Penang’s debt reduction, a tale of prudence

This is in response to the news ‘Don’t proceed with Penang dam project until Guan Eng says sorry, says Najib’ (Free Malaysia Today, 10 January 2021).

Dato Seri Najib Razak claimed that Penang’s debt reduction was due to Barisan Nasional federal government’s giving “free grant for the Mengkuang dam worth RM1.2 billion and converting the state’s debt into annual instalments,” following the federal-state water restructuring deal in 2011.

How the debt conversion works is by requiring the state government to transfer water-related assets to the federal government, and in return the assets are leased back to the state government for annual payment for 45 years.

Najib then casted doubt over the DAP-led state government’s economic prowess and accused former Penang Chief Minister, Lim Guan Eng for propagating “fairy tales of reducing state’s debts.”

This accusation against Penang government is not new, aggressively circulated by BN machinery in 2017, in preparation for GE14.

To know whether who is telling fairy tales is very simple, by comparing Penang with the other six states that participated in the water deal from 2008 to 2016. We just need to compare each state’s debt before entering the water deal and the amount of leftover debt in each state by 2016. Attached is the table for reference.*

As seen in the table, the debt conversion does not guarantee low state debt over a sustainable period. The two obvious examples are Johor and Kelantan.

Johor received the highest debt conversion of RM4,030 million, which was three times more than the state’s debt of RM1,010 million. If the debt conversion guarantees sustained low debt, then Johor shouldn’t have any debt at all. However, by 2016, Johor had accumulated RM413 million of debt. Clearly, the water deal’s debt conversion does not guarantee low state debt over a sustainable period.

Kelantan’s debt was RM1,354 million before the water deal. The state’s debt conversion was RM604 million. Again, if the debt conversion guarantees sustained low state debt, then Kelantan’s debt should be (RM1,354mil – RM604mil = ) RM750 million. But that is not the case. Just one year after the debt conversion, Kelantan’s debt increased by 3% to RM1,396 million. Again, clearly, the water deal does not guarantee low state debt over a sustainable period.

Longer duration in the water deal also does not guarantee high debt reduction and low state debt. Despite being the first to enter into the water deal, Melaka had only managed to reduce debt by 23%. So, clearly, the debt conversion does not guarantee low state debt even over a longer timeframe.

Out of the seven states participating in the federal-state water deal, Penang’s debt reduction rate is the highest, at 91%, over a sustainable period.

So, why is Penang’s debt remaining low over a sustainable period? I think it goes back to the state government’s prudence and economic prowess.

I have already explained this in 2017, but BN still repeating this misleading claim.

Reference

*Data of state debt are taken from Auditor-General Reports: Penyata Kewangan Kerajaan Negeri Dan Pengurusan Kewangan Jabatan/Agensi Negeri Melaka Tahun 2007, p.vi; Penyata Kewangan Kerajaan Negeri Dan Pengurusan Kewangan Jabatan/Agensi Negeri Sembilan Tahun 2008, p.31; Penyata Kewangan Kerajaan Negeri Dan Pengurusan Kewangan Jabatan/Agensi Negeri Johor Tahun 2008, p.34; Penyata Kewangan Kerajaan Negeri Dan Pengurusan Kewangan Jabatan/Agensi Negeri Perlis Tahun 2009, p.xiii; Penyata Kewangan Kerajaan Negeri Dan Pengurusan Kewangan Jabatan/Agensi Negeri Pulau Pinang Tahun 2010, p.32; Penyata Kewangan Kerajaan Negeri Dan Pengurusan Kewangan Jabatan/Agensi Negeri Perak Tahun 2011, p.28; Penyata Kewangan Kerajaan Negeri Dan Pengurusan Kewangan Jabatan/Agensi Negeri Kelantan Tahun 2015, p.xi.

Penang’s debt reduction due to prudence, not water deal

Barisan Nasional politicians such as Najib Razak and Abdul Rahman Dahlan had asked the Penang state government to stop taking credit for reducing the state’s debt by 90% as the reduction was due to the federal-state water restructuring agreement.

The minister has completely missed the point of the whole issue about Penang’s low debt. It is not about the one-off water restructuring transaction that benefited both the federal and the state governments. Rather, it is about the Penang state government’s prudence in debt management.

Water deal was no free lunch

First, the water restructuring agreement signed in 2011 was not a result of the federal government’s benevolence to the state. It was a solution to address the critical debt problem affecting the federal government and all the states in the peninsular.

The collective water debt around the country in December 2007, before the signing of the first water deal, escalated to RM7.6 billion. The National Water Services Industry Initiative (NWSII) was aimed at solving this nationwide debt problem.

Both the federal and peninsular states had to compromise to benefit from the restructuring initiative. For Penang, the state government had to transfer water-related assets valued at RM655 million to the Ministry of Finance’s Pengurusan Aset Air Berhad (PAAB) for 45 years. In return, PAAB leases these assets to Perbadanan Bekalan Air Pulau Pinang (PBAPP) for 45 years with an annual payment of RM14.56 million.

PBAPP has been paying the annual fee to the federal government without default. It was not a free lunch.

Penang’s Debt Management

Secondly, as of now, there are altogether seven states that have entered into the water deal. Out of the seven, Penang has not only managed to maintain the lowest debt but also achieved the highest debt reduction rate from the year of their signing until 2016.

For example, Melaka was the first to enter into the water deal in 2008, with the transfer of water-related assets valued at RM889 million. The state’s debt in the preceding year (i.e. 2007) was RM1,100 million, and reduced to RM851 million by 2016. Melaka’s debt reduction rate is 23%.

Penang signed the water deal in 2011 with the transfer of water-related assets valued at RM655 million. Penang’s debt in 2010 was RM688 million, and was reduced to RM64 million by 2016. The debt reduction rate is 91%!

This table shows that the water restructuring agreement is only one of the many factors affecting state debt.

Johor is a case in point. Johor’s debt amounted to RM1,010 million before they signed the water deal. The value of Johor’s water-assets transfer was RM4,030 million, almost three times more than the state debt. However, Johor still owed RM413 million in 2016. Johor’s debt was reduced by 59%, from the year prior to the water deal until 2016.

Kelantan’s situation is no less remarkable. The state owed RM1,354 million in 2015. Kelantan entered the restructuring agreement in September 2016, with water-assets transfer valued at RM604 million. Yet, the state’s debt in that very year increased by 3%!

These show that the water restructuring agreement is only one of the many factors in affecting state debt.

The point: Penang has managed to maintain the lowest debt and achieved the highest debt reduction rate not only because the state government has signed the water deal but, more importantly, the Pakatan state leaders have the political will and prudence in managing debt. A clean and competent government reduces debt.
 

Politicians who keeps harping on the water deal as the reason for Penang’s lowest debt in the country is clearly misinforming the public.