MAHATHIR'S FALSE ECONOMIC
THEORY AND HIS MEGA FOLLIES

Mahathir has recently given his most comprehensive defence of his much criticised mega projects. In a speech during the recent opening of UMNO Assembly, he dwelled at length on the economic justification and the good things his mega projects are bringing to this Country - huge profits and prosperity.

On closer examination, I find his economic theory mis-applied, his reasons invalid and his picture of profits and prosperity false. Contrary to his claims, he has been squandering public funds on a massive scale. Reasons of his failure: overzealous on grandeur and under-emphasis on economic rationale.

After sieving through the myriad of reasons given by Mahathir, I have selected the following extracts from his speech as representing the more important points made by him:  "Malaysian projects are huge. This is because of the economies of scale. Besides, big projects generate bigger profits."

"Putrajaya is for the Nation's future, for Vision 2020, for the future generation, for a country which has matured and developed."

"Have confidence in our ability, and we should not believe that only foreigners are smart and able. We too are able."

Economies of Scale

It appears Mahathir has cited "economies of scale" as his main economic justification. Unfortunately, it is
wrongly applied. It is in fact an economic principle used to evaluate the financial viability of a commercial project, and is certainly not applicable to government projects such as KLIA and Putrajaya.

Economies of scale means that the bigger the scale of operation, the lower the cost of products. In the cost analysis of a product, the costs are broken down into 2 components: the "fixed costs" (or overheads) and the "variable costs". In a bigger scale operation, the fixed costs are "shared" by a greater number of products, hence the unit cost of production is lower.
And lower costs mean higher profits. This is part of the rationale that prompted the recent spate of mergers among the giant corporations of the world.

In the case of the Kuala Lumpur International Airport (KLIA), there is no hope that the Airport can operate at a profit. With the investment sum at RM 9 billion, financing cost  (or opportunity cost) alone, at 10% per annum, is already RM 900 million per annum or RM 75 million per month. This must be added fully to the operating costs to get a true picture of the comparative
financial return of this investment. And the operating costs must be very high in view of the size of the Airport. Hence, there is no way these costs can be matched by the operating incomes, which are mainly airport tax and rentals. In fact, for a grossly oversized airport such as this, it is not envisaged to make profits for many years to come and the chances of financial pay back is nil.

In the case of Putrajaya, estimated to cost RM 22 billion, the same scenario prevails. The conceptual and overall design of the whole project looks more like an extravaganza showpiece than a profitable proposition. The infrastructure and landscaping costs are so high that it can not hope to be financially viable. As of now, RM 5 billion is already spent for completing only the Prime Minister Office and Residence and part of the infrastructures and landscaping. Since Putrajaya cannot function as the
Administrative Capital with only the Prime Minister working and living there in isolation, a lot more money need to be poured in quickly to make Putrajaya tick. As regards revenue, the only inflow so far come from the parceling of residential areas to the various developers, and the total such revenue may not amount to more than one tenth of what have been spent. Putrajaya is expected to be the major drain of this Country's financial resources for years to come.

Mahathir brought in the example of Petaling Jaya to strengthen his case for Putrajaya. It is true that what started as a residential suburb of Kuala Lumpur has developed into  a prosperous township of the present Petaling Jaya. But does Mahathir realize that the success story of Petaling Jaya is the antithesis of the evolving Putrajaya? He must be aware that the development of
Petaling Jaya took place in numerous phases, stretching from early 1950s right into the eighties and nineties, over a period of 30 to 40 years. All the stages of development had been mostly successful financially, because the pace of development had been in keeping with the needs of buyers. In other words, the development had not stepped out of tempo with the economy. If the original developers of Petaling Jaya had been unrealistically ambitious, and started development in grand style, like Putrajaya -
grand in design and size, the developers would not have survived the initial stages of development, simply because their products could not have been absorbed by the market.

Mahathir's theory of "big projects generate bigger profits" works in reverse in both these mega projects.

Building for the Future

Mahathir said he was building for the future generation. We agree that it is a good idea to plan for the future or to develop with an eye to the future. But that does not mean we must spend now to complete something that will only be needed and utilised sometime far into the future. To grossly overbuild now in the name of "building for the future generation" is plain stupid, from the economic point of view.

This kind of stupidity is best explained by giving the example of a middle income young couple building a house for themselves. The couple wants to build a big house with plenty of rooms, for the purpose of housing not only their children but also their future grandchildren. As a result, they will have to carry the heavy burden of an unnecessary big loan for something that will not be utilised for next say 25 years (say). Wouldn't it be wiser to build a smaller house now, and extend or build a bigger one at a much later date when the need arises? By then, they will be much richer and will also have lived a wealthier life. The lesson of this analogy applies very well to the case of KLIA, which is grossly overdesigned in size and luxury. And the timing of its construction is very much premature. The old Subang Airport could still serve the needs of the Country for years to come, with improved efficiency and timely upgrading and expansion. The premature construction of this overdesigned Airport has cost this Nation dearly indeed. Firstly, the vast investment sum could have been diverted to make immeasurable contribution to the
Nation's economy and welfare. Secondly, we could have been spared the burden of heavy operating losses of the Airport for many years.

As for Putrajaya, it is in the first place highly debatable whether we ever need a putrajaya (an administrative capital) at all. Mahathir gave 2 main reasons for building Putrajaya: one is the traffic congestion in Kuala Lumpur, and two is the big profits for the Government. The latter has been shown to be more an illusion than reality.

Talking about traffic congestion, we must first remember that Kuala Lumpur has a very small population compared to other capitals in this region or in the world. Its population is only a small fraction of that in, say, Jakarta, Bangkok, Manila, Peking, Seoul, Tokyo etc. Besides, Kuala Lumpur has the good fortune of abundant space for expansion, much to the envy of other capitals. Through strategic planning for future growth, increasing population and traffic can be dispersed to a comfortable level. And of course, existing traffic conditions can be improved by building additional facilities and tightening of regulations and control.

The idea of building a new capital from scratch and shifting the entire federal government to it is an unthinkable subject among democratic countries in the present day. Apart from the costs being prohibitive for such a venture, there are numerous objections such historical sentiments, logistic inconvenience, social and financial problems created for the affected population etc. In the case of Kuala Lumpur, we face the added problem of a property glut. The existing over-supply of office space,
which is already expected to last for a few more years, will certainly be compounded by the creation of Putrajaya.

Ill-conceived Mega Projects - Why?

Many foreigners are puzzled as to why a supposedly model developing country like Malaysia should embark on such glamorous but uneconomical mega projects. Economic analysts and observers have expressed skepticism over the economic justification for projects such as Petronas Twin Towers, Bakun Dam (now halted), KLIA and Putrajaya. If these mega projects are not built for economic reasons, then for what reasons? The answer may lie in a combination of factors: the vanity of one person and the greed of cronies.

In recent years, Mahathir's appetite for mega projects has become insatiable. In fact the tempo with which new mega projects were popping up had stepped up to a frenzy, up to the onslaught of the Asian Economic Crisis. Witness the string of mega projects started or just planned then: Petronas Twin Towers, Bakun Dam, KLIA, Putrajaya, Kedah Reclamation, Northern International Airport, Bridge to Sumatra, Kuala Lumpur Linear City, New Transcontinental Railing from Singapore, New Johor Bahru - Singapore Bridge etc. Though some of these were at their initial stages, they were nevertheless discussed and pursued with seriousness.

Mahathir's obsession with grandeur is reflected in the grand but uneconomical design of Petronas Twin Towers, KLIA and Putrajaya. His majestic Office Buildings and his palatial Residence are stumping evidence of such pursuit.

This mis-placed ego of his play very well with the ambition of his ever greedy crony capitalists, whose business empires have expanded rapidly in recent years through political connected contracts, loans and so-called privatisation. The interplay of ego and greed produced the mega project phenomena we witness today.

Concluding Remarks

Perhaps the saddest part of this phenomena is that all these things should take place  without so much as a critical murmur from the populace. This is a prominent example of a democracy gone aground - the mechanisms of democracy simply fail to function. The root causes are traced to a series of dictatorial legislation engineered by Mahathir in the past years to stifle civil liberties and to control and orchestrate public opinion. The vast majority of the masses have become brain-dead politically speaking.

In fairness to the opposition parties and NGOs, there have been critical comments from them. But these voices are not given space in the mass media, and the little we hear from them are easily drowned out by the loud propaganda incessantly trumpeted by the mass media which are completely under the thumbs of the ruling party.

In any democracy, ultimate political power is in the hands of the people. But not so in this Country. This is because National Election has become more of a farce than a sacred process through which the people make their final decision as to who they want to rule the country. Through heavy manipulation of all democratic Institutions, particularly the Election Commission, Police, Attorney General and Judiciary; and through arbitrary exercise of dictatorial powers by the Government, there is no way any Election can be free or fair.

So where do we go from here? How can we change the Government?

Fortunately, it is not all gloom and doom for us. There is a silver lining in every cloud. The political wind of change originating from the Asian Crisis has been blowing through this part of the world, sweeping away the unwanted and corrupt leaders. People of Malaysia must have seen the beneficial effects of democracy triumphing over corruption in Indonesia, Thailand and South Korea. With these changes, Malaysia has belcome isolated, standing out as one of the last bastions of corrupt and autocratic rule.

Basking in the stream of this favourable wind, our quest for change is immensely aided by the Anwar Factor. The unjust persecution of Anwar Ibrahim has violated the conscience of every right-minded Malaysian. The anger and indignation against this injustice has now been transformed into a ground swell of discontent against the repressive Regime. In this Election Eve, the political atmosphere is pregnant with excitement - will the mass-based discontent be eventually translated into votes for the Opposition? Much depends on what the Opposition Parties do now. Can they transcend their sectarian objectives to forge a cohesive and effective election machinery to challenge the entrenched and well- equipped incumbent?

Do their leaders have the vision and the magnanimity to gaze beyond the narrow interests of the moment?

This is a unique moment in our history. Never before had we been given such combination of favourable factors to achieve fundamental changes to our political system. However, these favourable circumstances are transient. Either we make it now or we may not have another such opportunity for a long time to come.

If we want to be the masters of our own fate, we must be prepared to sacrifice. And the time to do so is NOW!

Kim Quek