Expecto PETRONAS!

Expecto PETRONAS!

A few months ago, in one of our posts, we highlighted that Malaysia could be facing a credit downgrade due to poor fiscal discipline on the part of the government, which still does not have the political gumption to cut back on a raft of populist policies that helped it win the last general elections (held in May 2013) with an unconvincing margin.

Ratings agency Fitch did not mince its words when it stated flatly that 'Malaysia's public finances are its key rating weakness', while revising the outlook for Malaysia to Negative from Stable a few days ago.

Is this the beginning of the slippery slide down to a credit downgrade?

While we certainly do not have a crystal ball, we can try to make a few predictions and informed guesses based on current global trends and directions.

Malaysia's over-reliance on oil-and-gas (O&G) revenues to finance expansionary budgets will most certainly come under pressure from the new developments in shale extraction techniques, which will have a profound impact on global energy dynamics. It certainly will not be business as usual for the OPEC and other petroleum-producing countries - even Saudi Arabia is feeling the heat; what more for Malaysia?

From this perspective, it is worrying to note that Malaysia still sees conventional oil-and-gas and vast PETRONAS (Malaysia's state-owned O&G company; incidentally also its only Fortune 500 firm) capital expenditure as the key driver of the economy and supplier of government funds, under the ambitious Economic Transformation Programme which aims to break the country out of the middle-income trap. To this point, there is a joke that goes - Malaysia is like a Harry Potter tale - when the going gets tough, there is always the PETRONAS (Patronus for Harry) spell. However, with the shale revolution, there may come a day when even the all powerful PETRONAS may not be able to save the day for Malaysia.

A lot, thus, will have to hinge on the government having the political will to cut subsidies and widen its tax base through implementing the long-delayed Goods and Services Tax, besides charting new growth trajectories for the economy beyond a reliance on natural resources, and spending prudently to build capacity and competitiveness for the future instead of on ever-ballooning operational expenditures. As it is, the Malaysian economy is facing significant headwinds from increased competition, falling exports, low crude palm oil prices, and a massive brain drain.

The PETRONAS spell won't be able to fix this mess in an instant - only a return to good and accountable governance, and a focus on building long-term competitiveness will. It is also not wise to rely on one spell alone, as any Harry Potter fan will tell you.

Economics again: The example of AirAsia

In our last instalment, we discussed the vast gulf in terms of bus ticket prices across a stretch of land. While bus tickets from Singapore to Kuala Lumpur cost $30, it may be surprising to know that for that same journey, one can an air ticket on Malaysia-based budget carrier AirAsia for the same price.

So how do the economics work out here then?

Initially, we have to understand that the airline industry is a cutthroat and extremely price-competitive business. Ultimately, this competition benefits the ordinary consumer by driving prices down and raising service standards. The presence of national airlines receiving government support and the fact that the aviation business is ultimately a regulated one also help to ensure that no one player is able to completely dominate the market by strategically undercutting its competitors.

The fact that AirAsia has expanded aggressively from its initial 2 planes and 6 domestic routes in 2002 to become a leading regional carrier, has led to massive consolidation and economies of scale for the airline. With overhead costs spread over a larger fleet and passenger haul, the airline is in a position to offer very compelling fares. Which sometimes, as raised earlier, can be even cheaper than the price of a bus journey.

Still, this is not yet a satisfactory answer. There are many large airlines in the world with deep reserves and an impressive fleet – what then, is the secret ingredient that places AirAsia firmly in the black, while its more illustrious peers such as Malaysian Airlines and even Singapore Airlines struggle to balance their budgets?

The magic element is: operational efficiencies. AirAsia has managed to streamline its costs to such an extent that you would hear of top management inspecting and complaining about adding extra padding to the seats, which they calculate would subsequently weigh down the plane and cut fuel efficiency. Building an airline around a single kind of aircraft (the Airbus A320), focusing on a quick plane turnaround and a no-wastage policy, make AirAsia's economic model a very lean and mean machine – one that is difficult to emulate by others, giving it a sustainable competitive advantage which it has capitalised on to expand aggressively.

The fact that AirAsia is gradually shifting its company base to Indonesia is also another shrewd move to keep operating costs down, while at the same time tapping into a booming consumer market.

With a combination of sound management and of being in the right place at the right time at the heart of ASEAN's economic boom, one expects AirAsia to not just give its fellow airlines a run for their money, but even the long-distance bus companies. And that is how surprising – and pleasant – economics can turn out to be for the ordinary man on the street, who, compared to 20 years ago, does not have to be a big businessman to be able to take a weekend off in Bali.

The economics of a Singapore-Kuala Lumpur journey

A bus ticket from Singapore to Kuala Lumpur costs S$30.

A bus ticket from Kuala Lumpur to Singapore, same company, same time and day, will cost you RM45, or S$18.

Why the price difference?

As an economist, I can think of various possible answers.

Purchasing power in Malaysia is lower than that in Singapore, so individuals living in Malaysia should be expected to pay less than those living in Singapore. According to Numbeo.com, consumer prices in Singapore are 94.22% higher than in Malaysia. So individuals making the return trip from Singapore to Kuala Lumpur (KL) could be expected to pay less, in absolute terms, than individuals living in KL and doing the inverse trip.

Singapore's regulation requiring cars and buses travelling out of Singapore to fill their tankers at the ¾ could mean that the trip out of Singapore is more expensive to the bus company than the trip out of KL, resulting in a higher cost of the Singapore-KL journey. Taxes and duties make up to 30% of pump prices in Singapore. Every year, Malaysia spends US$14bn subsidising gasoline. The result is cheaper gasoline in Malaysia compared to Singapore. To prevent arbitrage, the Singapore government requires all motorised vehicles leaving the city state to have tanks full at the ¾. This could mean the cost of a Singapore-KL trip is higher than that of the inverse journey, where buses will fill up tanks cheaply in KL and make their way to Singapore running on cheap petrol. In most business models, higher costs mean higher prices, so Singapore-KL should cost more than KL-Singapore.

More travellers make the Singapore-KL journey than the KL-Singapore one. This could be a possible answer due to Singapore's role and position as a global hub. However, it rests on the initial hypothesis that more travellers arrive in Southeast Asia through Singapore rather than leave from Singapore. The reasoning goes as follows. Singapore is regional transport hub: the world's largest harbour, the region's largest airport. Singapore is often the main point of entry of foreigners to the region. Foreigners could be more likely to make their way out of Singapore towards the peninsula via land rather than air, due to the ease of bus and car travelling. Consequently, one could hypothesise that buses towards KL are fuller than those towards Singapore. (Checking this hypothesis would be rather easy, just by asking a few bus operators)

Whatever the correct answer, the lesson to remember is to not buy a return trip when leaving Singapore – cheaper is to buy it in KL when you arrive!

Globalisation in action

Harbours are fascinating places to witness the increasing interconnections the world is experiencing. A casual walk along the southern coast of Singapore, overlooking the harbour, provides just the experience.

For miles, ships are parked in the sea of Singapore. At night, their lights shine lightly along the horizon, while during the day their long shapes paint the horizon with narrow rectangles of maroons and reds. Awaiting their turn to offload and onload at the harbour, the writing along their sides hints at their port of origin. Hamburg Süd, Odfjell, 中国远洋 – Germany, Norway and China all meet in Singapore harbour.

Singapore is the world's second busiest port in terms of total shipping tonnage after Shanghai. Every day, millions of tons of furniture, cars, clothes, food are offloaded and unloaded along the city state's decks, managed by over 150,000 people employed across 7,000 companies. Every year, 7% of Singapore's total GDP is created in the huge warehouses and decks at the south and east of the city.

Ships from Europe, the Americas and Oceania gather here. In the port, thousands of containers are lifted in the air, containing the essential or superfluous elements for people all around the world. A Dutch ship might be travelling from Hong-Kong to Brazil with a stopover in Singapore, transporting thousands of remote-controlled cars assembled in Guangdong in China to excited children in Bolivia. These cars might have been constructed thanks to the trip undertaken by a ship registered in Australia, who earlier in the year sailed from Japan to China, filling a good part of its containers with electronic equipment designed by Japanese engineers. And too, a British-owned ship might have transported a new expatriate's luxury car from the United States to Singapore.

It is around harbours that one feels that the world is becoming increasingly small, and that distances are being slowly eliminated. More than cargo airports, which are often inaccessible to the general public, harbours are the physical face of globalisation.

A city on the verge of total gridlock

Jakarta. The political and economic capital of Indonesia. And a city which is increasingly turning into an urban nightmare.

Anyone travelling to Jakarta will with little doubt comment on the major traffic jams the city experiences. At peak hours and during monsoon downpours, millions of cars, vans, and motorcycles bring the city to a standstill. A few numbers illustrate the scale of the problem: between 2011 and 2012, car sales increased by 11%, and the total number of cars increased ten times faster than the number of roads they roll on. Amongst the total population of the city, 30% uses public transport while the remaining 70% use private cars to get around. In 2014, the government expects Jakarta to experience total traffic gridlock.

The Indonesian authorities have been surprisingly slow in reacting to the traffic situation. Regulations limiting secondary car ownership and auto loans deposits were introduced last year, but with little success thus far and with wide discontent. The Transjakarta busways, implemented on the format of the Bogota TransMilenio, introduced separate road lanes for buses but remains inefficient due to poor urban planning and an inexistent sewage system, a big problem in a city affected by major floods. The 3-in-1 car passenger policy is widely ignored, and a proposed monorail project is still in limbos.

The economic consequences of the Jakarta traffic congestion are serious. Every year, the city loses US$1bn due to gridlock, and in 2020 the total economic losses – including vehicle operating costs and travel time – are expected to reach US$6.9bn.

New plans urgently need to be implemented. The recent election of Joko Widodo to the role of Governor of Jakarta has raised hopes to have the traffic situation finally tackled, with his main pledge being to defeat Jakarta’s traffic problem. Widodo has revived the option of a long-abandoned railway project, and introduced new laws regulating street stalls which clutter the streets and aggravate congestion.

In an emerging country growing at 6% and international car makers investing $2.2bn annually, communication, collaboration and strong leadership will be needed to eliminate the traffic problem. 

Bali, the neglected island

A holiday in Bali can be eye-opening in many respects. The blackness of the beaches of the volcanic island reminds us of the importance of nature in shaping our environment. The rice paddies clinging on to the hill cliffs remind us of how humans have mastered the physical environment around them and created one suitable for them to live and thrive in. And the piles of bottles on public beaches, the odd shoes found on the sand at low tide, the plastic bags clogging up ditches also remind us that humans have forgotten about actually caring for the environment around them.

Tourism began in Bali in the 1970s, when groups of Western hippies came to the island, attracted by the beauty and spirituality of the landscape and the friendly and tolerant reputation of the island’s inhabitants. Tourism then was what is called cultural, with foreigners expressing interest and concern for the region’s culture, the locals’ lifestyle, the island’s architecture and history. However, cultural tourism slowly made way to mass tourism, booming in the 1990s and 2000s as developers realised the huge tourism potential of the region. Hotels and resorts started popping up all over Bali, erasing coconut trees and beaches to make way for private terraces and infinity pools. Other beaches were widened and the background nature was destroyed, transformed into parking lots to accommodate the masses of tourists flying in from Australia and Europe.

Bali’s environment is at threat of succumbing to mass development. Every year, 700 hectares of land is lost to hotels, luxury housing and roads. Every day, 13,000 cubic metres of waste is dumped and only half of it is recycled. Traffic jams are becoming increasingly problematic, with the island’s road connections struggling to accommodate the 13% annual increase in number of cars.

Today, the main environmental issue regarding Bali is water, with one expert saying that Bali could face a drinking water crisis by 2015. Waste dumping is dramatically polluting freshwater reserves. The non-existent garbage collection system leads to individuals and hotels disposing of their waste in open-air public dumps, polluting the groundwater as rain trickles through the waste and soil, filled with polluting products. Intensive water usage is also a concern, with hundreds of hotels absorbing a large part of the freshwater reserves, depriving locals of an essential irrigation and drinking resource.

Locals and foreign tourism organisations are slowly realising the need for a sustainable plan of action regarding water and waste. Previously non-existent regulation regarding waste dumping was introduced last year, and information campaigns regarding water scarcity are being organised. But locals and foreigners alike will all have to seriously tackle the environmental issues facing Bali. The booming tourism industry, which involves both industry players and tourists, will have to become more aware and informed, and actively play their part in protecting the island’s environment, which is, after all  the lifeblood of the tourism industry. With the participation of all stakeholders, the environment catastrophe looming over Bali will easily disappear and a lose-lose situation averted.

War on Two Fronts for the Personal Navigation Device

One of our navigation-related articles has recently been published on Coordinates, a monthly magazine for the location and navigation industries.

Check out the online link here!
http://mycoordinates.org/a-war-on-two-fronts-for-the-pnd/