It is heartening to read the recent statement by Datuk Abdul Rahman Dahlan, the minister in the Prime Minister’s Department in charge of the Economic Planning Unit (EPU), that the latter will examine the return to projects or investments before project approvals are granted.
He also alluded to the need to go back to the basics, in particular, the concern for rural people.
The seriousness of the view that low-income positions in rural areas must be adequately attended to is reassuring, given the fact that the minister is from Sabah, where incidences of poverty and low income are prevalent.
This viewpoint has been the position of the EPU all along, as per its position as the national planning agency.
During the Tun Dr Mahathir Mohamad era, the concentration of big projects was largely in the Klang Valley, making the region a more dominant economic space.
This concern led to Tun Abdullah Ahmad Badawi carrying out economic corridor development policies, which have proven effective in harnessing latent potential in some regions. The Iskandar regional corridor in Johor and the Sarawak Corridor of Renewable Energy have brought new economic growth impetus to otherwise sleepy regions.
The insistence for the rate of return to projects is necessary to promote efficiency and efficient resource allocation.
However, although economic analyses are always necessary, they are not a sufficient consideration for all development projects, given the complex demands of society. For example, defence- and security-related projects may not generate economic returns, but are critical for the nation’s survival.
Of course, the main principle of project appraisal remains that commercial projects must be approved based on the financial rate of return, while socio-economic projects, based on the social rate of return, take care of real costs and benefits to society.
Thus, in calculating the economic or social rate of return, subsidies and price support are not incomes, but treated as costs.
Additionally, the impact of projects, such as positive externalities (rise in land value or rentals, for example) and negative externalities (the environmental impact, for instance), must be quantified and taken as social costs (or benefits).
The EPU, as a central agency like the Finance Ministry, is duty-bound to examine the real costs and benefits to
the community when it comes to major government-intervention programmes aimed at bringing about desirable results in society.
If the estimated rate of return exceeds the cost of funding, then the projects can be approved.
However, if the analysis shows that the economic return is less than optimal, and the authorities still proceed with the projects, then the EPU should be in a position to explain the social desirability of the projects and, hence, their approval.
The case in point is the rice double-cropping programme, involving irrigation projects aimed at enhancing the rice self-sufficiency level.
Despite the availability of cheap rice from neighbouring countries, Malaysia implemented the programme and provided padi price support to encourage farmers to continue planting the crop.
It is an uneconomic venture, but the consideration for food security precedes the economic consideration.
On the matter of rural income improvements, this subject should remain a national priority, especially the implementation of programmes in Sabah and Sarawak, whose populations are largely found in rural areas.
Thus, projects involving infrastructure and utilities, as well as social amenities (housing, education and health), must continue to get policy attention.
As the next general election is not too distant from now, this concern can take a front seat in national planning.
In addition to the rapid development of communications, the issue of the digital divide has come to the fore. Thus, beefing up communications facilities in small urban and rural areas can help reduce this divide, while promoting the development of the digital economy in the country.
In this regard, Telekom Malaysia’s suburban broadband project, the second phase of its broadband facility extension, is largely designed to address this matter.
However, in support of the government’s fiscal policy, the EPU may have to do things with reduced financial resources.
This is quite a challenge. One way is to begin the second phase of its private-partnership programme to let the private sector carry out many social projects (affordable housing, for example), but with adequate safeguards for equity and public sector financial commitments.
Our nation’s resource surplus, which is largely in the private sector, demands that the private sector bear the main brunt of development financing.
As a former staff of the EPU, I am confident that it will rise to meet the challenges and expectations of the times with its new leadership. With its special position in charge of development budgeting, unlike other planning commissions, the EPU can influence public policy for the long-term social betterment of the nation — “the megatrends”, to quote the minister.
Tan Sri Dr. Sulaiman Mahbob is chairman of the Malaysian Institute of Economic Research