The State of the Nation: Link broader talent, economic goals when recasting PTPTN loans, grants

TheEdge Mon, Dec 26, 2022 03:00pm - 1 year View Original


PROMISES to forgive at least a portion of National Higher Education Fund Corp (PTPTN) loans, especially among graduates from the bottom 40% of households (B40), are expected to feature when Prime Minister and Finance Minister Datuk Seri Anwar Ibrahim retables an improved Budget 2023 as early as January.

Not only was targeted PTPTN debt forgiveness for B40 and scheduled repayments for graduates earning at least RM4,000 a month among promises in Pakatan Harapan’s (PH) manifesto for the 15th general election (GE15), but Anwar had in his 2022 book, SCRIPT for a Better Malaysia, written: “In a strike against poverty, we need to abolish repayment to [PTPTN] for the B40s.”

Discounts were dangled in the Budget 2023 that was tabled before GE15, not just for early repayment and total settlement of PTPTN loans, but also for those who set up salary deductions for their remaining debt. Anwar had said on Dec 5 that the previous Budget 2023 was mostly acceptable, but feedback would be sought on what needs to be modified and improved.

Cancelling PTPTN loans — even just for the B40 — is no small feat, given that 55% of PTPTN borrowers are from the B40 group and they receive 60% of the amount disbursed, on average, according to data in a paper written by former PTPTN chairman Wan Saiful Wan Jan titled “Tackling the PTPTN Time Bomb”, published by the ISEAS Yusof Ishak Institute in 2020 (see Chart 1).

Between 1997 and end-2020, PTPTN has approved loans totalling RM82.03 billion, which involved the disbursement of RM62.52 billion to 3.48 million students.

As at end-September 2021, total PTPTN disbursement reached RM64.8 billion to more than 3.5 million students, according to a parliamentary reply in November 2021. Among the 2.42 million graduates accounting for RM24.6 billion PTPTN loans as at end-Sept 2021, only 48.6% have either fully repaid (751,216 persons) or are consistently servicing (427,861 persons) their loans according to a predetermined schedule while others are inconsistent payers and 539,284 borrowers (22.2%) have never repaid a single sen (see Chart 2).

What is certain is that whatever is proposed in the improved Budget 2023 needs to take into consideration the country’s fiscal situation, global socio-economic headwinds and the fact that PTPTN loans make up RM39 billion, or 12.7%, of the federal government’s total directly guaranteed loans, which stood at RM306.98 billion as at end-June 2022 — smaller than only Prasarana Malaysia Bhd (RM41.61 billion) and Danainfra Nasional Bhd (RM80 billion).

No bang for the buck

Policymakers should also know that forgiving all or part of the PTPTN loans alone will not solve the sustainability issue of its debt, nor does it help increase the supply of suitable talent to attract the high-impact investments necessary for the creation of higher-paying jobs and boosting the economy’s long-term strategic competitiveness.

The issue of an insufficient talent pool to feed demand was detailed in a cover story by The Edge (“Penang — not short of investments but of skilled workers”, Issue 1551, Dec 12, 2022). “The big challenge we are facing right now is the shortage of human talent. We all know this is happening everywhere; it is not just a Penang problem,” InvestPenang CEO Datuk Loo Lee Lian had told The Edge.

It is already a well-known fact that Malaysia needs to get a much better outcome from the money spent on education every year.

A 2011 World Bank review of government expenditure found that Malaysia’s public expenditure on basic education as a percentage of gross domestic product (GDP) (3.8%) is above the OECD average of 3.4%, more than double that of other Asean countries (1.8%). That year, Malaysia spent RM36 billion, or 16%, of its budget on basic education — the single-largest share among ministries — and, on top of that, allocated RM12 billion to the Ministry of Higher Education and other ministries that provide education-related services. That is higher than the Asian Tiger economies of South Korea (11%), Singapore (11%), Hong Kong (12%) and Japan (7%). “There is reason to believe, however, that Malaysia may not be getting the highest rate of return on its investment,” read the Malaysian Education Blueprint (2013-2025) (see Charts 3 and 4).

Expenditure estimates for Budget 2023 show RM55.6 billion, or 15% of budget allocations, going to the Ministry of Education and RM15.09 billion, or 4.1% of the budget, going to the Ministry of Higher Education. Together, they work out to more than 4% of GDP. Emoluments for these two ministries alone total RM43 billion, or 11.7% of Budget 2023 and 2.4% to 2.8% of GDP.

Simply put, money has to be spent more wisely to derive more effective outcomes for the people and economy, as it is hard to raise the proportion of the budget going to education.

There is already anecdotal evidence of counter-productiveness. A PTPTN-commissioned study in 2019, which received responses from 1,866 borrowers, found that 87.7% of borrowers earned below RM4,000 a month after graduation, putting them in the B40 group (B40 household income threshold is RM4,850).

Specifically, 13% of these graduates with PTPTN loans to service had no regular income, 38.6% earned below RM2,000 a month, and 36.1% earned between RM2,000 and RM4,000 a month (see Chart 5).

The top reasons given for defaulting on payments boil down to irregular or insufficient income. Among the 551 defaulters in the study — 97% being B40 — 25% had no regular income, 49% earned below RM2,000 a month, and 23% earned between RM2,001 and RM4,000 a month (see Charts 6 and 7).

Unsustainable model unravelling

Even if PH gave more scholarships to reduce B40’s dependence on PTPTN loans, as promised in its GE15 manifesto, the move would only be deemed populist if most of these scholarships do not yield scholars with high-income potential, skills that are either sought after by businesses and industries or contribute to the country’s arts and cultural betterment. The latter, as the South Korean wave proves, is also good for the economy and government coffers.

“[Reasons given by PTPTN defaulters] imply that PTPTN’s financial challenge is not necessarily due to how the organisation is run, but is actually influenced by the wider economic structure of the country — a large number of graduates seem to be stuck in low-paying jobs or, worse, remain unemployed,” Wan Saiful wrote in his paper, which describes the PTPTN model as one that “has created a very heavy financial burden on itself as well as on the Malaysian government”.

So, if poverty eradication, upward social mobility and human development is the reason more people have been given access to higher education with PTPTN loans or grants, again, Malaysia is not only not getting a return on its money, but there is also a burgeoning amount of debt that may have already begun to unravel.

In 2020 alone, RM3.59 billion in loans were approved by PTPTN involving the disbursement of RM3.13 billion to 150,567 students, with 59,421, or 39.46%, from the B40 group, according to data appended in PTPTN’s 2020 annual report.

The total number of students receiving financing in 2020 is lower than the annual range of 160,000 to 180,000 students that Wan Saiful’s paper says PTPTN provides financing to.

In 2019, Wan Saiful highlighted that one application may have to be rejected for every RM7,000 that is not repaid. This was also mentioned in the PTPTN (2021-2025) Strategic Plan, which expects PTPTN’s funding needs to rise from RM40 billion to RM55 billion within 10 years, which the report said would require the government to increase subsidies on interest for loans to RM24 billion.

Without real change, the cost of “bailing out” PTPTN could reach RM3.2 billion a year by 2025, with the cumulative cost reaching RM26 billion between 2015 and 2025, according to a 2016 paper titled “The Sustainability of the PTPTN loan scheme” by the Penang Institute, co-authored by Ong Kian Ming, Jonathan Yong, Chew Khai Yen and Dickson Ng.

PTPTN loans are charged 1% interest per year, much lower than its own cost of borrowing, which Wan Saiful says is 4% to 5% on average.

Just covering the interest differential alone year after year will add up, especially when debt is rolled over at higher interest cost as interest rates rise. Annual interest cost on the existing RM40 billion debt alone is RM1.6 billion at 4% per year and RM2 billion at 5% per year, back-of-the envelope calculations show.

In his paper, Wan Saiful also mentioned PTPTN being responsible for RM13 billion in interest cost, on top of its RM40 billion in debt in 2019. “The difference [between its borrowing cost and the 1% charged to borrowers] has been compounding year on year for 20 years, contributing significantly to PTPTN’s mountain of debt. This is a major challenge for the government because all the debt is backed by government guarantees. But perhaps the root cause of PTPTN’s challenge is the tendency of politicians of all colours, and many among the lay public too, to look at PTPTN with a heavily politicised lens. Serious analysis of how to solve PTPTN’s mounting debt problems is scarce, but political debate about it is widespread,” he wrote.

To be sure, solving the problem at hand will not be easy, but tough problems often snowball if left unresolved.

With 63% of PTPTN loans going to students attending government-funded public universities, it is not immediately certain how changes to PTPTN loans would affect the latter.

There may also be an impact on students heading to private universities that charge higher fees, given that the amount disbursed by PTPTN to students attending private universities is 51% of total disbursements (which works out to RM1.59 billion based on 2020 disbursements), even though they account for only 37% of total loans approved (see Charts 8 and 9).

Some 66 private universities, 31 private university colleges and 329 private colleges qualified for PTPTN loans in 2019, compared with only four private universities in 1997, Wan Saiful wrote in his paper, noting that some parties had argued that many private institutions would not have been set up at all without PTPTN supplying easy money to pay student fees.

Assess talent, communicate economic goals

Whether or not that argument holds water, it is clear that the status quo cannot continue because fiscal space needs to be restored and each ringgit spent needs to be well justified to yield the right kind of results for the country.

After all, making education cheap and lowering entry requirements to universities would help raise the number of people with some sort of graduate degree in the country but these nicer-looking statistics may not yield the high-skilled labour force the country needs to attract investments and fill higher-income jobs.

There is no denying that low-income graduates need help with their loans, which can also come in the form of training to fill higher-income jobs. Higher-income skilled graduates not only contribute more to the economy but also help fill government coffers with more tax money.

It is high time, perhaps, that future PTPTN loan applicants be assessed to see whether they can be better placed elsewhere, rather than just giving easy approval of government-subsidised loans for a generic degree that may well yield a lesser outcome for their personal skill development and income generation capabilities.

More emphasis has been placed on education in science, technology, engineering and mathematics (STEM) to prepare students for technological changes brought about by the Fourth Industrial Revolution (4IR) but working with industries on specialised technical and vocational education training (TVET) may well be a better alternative for some PTPTN applicants, who may even be guaranteed jobs, if policymakers work with businesses and industries that are willing to train and hire. Collaborations between government, industry and businesses will be easier and more targeted if Malaysia not only communicates its socioeconomic goals well but also takes active steps to realise those goals.

If policymakers make the right call on PTPTN, they may not only solve the political hot potato and drag on fiscal sustainability but be building a new engine of growth for the country.

 

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