RM5,900 average household income?

One would certainly doubt the figure when the federal minister's claim that malaysian household's make an average RM5900 per month. There is one article who summarize well how the figure derived from and what does it mean here. To summarize short:

- Income not only mean wages and salary, but include investment income from properties, stocks, and probably EPF. 

- "mean" figure means rich people who earn many money will tend to distorted the figure. " median" income is a more realistic assessment. 

- some of the income are imputed, means income are counted even though you consuming self-produced goods and services. For example, if you living on your own house, the survey will assume you will receive an income (rent) from your house with as the amount you will received if rent it out to others in the rental market. If you cook your own meal, the survey will assume you received income (from yourself) on the cooking services that you provided.

What should be interesting, is how the income distribution go, and what can we do about it. 

For example, if you read p29 from 2012 household income survey (here), it can be seen that Malaysia's Gini Index according to household income is about 0.431. This implicates a high income inequality distribution taking place in Malaysia. The sources of the income inequality could be from different in education received, as indicate in table below from Malaysia Salaries & Wages Survey Report (here). It can be seen from the table that, although degree holder generally earn higher salaries and wages (mean = RM4571) from diploma holder (mean RM 2839) and below (mean RM 1721 for SPM holder to RM992 for no cert). Only 12% of current workforce hold a degree. 

Table: Average salaries and wages according to education level , Source: Malaysia Salaries and Wages Survey Report

Few measures i believe can help to ease the inequality in income distribution.

Measures 1 : Increase the coverage of quality higher education. The chances of getting a higher education in Malaysia is increasing thanks to more public universities built, more private college and universities allowed to open, and PTPTN loan. but the quality of education received may not keeping pace. (see here and here for story of graduates jobless or in job mismatch with education received)

Measures 2 :  Restricting the number of foreign workers at low skill category, both legal and illegal. 

As salaries and wages in the market is determined largely by supply and demand, large influx of foreign workers in low skill category will continue suppress the salaries of the locals in that particular category. Thus, restricting their numbers, thus altering the demand and supply in the job market, will be the most effective way to increase the salaries and wages of low income workers compared to minimum wages policy. There are only two problems, first, the small and medium enterprises (and plantations) who heavily relied on cheap labours to remain competitive will not be happy about this, Second, as large number of foreigners had been granted citizenship in Sabah, the supply of low skill workers in job market may still higher than demand, thus keep suppressing wages in this category. 

Measures 3 :  Easing the income inequality through tax and transfer system. More specifically, increase the aid for low income group under BR1M, and fund the increase by taxing the rich. Few of the new taxes targeting rich people that can be introduced include, 

i. Capital Gain Tax

ii. Real property gain tax for second home owned

iii. Estate tax and gift tax

My Q&A on Malaysia Electricity Supply Market

Cost vs Reliability

Malaysian Consumers had to realize that two of their main demands regarding electricity supply are conflicting with each other. If you want to reduce the reserve margin （price pay for excess capacity) to make electricity cheap, you will risk facing the black out of 1992 again. To ensure the system as reliable as possible and avoid any black out at all, you need to keep vast amount of spare capacity which came at huge maintenance cost. 

Why Privatized? 

I can see two compelling reasons why we need to privatized the power generation business. 

The first,  we need a benchmark to see if the player(s) in the market is under/over performing. In previous state owned Lembaga Letrik Negara (LLN) era, you won't know if we are over/under performing until massive black out occured. 

The second, if a particular organization had state financial in back-up, the main drive for efficiency will be solely relying on those in controlling position for the organization. More specifically, we will rely on the good faith of the peoples in the organization, or the moral principal that they hold, to ensure we keep going to the direction of generating cheap but yet reliable electricity. Given the fact that the state-owned enterprise don't usually attracting the best talents given its lackluster remuneration structure, i wouldn't count my bet on that. 

Are we benefiting from the latest PPA tender exercise?

The answer is yes and no. 

We need to aware that any savings from latest Power Purchase Agreement (PPA) tender exercises does not directly pass to consumers.  The client for all Independent Power Producers (IPP) and even TNB generation is still TNB transmission & distribution arm. Hence, TNB transmission and distribution will enjoy the savings from PPA exercises first, before deciding whether to pass on to the ultimate customers - the consumers. 

And here is the catch. Competition for new PPA is becoming more intense between players like TNB, 1MDB, Malakoff, and other IPPs(currently left only YTL) where cut throat price war resulting in cheaper electricity generated. However, there is no competition in the electricity distribution and transmission business. TNB monopolized the market, and eventhough it is regulated, with TNB a private corporation in nature government still need to make sure TNB are making profit. 

Thus, any saving from lower cost of electricity generation can be pass on to the consumers only if TNB already making enough profit. Which to many outsider, it seems natural to try to squeeze more efficiency out of TNB transmission and distribution business. 

How can we squeezing more out of TNB transmission and distribution business?

so that end consumers will benefit more？

Well, with current structures it will be very hard, totally relying on the good faith of the managers in TNB transmission and distribution business to ensure the organization transmit and distribute the electricity at lowest cost possible. As the business is regulated but need to cater for the profit demand for a private organization, it will be more easier for TNB to come to the regulator crying for tariff hike, instead of squeezing more productivity out of its current practise. 

There are several ways to change the landscape, 

One, since the market of transmission and distribution is  monopolized, it matter less whether it is operated by government or private sectors. We could just nationalize TNB transmission and distribution business and let the generation units competing in generating cheapest electricity. 

Second, Liberalized the market by allowing IPPs to enter into the transmission and distribution market. We might not have the market size necessary to ensure efficiency of scale achieved by major players in the market (like UK). But in a industry with huge capital expenditure layout (thus high fixed cost), there is a higher chance to see price cut throat competition which ultimately benefit the consumers （think of the steel industry, aviation industry, or automobile industry, where overcapacity leads to lower price for consumers). 

Whats Wrong with 1MDB Entering the Market?

Currently it seems they are doing more benefit than harm. They are buying out 1st and 2nd generation PPAs from privates, they are among the lowest price bidder for latest PPA tender exercise (track 3B). However here is the catch, they can do so as they have a license to fail. And if they do failed, government will likely needed to bailed them out, as 

1)  They are owned by Ministry of Finance, a fail without rescue will put all other GLCs debt in doubt. 

2）Electricity generation is a matter of national interest, it dont seem likely that the government will allow the operation of the business fall into the hand of foreign bond holders. 

Now when you have the license to fail, it will be likely that you will be more aggressive, thus making more mistakes. And the mistakes will more likely to be tolerated. 

Already, 1MDB is reportedly overpaying for the power asset they acquired (read here and here). 

Then, the recent acquired of theirs, Jimah Power Plant, is a highly leveraged investment with frequent failure history this year. 

And the main reason why they want to listed their power assets, is to get enough equity to replace the costly debt financing. 

I am guessing KWSP and other government related funds (such as Lembaga Tabung Haji and Amanah Saham Malaysia)  will be directed to buy the shares of 1MDB. If it does so, it will be like consumers are subsidizing cheap electricity (track 3B for example) from their own pockets (KWSP and all other funds), probably in a less efficient way. Where in the process , Ananda Krishnan (previous major shareholder of Powertek), Genting Shareholders and Negeri Sembilan Royal Family (major shareholder of Jimah Power Plant) just get richer. 

So?

If we are to ensure 1MDB don't abuse its license to fail, and if we do view electricity generation business as a matter of national interest, that the companies operating them need to have sound financial situation to avoid any bailout request to government, we might need to regulate their financials like the way we regulate the banks. 

Few of the measures could be, 

1) prohibited companies with not enough equity to participate in any PPA tender exercises, 

2) prohibited any highly leveraged buyout for power plant assets. 

Warning : The author of this article do work in Electricity Generation Industry and hence his view could be very bias. Becareful when reading.