I read the disturbing news reported by the Wall Street Journal on Saturday that Tan Sri Dr. Irwan Serigar bin Abdullah, decease the current Chief Secretary of Ministry of Finance, find will be named as the new Central Bank Governor of Malaysia as Tan Sri Zeti Akhtar Aziz.
I want to raise some concerns regarding Dr Irwan’s role in multi-billion ringgit debts of Pembinaan PFI Sdn Bhd, a 99% Ministry of Finance owned company. Pembinaan PFI first rose to prominence when the 2013 Auditor General’s report showed that it had accumulated liabilities of close to RM28 billion at financial year end 2012, putting it only behind Petronas and Khazanah among government owned entities (See Figure 1 below).
Figure 1: Three government owned companies with the highest amount of liabilities in financial year 2012
Source: Auditor General’s Report 2013
Dr. Irwan was appointed to the board of Pembinaan PFI in 2012 when he was the Deputy Secretary in charge of policy in the Ministry of Finance (MoF). After he was promoted to Chief Secretary of the MoF, Dr. Irwan remained as a director of Pembinaan PFI.
The Auditor General’s report prompted a Parliamentary Accounts Committee (PAC) investigation into Pembinaan PFI. The PAC report was released in March 2015, a copy of which can be downloaded from the parliament’s website. The testimony of the witnesses, including Dr. Irwan, clearly showed the spending incurred by Pembinaan PFI is nothing more than a creative way to hide development expenditure from the official budget and in doing so, artificially keep Malaysia’s debt to GDP ratio at below the 55% mark. Pembinaan PFI is not funding expenditure through private finance initiatives (which its name implies) since there is no private money involved in these projects.
Indeed, during the PAC meeting, Dr. Irwan admitted as much when he said the following to the Chairman of the PAC:
“Ini Tuan Pengerusi, your understanding it very clear. That you know this is off-budget. It doesn’t come in to the government so that why you know our debt level and rating and everything we can maintain”
Dr. Irwan’s role in relying on off-budget expenditure items in order to maintain our official debt levels and ratings raises concerns about his responsibilities as the next Bank Negara Governor. Will he also rely on creative accounting for other sensitive economic data such as BNM’s official reserves? Will he paint an unrealistically positive account of the Malaysian economy via BNM’s economic reports and fail to flag areas of concern such as the possibility of a growing fiscal deficit?
When asked by The Edge TV on the specific issue of Pembinaan PFI, Dr Irwan gave a misleading answer. He likened the projects under Pembinaan PFI with the MRT project, stating that the payback period is over a very long horizon while in actual fact, most of the projects under Pembinaan PFI are not capable of revenue generation. This kind of obfuscation is also worrying especially during these economically challenging times when clarify of thought and explanation are needed in order to assure the jittery markets.
The markets are looking for a steady pair of hands to replace Dr. Zeti as the next BNM governor. Any of the three current Deputy Governors would have sent a strong signal to the markets that the independence of BNM will be maintained. The appointment of Dr. Irwan, if true, does not give any reason for the markets to be assured and in fact raises more questions about the independence of our central bank moving forwards.
 The building of schools, for example, is usually financed through the development expenditure of the government budget. The projects, including the building of schools, financed through Pembinaan PFI, are all off-budget expenditure items which means that the government doesn’t have to officially borrow money to finance these projects. Pembinaan PFI, as a 99% MoF owned company, borrowed the money from EPF and KWAP. The Malaysian government has to help Pembinaan PFI service these loans to EPF and KWAP through its operating expenditure or OPEX.