DBKL and Selangor: A tale of two contrasting budgets

Last week, I wrote on Dewan Bandaraya Kuala Lumpur’s (DBKL) proposed 100% to 250% hike in property assessment tax and reasoned why it was neither right nor justified. 

My argument was that a rise in property prices should not be the justification for an increase in assessment, a reason that the politicians and authorities seem eager to harp on. 

Rather, any increase in assessment rates should be tied to an increase in DBKL’s operating costs. As a municipality, DBKL’s aim is to cover operating expenses for the provision of services to the residents, and NOT to profit from an appreciation in property prices. DBKL is already budgeting an operating surplus of more than RM200 million for 2013. 

The debate and anger continue to roil on this issue. Indeed, another piece of news this week further strengthens the reason why the rate hike is unjustified. I am referring to the tabling of Selangor’s budget on Tuesday by its Menteri Besar Tan Sri Abdul Khalid Ibrahim.

The Selangor government tabled a balanced RM1.85 billion budget for 2014, an increase of 13% in expenditure, compared with RM1.63 billion for 2013. 

In light of the DBKL assessment rate saga, the contrast between the two budgets is shocking. Before we go into the financial details, let us first look at some macro statistics. 

Kuala Lumpur covers an area of 243 sq km and has 1.6 million residents. Selangor covers 8,104 sq km and has five million residents. There are 424,324 households in Kuala Lumpur compared with 1.35 million in Selangor. 

In other words, the Selangor budget has to serve a population 3.2 times that of Kuala Lumpur, and its services spread over an area that is 33 times the size of the capital city. 

With such a vast disparity in size and population, one would logically expect the budget of Selangor to be bigger than that of Kuala Lumpur. Look again and you’ll be surprised — Selangor actually spends less in total than Kuala Lumpur and keeps a balanced budget! 

Let us take a look at the 2013 budget figures for both Selangor and DBKL. 

DBKL expects to receive revenue of RM1.69 billion, roughly similar to Selangor’s RM1.63 billion. But DBKL wants to spend RM2.19 billion in total expenditure, 34% more than Selangor’s RM1.63 billion. It spends RM1.406 billion in operational expenditure, 41% more than Selangor’s RM996.68 billion. Emoluments and overtime expenses come up to RM442.1 million for DBKL, 19% more than Selangor’s RM370.5 million. 

Analysing these figures further, it is clear that DBKL is comparatively inefficient. 

On a per capita basis, DBKL spends RM907 in operational expenditure per resident, over four times more than Selangor’s RM201. In terms of operational expenditure per household, the figure is RM3,348 for Kuala Lumpur, nearly five times the RM738 spent by Selangor. 

Looking at operational spending over gross area coverage, Selangor spends RM122,986 per sq km compared with DBKL’s RM5.79 million.   

In terms of development expenditure, Selangor spends RM633 million, less than DBKL’s RM782.6 million. Selangor has a balanced budget and in fact, its coffers have increased from RM400 million in 2008 to RM2.7 billion.  

In contrast, DBKL has an operating surplus of more than RM200 million but requires federal funding for its overall budget deficit of some RM560 million. On the argument that DBKL needs to raise this amount to balance its overall budget, I beg to differ. 

The development expenditure of DBKL should be funded by the federal development budget of the country, as residents of Kuala Lumpur also pay high corporate and personal income taxes. DBKL expects to receive RM414.7 million in federal government funding in 2013. Put into perspective, the country’s capital city receives less than 1% of the federal government’s total development expenditure budget.
  
It is clear from the above statistics that DBKL is substantially less efficient than Selangor. Instead of asking for more money, it should be looking at ways to improve efficiency and reduce costs and wastage. And it should be transparent and responsible in showing how our money is spent. 

DBKL also needs to be transparent on the higher assessment tax imposed on the residents. Are the rates the same across the board? How was the valuation done? Imposing any form of tax on the residents must not only be fair but must also be seen to be fair. 

Lastly, with the increase in assessment tax, DBKL will have a RM600 million surplus over operating expenditure. It needs to explain to the residents how this will be spent, given that in comparison with Selangor, its spending has been less than prudent in the past.

Update: Matrix Concepts

Since our highlight on Matrix Concepts (Matrix) on 10 Oct 2013 in “The Good, The Bad, The Ugly”, share price has risen by 13% to hit a high (since listing) of RM3.24 on 19 Nov 2013. 

The company declared a third interim single tier dividend of 5 sen per share and special single tier dividend of 5 sen per share on 19 Nov 2013. The ex-dividend date for Matrix is 27 Dec 2013. DPS declared post listing amounts to 17 sen per share and based on our estimate the company should deliver DPS of 23 sen for the full year (40% dividend payout ratio) giving a yield of close to 7%. 

To read more about the company and its latest 9M results, go to http://mchb.investor.net.my/ 

A good and safe bet

In the upcoming issue of The Edge is an article on a Bursa Malaysia listed company that I would invest for my children.

The underlying assets are excellent and will gain values over time, much faster than inflation or bond yield. The Management is conservative and has a good track record. The Company is cash-rich and can easily withstand any economic slowdown. Operating costs are prudently managed.

Yet, it is trading at a very cheap valuation. There is no imminent competitive risk to the Company.

It is one of the few cases where you can invest and sleep soundly.

DBKL’s 200% assessment hike is not right

The latest angst among property-owners in Kuala Lumpur is Dewan Bandaraya (DBKL)’s proposed sharp increase in property assessment taxes.

The proposed assessment tax increases – by between 100% and 250% according to various reports – is the latest measure to hit the property sector and comes on the heels of higher real property gains tax and other measures announced in the recent Budget.

With the rising cost of living in Kuala Lumpur and an increasingly squeezed middle-class, this adds further to the burden of the public. For those renting properties, be prepared to pay higher rents as landlords pass these additional costs down.

The authorities have justified the hike in assessment rates on the rise in property prices. But that should not be the reason for such a hefty rise.

Property prices in Kuala Lumpur are already high and out of reach for many today. That is why the government is trying to create more affordable housing under PR1MA and various schemes, and had imposed the property cooling measures to reduce speculation and prices.

Raising the assessment tax will have the opposite effect.

Let me argue why the reasons for raising assessment rates are flawed.

While the amount of assessment taxes is tied to the value of real estate, I believe the rate it increases should not be tied to an appreciation of property values. It should, instead, be linked to the costs DBKL incurs in providing its services.

As a municipality, DBKL should aim to balance its own budget and manage its costs. It must generate enough revenue to cover the costs of providing services to Kuala Lumpur residents.

And in doing so, it must be able to provide essential services efficiently and at the lowest costs possible. There must be little or no room for corruption, inefficiency and wastages. This must be the overriding priority.

In other words, the impetus for any rate hike should be the costs to cover DBKL’s spending, rather than just because property prices have increased.  

With this in mind, let us look at DBKL’s finances.

DBKL’s annual reports are not posted on its website. What we do have are the annual budget speeches by the mayor, from which we can glean some financial information.

For 2013, DBKL has budgeted total expenditure of RM2.19 billion, up 15.3% from RM1.9 billion in 2012. Of this amount, RM1.406 billion is for management or operating expenses while the remaining RM782.6 million is for development expenditure.  

For management expenses, the three biggest cost items are emoluments (RM386.7 million), overtime payments (RM55.4 million) and supplies and services (RM908.7 million).

On the revenue side, DBKL expects total revenue of RM1.62 billion in 2013, up 11.1% from RM1.46 billion in 2012. It should be noted that DBKL’s spending growth is outpacing revenue.

Of this amount, RM880.8 million or 54% will come from assessment taxes, an 8.6% increase over the RM810.5 million achieved in 2012. Other major revenue sources include payments of building control (RM270 million), housing rental and service charges (RM71.3 million) and licencing (RM53.9 million).

With revenues at RM1.62 billion and expenditure at RM2.18 billion, does this then imply a deficit of some RM560 million that DBKL needs to address?

This is not the case, as revenue already covers management or operating costs. In fact there is an operating surplus of over RM200 million, which is used to partly fund development expenditure.

Development expenditure, on the other hand, is largely funded by the federal government and leftover operating surpluses, as it has been for a very long time.

For 2013, DBKL expects to receive RM414.7 million in federal government funding. This will be in the form of RM300.5 million under the federal government’s allocation for the 10^thMalaysia Plan and RM114.2 million from various government grants.

   

Of course, one could argue that since DBKL operates with a deficit, it should raise assessment taxes and other forms of revenue to balance the overall budget.

This should not be the case.

This is because apart from assessment and other municipal taxes, residents of Kuala Lumpur also pay hefty corporate and personal income taxes to the federal coffers. These taxes are used by the federal government for development and operating expenditure for the whole country. The federal development expenditure is apportioned to the various states, municipalities and ministries.

In other words, the development budget of DBKL is funded by the development budget of the country for which residents of Kuala Lumpur already pay corporate and personal income taxes.

In conclusion, higher property prices alone should not be the reason to raise assessment taxes. I believe as long as DBKL’s operating costs are adequately covered by revenue, there should be no reason to increase assessment taxes, certainly not in the quantum that has been proposed.

Just as the federal government is reigning in on spending, DBKL and other municipalities should also do the same, and ensure the taxes we pay are spent transparently and responsibly.   

It is not right to keep going back to the people for more money.