An alternative solution to Malaysia’s education woes

The poor quality of Malaysian public schools and universities is a hot topic, and has had a significant impact on ordinary Malaysians and the government. We are not just talking about its impact on knowledge and innovation, but also on household incomes and social structure.

The poor quality of our public education system is not just a perception issue. Just ask any employer, or look at the global rankings of our public universities. International, private and home schools have mushroomed throughout the suburbs, catering now for locals rather than expatriates. 

I wonder if there are any children or grandchildren of cabinet ministers currently studying in local public schools or “sekolah kebangsaan”. 

Middle-class Malaysians are increasingly turning to private schools, not just for tertiary but also primary and secondary schooling. This is squeezing a middle class that is already highly stretched. For many middle-class Malaysians, switching to private schools is not an elitist decision; some have even mortgaged their homes for it. 

And as they pay for private schooling in addition to private healthcare and highway tolls, they feel somewhat disillusioned that they are not getting much back from the taxes they pay. 

There are also social and national implications. A widening social class and ethnic divide starting at a young age threatens national integration in the future. Schools – both public and private – are increasingly turning into exclusive enclaves, drawn along the lines of social class or ethnicity.   

How much do we spend on education? 

 

Could the poor quality of public education be due to under-investment?

According to World Bank statistics, public spending on education amounted to RM39.3 billion in 2010. Of this, RM3,831 was for each primary student per year and RM5,093 for each secondary student.

Statistics from the government show that total spending on education, comprising operating and development expenditure, increased to RM54.59 billion in 2012.  

According to a 2011 World Bank report, Malaysia’s public expenditure on basic education –defined as preschool to secondary, amounted to 3.8% of GDP. 

Put into perspective, this ratio was more than double the other ASEAN members’ average of 1.8%. It was also higher than the 2.2% average for the Asian tiger economies of South Korea, Hong Kong, Japan and Singapore. 

Even the developed OECD countries had a lower average ratio of 3.4%.

Malaysia’s expenditure on education as a percentage of total government spending at 16% was also almost double that of the OECD average of 8.7%. 

Our ratio is the second highest in Asia, behind Thailand’s 18%, but ahead of Hong Kong’s 12%, Korea and Singapore’s 11% and Indonesia’s 9%.  

What is our student quality?

Malaysia spends a lot on education. This is good if we get the desired results. But what have we achieved after spending so much money? 

There are two main internationally recognised assessments for quality among primary and secondary students: Trends in International Mathematics and Science Study (TIMSS) and Programme for International Student Assessment (PISA). 

When Malaysia first participated in TIMSS in 1999, its average student score was higher than the international average in Mathematics and Science. By 2007, it had slipped to below the average. Some 18% and 20% of students failed to meet minimum proficiency levels in Mathematics and Science, respectively, a two to fourfold increase from 7% and 5% in 2003. 

The results from PISA in 2009 showed Malaysia in the bottom third of 74 participating countries, below both the international and OECD average. Almost 60% of the 15-year-old Malaysian students failed to meet the minimum proficiency level in Mathematics, while 44% and 43% did not meet minimum proficiency levels in reading and science respectively.

In terms of tertiary education, for the third consecutive year, no Malaysian universities have made it to the top 400 list in The Times Higher Education World University Rankings. There are over 60 Asian universities in the top 400 list, including universities from Thailand, Korea, China, Taiwan, Hong Kong, Turkey, India and Iran. 

So we spend more on education than other countries, but our students perform much worse. Is this contradiction due to wastages, inefficiencies, genetics, politics or other factors? Is our education aimed at quality or has it been hijacked for political ends? 

  

What can be done? 

Putting blame is not constructive. Instead, we need to ask what can be done.  

A meaningful discussion of how to revamp the education system would involve a plethora of sensitive issues, ranging from ethnicity, language, politics and religion. It will involve so many issues, many of them taboo that a one-size-please-all solution can never be found. 

Instead of discussing these issues, allow me to propose a solution – a system that cuts across all these issues and allows market forces to make the education system better. 

Every Malaysian will have the basic fundamental right to affordable education. The government will fund ALL Malaysians for education, but where parents will get to CHOOSE which schools they want. The schools are allowed to operate in an independent and entrepreneurial way to improve and to attract students. 

This proposed system is based on the “School Choice” concept first espoused by economist Milton Friedman. Some variations of the “School Choice” concept have been successfully implemented in Sweden, France, Chile and several states in the US.  

How does it work?

We know the government spends RM3,831 per year per primary student and RM5,093 per year per secondary student, based on 2010 World Bank statistics.  

The government can issue RM4,000 vouchers for each primary student and RM5,000 vouchers per secondary student. They would be valid only for education in public schools. The parents can then choose which public schools to enrol their children in, and redeem these vouchers. If the cost is higher, say in certain urban schools, they only need to pay the difference. 

They can choose based on quality or location, or any other attribute. The choice of public schools will no longer be forced down on them, such that the only alternative is a private school.  

This will create a market-driven approach to public sector education. Consumers can choose, and the schools will compete among themselves to attract students. Students will be attracted to a school in terms of quality or location, rather than ethnicity or social class factors. This promotes integration and creates a positive virtuous cycle. 

Am I advocating the privatisation of schools? NO. 

All the schools will still belong to the government. But a board made up of the Parent-Teacher Association, past teachers and present students will independently administer each school. Each school will need to look after its own quality and costs. Essentially it injects private sector entrepreneurship to public sector administration. 

While they would be non-profit oriented, there will be a financial incentive to improve efficiency. Excess profits would be reinvested in the school. 

The elites and upper class have a choice when it comes to education for the children. A large majority of the middle- and lower-income parents do not. They are stuck with poor quality public schools (often not of their choice), or an alternative where private schools cost the equivalent of a year’s GDP per capita. 

Such a scheme will give parents access to choices they can't afford in the free market. Besides levelling the educational playing field, it will also rebuild quality, confidence and trust in public sector education. Equally important, it will help reduce racial polarisation amongst the young. 

I will be the first to acknowledge potential pitfalls of this scheme. For example, in rural areas, the small population means these schools will have less financial resources and, therefore, less facilities or quality teachers. 

But each of these challenges can be practically addressed. For example, we can have different voucher values per student, based on underlying economics of the geography.

The point is that the current education system is not in good shape and continuing on the same path is not rational.  Let's try something out of the box.

 

Post Budget Impact and Opportunities for the Property Sector

There is a window of opportunity from now until the end of the year in the secondary property market as higher Real Property Gains Tax (RPGT) rates will only take effect on 1 January 2014. The likelihood is that we are going to see an increase in sales volume in the secondary market but at lower prices, especially for those projects with Developer Interest Bearing Scheme (DIBS). 

Higher RPGT will have a negative impact but since the computation of the tax is based on the date the sale and purchase agreement (SPA) is signed, the impact might not be as severe if one is willing to wait slightly longer to dispose of a property. Typically, high rise residential projects take 36-42 months to complete. The impact will be greater on the landed residential segment as it takes about 2 years to complete but this segment is also a less speculative market.  

With the removal of DIBS, we are going to see fewer property transactions over the short term but we understand that banks have also been more cautious and gradually reduced their DIBS loan exposure over time. Hence, the impact would be less severe than initially thought. 

We think the increase in the minimum price of property that can be purchased by foreigners from RM500,000 to RM1 million could have a more significant effect as many developers have a large planned supply or units under construction to cater for both foreign and local buyers in the RM500,000 to RM1 million price range. Also, there is a higher proportion of speculative buyers in this price segment.   

The 6% Goods and Services Tax (GST) that takes effect from 1 April 2015 does not apply to residential properties but it does to commercial and industrial properties. In recent years, we have seen quite a number of mixed development projects under commercial land titles because they are more profitable. Most developers were building a large number of small units due to affordability. Residential land titles are regulated by density but commercial land titles are guided by gross floor area (GFA). Hence, there is generally no cap on the number of residential units. So residential developments under commercial land titles may not be able to claim GST paid for construction. This means that developers will face margin compression if they do not pass on the higher cost to buyers. However, the ability to pass on the higher cost will depend on demand conditions.

Next year, we can expect lower transaction volumes, lower prices due to lower demand, margin compression and lower profits for developers in a 2-3 year horizon. We think the market has priced in some of the negative news but clearly not all as few expected the severity of the measures announced. While stock prices are still resilient, we think it’s the calm before the storm. Most are still in a state of denial.   

More details on this article are published in The Edge this weekend.

Making US$1billion, the quick and easy way

The Edge team this week put together the most comprehensive story to-date of Asiasons, Blumont and Lion Gold.  What happened, why and some probable rationale for the spectacular rise and collapse of the stock prices of these three Singapore-listed companies with major Malaysian personalities as directors and shareholders.

The stock prices rose even as the values of their investments were falling.  Further intrigued by a series of stock placements and short-selling of shares.

Then there is Black Elk, a highly problematic oil and gas company operating in the Gulf of Mexico and its owner, Platinum, a US hedge fund.  What have they got to do with the three companies above?