. So, the PM/FM has a massive task to generate enthusiasm and positive outcome for 2024.

Reference:

Budget 2024: A tough balancing act for Anwar, Geneshwaran Kana, The Star, 30 September 2023

What Is Series A, B, and C Funding?

HSBC Malaysia recently launched a first-of-its kind fund, the “HSBC New Economy Fund” worth RM500 mil. This will be made available to start-ups that have reached a Series B stage and have shown demonstrable growth, measured through the quarters, and want to continue tapping into the digital economy.

Series A, B, and C are funding rounds that generally follow "seed funding" and "angel investing," providing outside investors the opportunity to invest cash in a growing company in exchange for equity or partial ownership. Series A, B, and C funding rounds are each separate fund-raising occurrences. The terms come from the series of stock being issued by the capital-seeking company.

Source: https://www.loanspot.ng

Before any round of funding begins, analysts undertake a valuation of the company in question. Valuations are derived from many factors, including management, growth expectation, projections, capital structure, market size, and risk.

Investors each have their own method for evaluating a business, but many use some of the same factors:

• Market size: The size of the market the business is in, in dollar value

• Market share: How much of the market the business makes up, like 0.10% of the overall market

• Revenue: An estimate of how much the company made and will make. This is market size multiplied by market share.

• Multiple: Generally an estimate used by the investor to give them an idea of the business's value, like 10x or 12x the revenue

• Return: The increase in value, in percent form of how much is invested, based on estimates of growth in market share, market size, and revenue.

The earliest stage of funding a new company comes so early in the process that it is not generally included in the funding rounds. Known as "pre-seed" funding, this stage typically refers to when a company's founders get their operations off the ground. The most common "pre-seed" funders are the founders, close friends, supporters, and family.

Seed funding is the first official equity funding stage. It typically represents the first official money a business venture or enterprise raises. Some companies never extend beyond seed funding into Series A rounds or beyond.

The first round after the seed stage is Series A funding. The term gets its name from the preferred stock sold to investors at this stage. In this round, it's important to have a plan for developing a business model that will generate long-term profit.

Typically, Series A rounds raise between $2 million and $15 million, but this number varies due to many circumstances. 

Series B rounds are about taking businesses to the next level, past the development stage. Investors help start-ups get there by expanding market reach. Companies that have gone through seed and Series A funding rounds have already developed substantial user bases and have proven to investors that they are prepared for success on a larger scale. Series B funding is used to grow the company so that it can meet these levels of demand.

Businesses that raise Series C funding are already quite successful. These companies look for additional funding to help them develop new products, expand into new markets, or even acquire other companies. In Series C rounds, investors inject capital into successful businesses in an effort to receive more than double that amount back. Series C funding focuses on scaling the company, growing as quickly and successfully as possible.

The typical number of seed rounds a company goes through before completing an initial public offering (IPO) is three. However, no set number of rounds must be used to raise funds.

Many companies will complete an initial public offering (IPO) after their Series C funding round. However, other companies may need to continue using fundraising rounds to expand or grow.

Series D funding is the fourth stage of fundraising that a business completes after the seed stage. The initial round of funding after the seed stage is Series A. The second is Series B, and then the third is Series C.

Understanding the distinction between these rounds of raising capital will help you decipher start-up news and evaluate entrepreneurial prospects. The different funding rounds operate in essentially the same basic manner; investors offer cash in return for an equity stake in the business. Between the rounds, investors make slightly different demands on the start-up.

Company profiles differ with each case study but generally possess different risk profiles and maturity levels at each funding stage. Nevertheless, seed and Series A, B, and C investors all help ideas come to fruition. Series funding enables investors to support entrepreneurs with the proper funds to carry out their dreams, perhaps cashing out together down the line in an IPO.

References:

Series Funding: A, B, and C, Nathan Reiff, Investopedia.com, updated 15 July 2023

HSBC Malaysia launches RM500mil startup fund, Lydia Nathan, The Star, 

13 September 2023

Learn and Live Your Best Lives!

If there is one word that should be banned from a senior citizen’s vocabulary, it is ‘Old’. Society will not have a positive perception of older people if seniors think themselves as ‘old’ – as in ‘‘I’m too old to...”

Words have power. Never think you are too old to learn. Brain cells do not atrophy with age. In fact, they regenerate. Our brain cells get stimulated with new learning. Neurogenesis and neuroplasticity enable many to continue absorbing new knowledge, new skills and new experiences. These two processes continue throughout our life span. When we think we have lived long enough, seen enough, and there’s nothing more to learn, it is easy to slip into boredom and have no purpose. Life becomes a long stretch of the boring!

Source: https://www.greatseniorliving.com

Nothing new, nothing exciting to enjoy or look forward to. On the contrary, the best time to learn new things, to pursue our dreams is in the retirement years. No more nine to five, no more parenting responsibilities. Now is the time and savings to learn what one wants, with no pressure to sit for exams.

If you want to pick up a new skill such as cooking, painting or home repairs or learning a new language, a musical instrument or a new dance, this is the time. Looking for something related to wellness? There’s yoga, tai chi and qigong.

And if technology is your cup of tea, then there’s smartphone usage, cloud computing and drone basics, all taught under Digital Technologies. Thinking of setting up a home-based business or a start-up enrol for a course on entrepreneurship. 

All the above, and more, are courses offered at University of the Third Age (U3A) at MyAgeing, Universiti Putra Malaysia. There are more than 40 courses to choose from ranging from art and music to languages and digital skills. Most of the courses run for six weeks with course fees at an affordable RM80 per course. And most of them are on Zoom.

Aside from U3A, there are 132 Pusat Aktiviti Warga Emas (PAWE) activity centres throughout the country. Courses are offered free to enable seniors especially from the B40 group to expand their knowledge and learn new skills that could help them generate some income. 

Seniors who did not have the opportunity to further their studies after secondary school can now fulfill their dream of obtaining university qualifications. Compared to the limited number of courses in the 1960s-80s, many universities now offer literally hundreds of degree courses. As Malaysia heads towards ageing nation status, we may see a surge in university applications from older adults. 

Grants, scholarships and loans have an upper age ceiling that close-out applications from older adults. Education has always been seen as a way out of poverty. This applies to young people as well as to older people. But with ageism, opportunities to improve the socio-economic status of retirees and pensioners via higher education remain limited.

One alternative is to go online for learning resources. With thousands of courses available online and for free, adult learners are spoilt for choice. All that is required is the determination to complete the course. 

The internet opens up a world of e-learning. It is our go-to virtual library. Knowledge is practically at our fingertips, and just a click away. It’s that simple to enrich our mind. Unfortunately, there are still many among the older generation who think they are beyond learning anything new. 

Use it, or lose it: That applies to our brains as well. If we continue to use our brain, we are exercising it, stimulating it to think, to analyse, to reason, to stay mentally sharp. Learning new things throughout our lifetime can help reduce the risk of Alzheimer’s disease. Our memory improves when we challenge it with learning new skills. Learning something new also boosts self-esteem. When we learn a new skill, we feel a sense of achievement and pride. When we add a new qualification to our name, we earn respect from others. 

So, please keep at it or end-up with dementia!

Reference:

Seniors, Ditch age old stereotypes and live you best lives, https://www.seniorsaloud.com