The burden to the country

Dass: Corruption will lower the country’s competitiveness.

Dass: Corruption will lower the country’s competitiveness.

EVERY penny counts, they say.

Hence, the estimate by Transparency International Malaysia (TIM) that Malaysia lost nearly RM46.9bil in 2017 alone due to the corruption within the public sector is nothing less than alarming.

For context, the amount, which is higher than the RM44bil collected last year via the now-zerorised goods and services tax (GST), is also almost double the allocation for national healthcare in Budget 2017.

Had the monies remained with the government, it could have been used to build some 117,250 affordable 1Malaysia People’s Housing Scheme (PR1MA) houses priced at RM400,000 a unit for low- and middle-income Malaysians.

Describing corruption in Malaysia as a “serious conundrum”, TIM president Datuk Akhbar Satar tells StarBizWeek that the RM46.9bil amount is likely to be a conservative estimate.

“Corruption in the country’s civil service has been increasing over the years and is valued at about 5% of Malaysia’s gross domestic product (GDP).

“The new government’s initiatives to combat corruption should be praised, but more needs to be done. Too much damage has been done before this,” he says.

Siau: Malaysia’s corruption level has not affected the country’s economic fundamentals.
Siau: Malaysia’s corruption level has not affected the country’s economic fundamentals.

Corruption is a deadly affair, robbing the resources meant for all and channeling them into the hands of a corrupted few.

Interestingly, it was the same corruption which dealt the death blow to one of the world’s longest one-party rule in Malaysia.

Barisan Nasional, and its predecessor the Alliance, ruled the country for nearly 63 years until the “back-to-the-future” former Prime Minister Tun Dr Mahathir Mohamad led the Opposition, Pakatan Harapan, to an unprecedented electoral victory in the 14th general election (GE14).

Voters sided with Pakatan this time around, encouraged by its pledge to save RM20bil or 1.4% of GDP by cutting wastage and fighting corruption. The deal was to oust an administration which was seen as a kleptocracy by many.

Akhbar: The new government’s initiatives to combat corruption should be praised.
Akhbar: The new government’s initiatives to combat corruption should be praised.

Internationally, Malaysia’s ranking in Transparency International’s 2017 Corruption Perception Index (CPI), which gauged the perceived levels of public-sector corruption according to experts and business people, went down seven places in the overall ranking of 180 countries to 62nd place.

In comparison, low-income country Rwanda was ranked 48th, higher than Malaysia.

Akhbar points out that this was Malaysia’s worst performance since the introduction of the CPI in 1995.

Similarly, the corruption level within Malaysia’s private sector was not any better. According to the 2016 Global Economic Crime Survey by PricewaterhouseCoopers’s, bribery and corrupt activities among the private entities in Malaysia rose sharply from 19% in 2014 to 30% in 2016. 

The audit firm also found that one-third of the Malaysian respondents believed their companies would experience bribery and corruption over the next two years.

In its pursuit to combat corruption and clean up the administration, the new government has undertaken a slew of measures since taking office post-GE14, although criticised as a political witch hunt by detractors.

A special committee was established on May 17 to investigate the controversy-stricken 1Malaysia Development Bhd or 1MDB, the private residences of former premier Datuk Seri Najib Tun Razak were raided and he was barred from leaving the country, a police complaint was lodged on the alleged misappropriation of RM3bil worth of government funds in the controversial Tun Razak Exchange project, and the mega-infrastructure projects announced under the previous government are now being reviewed.

In a recent interview with Channel NewsAsia, Dr Mahathir even suggested that the government might look into replacing the currency or going cashless to combat corruption.

The ugly cost of corruption

Corruption does not come free and most often than not, it is the ordinary citizens of a country who will eventually pay the price. The adverse effects of corruption can be well-entrenched in the entire nation, with detrimental implications on economic growth, trade, foreign investments as well as the government’s coffers.

Ali: Corruption-ridden GLCs are not a new phenomenon in Malaysia.
Ali: Corruption-ridden GLCs are not a new phenomenon in Malaysia.

Globally, corruption is equivalent to 10% of the total cost of doing business, and adds up to 25% with regard to the cost of procurement contracts in developing countries.

Speaking with StarBizWeek, AmBank Group chief economist Anthony Dass says corruption has throttled down Malaysia’s economic growth.

Simply put, the country’s GDP growth will drop by 1.96% while the impact of government expenditure will be lowered by 0.3% due to corruption.

Meanwhile, corruption raises inflation by 2.2%.

“Corruption will lower the country’s competitiveness, which, in turn, results in lowering economic growth, crowding out government spending, increasing income inequality, as well as distorting the market mechanism and causing resources misallocation and raising economic inefficiencies.

“Hence, if no action is taken to address the level of corruption, Malaysia will have difficulties to move up from the “middle income” bracket, and it will also retard the speed for businesses to move up the value chain.

“Our living standard will remain depressed with growing inequality between the rich and the poor and more so with the super rich,” he points out.

Wide-spread corruption practices will also shut off potential entries into the market, preventing the economy from operating efficiently. Over the longer term, this could eventually lead to less competition in the market and catalyse the creation of oligopolies or even monopolies, limiting choices for consumers.

Another area where corruption concerns usually arise is in the country’s public tender system.

Direct negotiated tenders and limited tenders tend to open up ample space for corruption to flourish. The unavailability of a transparent and open tender system across the board enables unscrupulous individuals in both the civil service and the private sector to profiteer by charging “significantly different” prices, compared to the prevailing market price, on goods and services supplied to the government.

These individuals will eventually pocket the difference between the price quoted by the suppliers and the market price. Ultimately, the taxpayers will have to bear the higher costs incurred by the government.

The pressing need for an open tender system in Malaysia has been highlighted by many parties on numerous occasions over the years. To its credit, the previous government had also worked towards introducing an open tender mechanism for public procurement and projects.

Back in 2008, Najib, who was then the Deputy Prime Minister, said that a large portion of government procurement would be made via open tender. However, concerns continue to linger that the open tender system was not holistic and extensive enough.

According to the Institute for Democracy and Economic Affairs chief executive officer Ali Salman, Malaysia’s public sector may have likely paid far more than the exact value of goods and services it had purchased over the years.

“In absence of any systematic research, which is constrained by lack of access to information, anecdotal evidence suggests that these tenders are usually overpriced by a factor of 1.5 to 2, to say the very least,” he says.

Meanwhile, Dass says combating corruption could bring down the bill for public procurement.

“We used the ‘supplies and services’ under the operating expenditure as a proxy of public procurement. From our analysis, the amount we can save from procurement by reducing corruption is about RM100mil.

“Thus, to reduce our fiscal deficit and public debt, an area we should look at will be on how to reduce the inefficiencies under ‘supplies and services’ by re-examining the awards through a greater level of transparency,” notes Dass.

Wide-spread corruption, which can wreck a country’s business environment, could also lead to a low confidence level among existing and prospective investors and eventually discourage private investment.

The Pakatan government’s aggressive and continued exposé on corruption and mismanagement related to the previous administration has rattled investors. Coupled with the nation’s RM1 trillion debt concerns and other external shocks, especially due to trade war concerns, Bursa Malaysia has been on a downtrend post-GE14, erasing the gains made by the index over the last few months.

However, Singapore-based private equity firm Ericsenz Capital Pte Ltd chief executive officer Anthony Siau says that Malaysia’s corruption level has not affected the country’s economic fundamentals, although he concurs that it is a serious problem.

“Corruption is a baggage that has accompanied Malaysia for many years, but it is the extent of the corruption that has opened the eyes of investors both near and far.

“However, the recent downtrend in Bursa Malaysia is not solely due to the corruption concerns. It is part of a global sell-off in emerging markets, as investors look to move their investment back to the developed markets,” he adds.

The black market, or the unregulated shadow economy, also thrives on corruption partly.

Swindled funds and proceeds from corrupt practices are usually not declared, especially for tax return filing purposes.

In order to avoid punitive action on such non-disclosure of funds, the monies are often channelled into foreign tax havens, usually in the form of illicit financial outflows.

Malaysia has come under scrutiny for being one of the top source countries for illicit fund outflows over the past few years.

In its Illicit Financial Flows to and from Developing Countries: 2005-2014 report, Washington-based Global Financial Integrity pointed out that Malaysia may have lost a whopping US$44.32bil (RM144.93bil) in 2014 alone due to illicit financial outflow, an amount equivalent to 66% of the federal government’s revenue in that year.

While Bank Negara strongly disputes the figure, Malaysians have been implicated in several scandals related to foreign tax havens.

Following the controversial “HSBC Swiss Leak” incident, Malaysia was ranked 87th with the largest dollar amounts in the leaked Swiss files. The International Consortium of Investigative Journalists’ publications of a series of secretive documents dubbed the “Panama Papers” also revealed a number of Malaysians with offshore bank accounts.

A number of high-profile individuals such as Najib’s son Datuk Nazifuddin Najib have been named in relation to these controversies.

However, it is unknown on whether the funds belonging to Malaysians in foreign tax havens have been declared and legally transferred. It is also unclear whether the Malaysian authorities have initiated any investigations following such leaks.

The causes of corruption

Corruption concerns are not new in Malaysia and certainly did not crop up only after Najib rose to the premiership.

The New Economic Policy (NEP), which ran from 1971 to 1990, has been criticised by many for creating a rent-seeking mentality and also for inducing corruption in the country.

Former senior civil servant Tan Sri Ramon Navaratnam has also called for the complete adoption of the New Economic Model (NEM), to eradicate the elements of the NEP which are still existent in today’s governance.

This, he says, will be key in fighting corruption in Malaysia.

Launched in 2010, the NEM’s aim is to transform the country into a high-income nation with a paradigm shift from race-based to need-based affirmative action.

The current prime minister Dr Mahathir, whose first stint as prime minister spanned from 1981 to 2003, was also riddled with corruption allegations and accused of cultivating a culture of cronyism that further spurred corrupt practices in the country.

Veteran DAP politician Lim Kit Siang, who used to be a strong critic of Dr Mahathir, had also in the past, accused the prime minister of turning a blind eye to corruption in Malaysia.

Dr Mahathir’s mega-development projects during his first tenure were also heavily criticised for having inflated costs due to corruption allegations. One such development was the Bakun Dam in Sarawak, which Transparency International labeled as a “monument of corruption”.

Commenting on Malaysia’s causes of corruption, Dass cites lack of transparency, both at the institutional level and in less formal organisations, apart from poor regulations and inefficient controls, as among the key factors for corruption.

“There is no sense of service when working in public or private institutions. This is seen, for instance, in those who use politics for their selfish interests, instead of serving the common good through politics.

“Next, we have the cultural environment that condones corruption such as defending or even admiring crooks,” he says.

The misuse of government-linked companies (GLCs) has also led to a heightened corruption level in Malaysia. Political influence on several large GLCs in Malaysia has been made at the expense of good corporate governance, and as a result tainted the image of the companies.

On the corrupt practices within the GLCs, Ali says that corruption-ridden GLCs are not a new phenomenon in Malaysia.

“But recent discoveries on several scandals of the GLCs indicate how pervasive it has become. The examples of Felda Global Ventures Holdings Bhd and Lembaga Tabung Haji, and now 1MDB, show how much more rotten the state of affairs have become.

“I recommend divestment, more transparency and ultimately the exit of government from business. At the minimum level, the government should appoint new and credible boards in all such problematic GLCs,” he adds.

Meanwhile, Akhbar says that corruption in Malaysia is unstoppable, unless the situation is properly addressed. The loopholes in the current legislation allows the system to be exploited easily, he adds.

He cited Section 23 of the Malaysian Anti-Corruption Act, which he urged to be amended, for there are many loopholes. Basically, under Section 23 of the Act, it is an offence to abuse one’s power or use one’s office or position for gratification.

“For example, if a sibling of one of the Mentris Besar is bidding for a government project, the person in public office must make a declaration and avoid being involved in the tender. It looks nice on the outset, but the other person deciding on the tender would likely choose the sibling as he may not want to offend his boss.

“Similarly, state governments could also have informal agreements in approving contracts or tenders. For example, a particular state government could award a contract to a crony of another state. The other would then do the same to return the favour,” he points out such practices which have happened before.

Echoing a similar opinion, another economist who refused to be named, says that “one needs to be in the game to actually know where the corruption takes place”.

“I’ll give you an example. Most suppliers to schools such as for books and other school needs, have the common industry practice of giving 15% of their revenue to the principal, in order to ensure that the school will continue to do business with them.

“If the principal does not need it, then the business will just take the money as extra revenue. Will the audit be able to find this kind of practice? Well, it has been going on for years and no one knew about it except those in the game,” he says.

He adds that the hidden nature of such corrupt practices will eventually turn the “cost of corruption” into the widely-acceptable market price.

Essentially, combating corruption is easier said than done.

In order to emerge successfully from its quest to reduce corruption, Malaysia should provide its graft-fighting commission more power, going forward. The successful anti-corruption models undertaken abroad could also be adopted.

One such example is Hong Kong’s Independent Commission Against Corruption.

Adding to this, Dass recommends the deployment of smart technologies to reduce corruption.

“Frequent and direct contact between government officials and citizens can open the way for illicit transactions. One way to address this problem is to use readily available technology to encourage more of an arms-length relationship between officials and civil society. In this respect, the Internet has been proven to be an effective tool to reduce corruption.“In addition, the purchasing activities of the government can be carried out through the Internet. For instance, we could look at Chile where they use the latest technology to create transparent public procurement systems,” he says.