Friday 29 November 2013

DBKL – It’s about responsible spending

Last week, we contrasted the budgets of Dewan Bandaraya Kuala Lumpur (DBKL) and the State of Selangor. The general conclusion was that given the two have relatively same revenue base, Selangor was spending its income much more efficiently than DBKL. This is because despite the fact that Selangor is far larger (in terms of number of residents or land area), it has a smaller operating budget.

Some people were unhappy and challenged my analysis on the basis that running a State is different from running a municipality. I acknowledge this fact. Indeed, comparative analysis is never absolute. No two municipalities have exactly the same mandate, requirements and expectations.

This week, I compare the budgets of DBKL with the municipality of Penang Island and Ipoh, as shown below.

The conclusions are the same. DBKL spends 3 times more than Penang Island and 5 times more than Ipoh in terms of operating expenditure per person.

In terms of land area, DBKL spends 9 times more than Penang Island and 34 times more than Ipoh per square km. Note that the budgets for Penang Island and Ipoh are not the latest, but it will not change the conclusion.

Are these cities totally comparable? No.

Kuala Lumpur is the capital city of the country and it deserves more attention and care. But we have also not taken into consideration that KL has a development budget of almost RM800 million while the other cities are operating on RM16million. So, perhaps this is more than sufficient to offset the difference in status of the cities.
Let me now move to the second area of misunderstanding, that assessments should be based on property valuations.

DBKL as a municipality operates on a budget, based on what it needs to meet the demands and expectations of its residents. The people have the right to expect that DBKL will be responsible, accountable and prudent in spending their money.

So, the first requirement is to question the budget. Is the budgeted amount fair and reasonable? This is why we have written extensively on this topic.

Once the total expenditure amount is agreed or acceptable to the people, then the next question is how to share the costs of running DBKL. A fair methodology used in most cities is to correlate the budgeted expenditure with the amount of assessment to be collected from each residence based on a percentage of the value of their property.

How does this work in practice? Say the total property value in City X is $10,000 million. The City’s budgeted expenditure is $80 million. Then, each resident will pay the equivalent of 0.8% of the property value.

Now, assuming the total property values in City X doubled to $20,000 million. If we allow the rate of 0.8% to remain constant, then the City will have a $160 million budget to spend. But this should not be allowed. It will only encourage wastages and inefficiencies. In any case, the gains in property values are taxed indirectly through RPGT and income taxes on rentals.

Instead, the right approach is to first decide what is a reasonable budget for City X. Say it is raised from $80 million to $100 million.  Then, the assessment rate will be reduced to 0.5% of the property value of $20,000 million.

I like to add that the above methodology on property assessments is the most common form applied, as far as I am aware.

I hope I have sufficiently clarified and put to bed the main assertions I have made, namely, DBKL needs to be more efficient and transparent in the way it spends and revenue collection should not be tied to property values.

Friday 22 November 2013

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.

Wednesday 20 November 2013

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 

Tuesday 19 November 2013

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.