Monday 2 December 2013

Can politicians honestly live on low salaries?

Recently, there has been much debate about the salary increments for the Selangor Mentri Besar, speaker, state executive councillors and assemblymen.

Most agree that some salary increment is necessary. After all, the current salaries are incredibly low. You cannot expect your elected representatives to be honest and dedicated if they are not even earning enough to survive and provide for their families with a decent livelihood.

But there are many who argue over the large quantum of the salary increase. Worse, some even suggest elected representatives should do “national duty” and be paid pittance to serve the people.  

Thus, the question really boils down to what is the “right” salary. We have already noted that despite a doubling of the Selangor Mentri Besar’s salary to RM30,000 a month, or RM360,000 per year, he would still earn far less than a CEO of a listed company, who typically earns RM1 million to RM5 million annually, many even over RM10 million. 

Let us take the example of a federal cabinet minister, who officially earns about RM15,000 a month – or RM14,907 to be exact. The cost of living for members of parliament and state assemblymen are harder to simplify due to the varying size of constituencies and where they live. 

The attached table shows that despite living a frugal and simple life – like many squeezed middle income urbanites today -- they will still be grossly out of pocket. 

A cabinet minister earning RM15,000 per month will receive about RM12,311 net of taxes.

On the expenses side, we have included a simple frugal lifestyle centred around a family with a house wife and two school going children, a Toyota Camry family car costing RM150,000 (for the wife and family to use, apart from the official car for the minister) and a suburban home costing RM900,000. 

Much of the monthly expenses will go towards servicing loans for the home and car, both assumed to be taken with about 85% margin of financing. Monthly instalments for the two will cost RM7,425. Other major monthly expenses include food (RM4,500), education (RM4,000) and maid (RM1,200). 

Using these assumptions, there is a monthly deficit of RM10,067, or RM120,806 per year. 

Obviously, the table is neither comprehensive nor completely accurate for a minister. But I believe it represents a conservative picture of a typical urban middle class family faced with the rising cost of living and asset prices. 

As senior politicians with responsibilities for running the country, surely the ministers – by extension all elected representatives -- deserve to be presentable. They must have a clear mind to do what they are entrusted to do. They must be financially comfortable, such that they can enjoy a comfortable, albeit frugal lifestyle totally funded from their salaries, and not from other sources. 

Some argue that we could opt for rich politicians who do not need to be paid. One example cited by a local newspaper was Michael Bloomberg, the mayor of New York, who is reportedly entitled to a US$225,000 annual salary but waives it for a token US$1.

There are a few major holes in this argument. 

Firstly, don't we want the best person to serve the country, including those who are not wealthy? To attract those who are not already wealthy, we must pay a salary sufficient for their livelihood, even if they want to sacrifice for the good of society. 

Secondly, in certain countries where the rich are elected to positions, like Bloomberg in New York, he will never be able to benefit personally from the position. 

Are we ready for the same? Will we have a way to make sure that tycoons who become ministers and PM's do not abuse their positions to promote their own business interests?
Are not the business elites already too powerful, making decisions as king makers, often at the expense of the public?

If so, then what we need are honest, dedicated and capable people to become our elected representatives, to serve the people and the country. And in order to do so, surely, we must provide them a decent livelihood for their families. 

So, let us be realistic and bipartisan, and not be hypocritical or delusionary. 

We should not set government salaries so unrealistically low that the honest cannot even survive and therefore do not see a future in serving the people. 

Sunday 1 December 2013

Yield and Currency Diversification into Singtel

In recent weeks, we highlighted a number of equity investment opportunities. These included Daiman Development, Matrix Concepts and the Selangor water concessionaires of Gamuda, Puncak Niaga and Kumpulan Perangsang Selangor. We were also negative on China Stationery, HB Global, Asiasons, Blumont and LionGold. The stock performances of these companies are listed in the table below. Obviously we are not always right, at least in some cases, not yet.

Making money is great. But keeping the money you made is critical.

In capital markets where non-equity investments are less sophisticated, many of us would look at some risk diversification within our equity portfolio.

This is what we have decided to share this week.

Singapore Telekom (SingTel) is the largest listed company on the Singapore Exchange by market capitalization and 51.88% owned by Temasek Holdings, the investment arm of the Singapore Government.

It controls 47% market share of the island’s telco business.  It has diversified regionally into Indonesia, Philippines, Thailand, Bangladesh, India, Malaysia, Sri Lanka and Africa and now serves a total of 468 million mobile customers.

It is trading at a low valuation of less than 17 times price to earnings, much lower than all its smaller competitors in Singapore and Malaysia. We believe this reflects the weaker earnings for this financial year due to forex losses from the weaker currencies of Australia, India, Thailand and others relative to the Singapore dollar as well as operational challenges at Optus, its Australian operations.

Despite paying a competitive dividend yield, its dividend payout ratio is only 75% of the profit it makes. As a result, the Company is able to invest strongly in capital expenditure, amounting to 12.5% of its revenue each year.  This is an industry of rapid technological changes and to stay ahead, companies must be able to make huge investments.

For those who are more interested in a pure Singapore play, then the alternative is M1. Its earnings will grow as it is the first operator to offer nationwide 4G services and it is focused on the mobile business. At current prices, it offers a yield of 4.9%.

As a comparison, the yields for the very safe and large consumer companies listed on Bursa are in the range of 3.6% to 4.7%. These are companies like Nestle and British American Tobacco. These companies are extremely well managed with excellent track record on governance and transparency. Their earnings are very stable and are market leaders for their products.

SingTel is both a growth and defensive stock, pays a Sing dollar dividend yield of 4.5% and is trading at a reasonable valuation. SingTel is definitely worth a closer look for anyone looking to mitigate risks in their existing stock portfolio.

There is, however, no need to rush as it is a huge company and the stock is unlikely to go up by 10% like what happened to Daiman last week.

This article is published in the upcoming Edge.

Saturday 30 November 2013

Selangor salary hikes a right move

By Ho Kay Tat

The large salary increases proposed for Selangor state representatives have been opposed not only by Barisan Nasional (BN) leaders but also by certain members of  Pakatan Rakyat (PR)  which administers the country’s richest state.

Effective from Jan 1, 2014, the hikes will see monthly salaries for assemblymen nearly double from RM6,000 to RM11,250, and State Exco members triple from RM6,109 to RM20,250. The State Assembly Speaker’s salary will rise from RM6,109 to RM22,500 and deputy Speaker from RM3,327 to RM15,750. The Mentri Besar's salary will double from RM14,175 to RM29,250.

Coming soon on the heels of DBKL’s rate assessment debacle, naturally some would draw parallels. While we were against the DBKL rate assessment hike, we actually think the Selangor state salary increases are justified. One should note that on its own, an increase in salary or assessment rates for that matter, isn’t bad, but it must be justified.

We were against DBKL’s proposed 100-250% rate assessment hike as it has no merit. The authorities had justified it on an increase in property values, but any increase in rates should be based on operating costs and services provided to ratepayers. And in any case, we have shown that DBKL has been operating inefficiently, and it still has an operating surplus to cover costs.

In Selangor’s case, the question is whether the salary increases are justified.

There is little doubt the state has been run far more efficiently since 2008, when the present administration under Mentri Besar Tan Sri Khalid Ibrahim and his team took over. Since then, the state’s reserves have increased from RM400 million to RM2.7 billion.

For 2014, Selangor tabled a balanced budget of RM1.85 billion. It has a similar budget as DBKL, but serves a population 3.3 times and an area 33 times larger. On a per capita basis, it spends almost a quarter of what DBKL spends. Yet, it keeps its budget balanced, does not depend on federal government grants and does not regularly ask residents for more money.

If salary increases are justifiable, then the next question is the quantum.
Is a MB worth RM30,000 a month?

Yes, at least that. The MB is like a CEO of a large corporation, but in this case, an entire state with even larger financial and social responsibilities.

Even after having tripled, the proposed new monthly salaries of RM20,000 for Selangor  exco members are still less than that of top management in the corporate sector.

If CEOs and top management of  reasonably large corporations can make anywhere between RM1.0 million to RM3.0 million a year why shouldn’t the Prime Minister and his deputy, Federal Ministers and the MBs and State Excos of some of our larger states be similarly remunerated?

But beyond numbers, there is a strong argument for higher salaries for politicians. In any organisation, we must pay to attract talent. In governments and organisations of power, this becomes even more critical as we need politicians of all divides (both ruling and opposition) to be bright, noble and honest.

Politicians must be paid a decent salary to support their family, and so that they need not depend on “side incomes” for support. This is an essential first step in any developing country moving up the ranks and trying to weed out corruption. Pay the politicians well to attract talent, and reduce the temptation for corruption. It is also something which Singapore has adopted much earlier and has worked out well.

In Malaysia, we have for populist reasons not adopted that model of remuneration to show that our politicians and top civil servants do not serve for monetary returns but as a national service.

Yet we know many of them live lifestyles beyond what their salaries can buy.  

Why have that charade and hypocrisy? No one believes it anyway.

Pay our elected representatives, State Excos, MBs, Ministers well. Benchmark their remuneration to, say, 20% below what positions of similar responsibilities fetch in the private sector. The 20% is the national service discount .

On top of that, put them on KPIs like GDP growth and budgetary discipline targets.  Reward them with a bonus when they achieve their targets.  Dock their pay when they fail.

To assuage the critics, Khalid should set such KPIs for himself and his State Exco for 2014.  And hopefully, other states and even the Federal Government will follow suit.

This article is published in the upcoming Edge.