Malaysian Economic Democratisation – Extract 5

(Extracts from DAP Alternative Budget 2010 launched on 7th October 2009)

9. Thrust II: Rakyat First – Restructuring and Reallocation

9.2 Managing Oil Wealth

Over-reliance on Oil and Gas

Malaysia is blessed with abundant natural resources. In particular, we are thankful that the country is rich in oil and gas, which created Malaysia’s sole representative in the Fortune 500, Petroliam Nasional Berhad (PETRONAS). Since the incorporation of PETRONAS Group 35 years ago, the Group has paid RM471 billion to the Government, in addition to bearing a cumulative gas subsidy of RM97 billion.

In the most recent financial year ending March 2009, PETRONAS achieved profit before tax of RM89.1 billion amidst the challenging economic backdrop. Of greatest importance was the fact that PETRONAS contributed RM61.6 billion to our national coffers in taxes, royalties, dividends and export duties last year. Contribution from PETRONAS Group alone was budgeted to make up some 46% of the Federal Government revenue for 2008. This represents a steep increase from approximately 20% in 2004. The heavier reliance on oil and gas industry for Malaysia over the years signals an alarming trend.

Despite the fact that the total Malaysia hydrocarbon reserves has increased marginally from 20.13 billion barrels of oil equivalent (boe) at January 2008 to 20.18 billion boe at January 2009, and the reserves replacement ratio (RRR) has improved from 0.9 times to 1.1 times during the same period, our reserves will inevitably run dry at some point. During an interview with Bernama in June 2008, the president and chief executive officer of PETRONAS Group, Tan Sri Hassan Marican said that “we will continue to produce for another 20 years or so.” In more immediate terms, “Malaysia will become a net importer when its domestic consumption, growing at six percent per annum, is expected to overtake national production in 2011.”

Furthermore, increasing globalisation has intensified the competition among PETRONAS, oil majors and other national oil companies. This impact is particularly significant because international operations were both the Group’s biggest revenue generator as well as its fastest growing segment for the last two consecutive years. 42.1% of the Group’s revenue for FY2009 was derived from international operations, compared to 35.4% in FY2005. In order to maintain its competitive edge as a leading global oil player, it is crucial for the Group to channel its profit and investment to maintain the amount of extractable oil and gas reserves, to enhance its recovery ratio and to improve the reliability and productivity of its infrastructure.

However the Group’s investment capability and long term sustainability might be undercut by the declining share of profit for reinvestment and rapid-growing total payments to the Governments. In particular, profit available for reinvestment by PETRONAS has dropped from 42.5% in FY2005 to only 21.1% in FY2009. In terms of absolute value, it has dropped from RM28 billion in FY2005 to RM21.9 billion in FY2009. In the meantime, share of PETRONAS Group profit allocated to the Federal Government has increased from 44.1% to 65.4% over the same period.

As a result, the total payments by PETRONAS to both the state and federal governments have ballooned from RM32.1 billion in FY2005 to RM74.0 billion in FY2009. The frightful acceleration of dependence on our limited oil and gas resources places the country’s economy at great risks.

9.2.1 Capping PETRONAS profit contributions
To tackle the over-reliance on oil and gas revenue, the DAP proposes that the PETRONAS Group sets the target to pay not more than 50% of the Group profit before tax, duties and royalties to the Federal Government from 2012 onwards. Through imposing this cap on the proportion of Group profit paid to the Federal Government, our nation would maintain the share of oil wealth to the Federal Government revenue at around 35%, which is coherent with the strategic goal of our nation to diversify its economy and revenue sources.

The cap imposed on the proportion of Group profit paid to the Federal Government would not compromise the fiscal strength in stimulating our national economy. The fact that Norway only derives approximately 30% of its national revenue from the petroleum industry despite its position as the third largest gas exporter globally provides an exemplary model for our nation to follow.

The cap would not only reverse the trend of over-reliance on exhaustible oil and gas resources, and hence catalyse the growth of other productive sectors of the economy, but also enable PETRONAS Group to boost its reinvestment ratio. The reserved profit endows PETRONAS with the flexibility and capacity to increase the share of profit reinvested to approximately 40% level. This will narrow the gap of reinvestment ratios among PETRONAS, oil majors, which reinvest 57.1% of their profits in average for FY2009, and other national oil companies, which channel an average of 72.9% of their profits for reinvestment in the same fiscal year.

Given the current challenging economic climate in Malaysia, the DAP understands the needs to stimulate and hasten our economy recovery through greater injection of our oil wealth. Therefore, the DAP proposes in this Budget that the PETRONAS Group channels 60% instead of 50% of the Group profit before tax, duties and royalties to the Federal Government for Budget 2010.

9.2.2 Optimizing Utilization of Oil Wealth
Malaysia’s abundance of oil and gas resources is akin to striking lottery. Our nation must not fall into the trap of what economists call the “resource curse” in which countries devoid of natural resources fare better than countries better endowed. It is imperative for our nation to optimise its oil wealth, and utilise the resources in the best interests of the nation and the Rakyat. In light of this, the DAP proposes in this Budget that only a fixed value of RM30 billion, out of the total payment by PETRONAS to the Federal Government, will be channelled directly to the normal national budget. This figure shall be adjusted upwards in accordance to the country’s inflation rate for subsequent years. Any surplus of the total contribution to the Government by PETRONAS shall be legislated as below:

1. At least 20% of the surplus payment will be channelled to Khazanah Nasional for new capacities and capabilities building in key areas such as Renewable Energy and Energy Efficiency (RE&EE), and Green Technology

2. At least 20% of the surplus payment will be deposited at a new National Stimulus Fund that boosts fiscal spending and provides financial assistance to all Rakyat during economic downtimes under the new Malaysia Reversed Bonus scheme and Special Risk-sharing Initiative (SRI)

3. At least 20% of the surplus payment will be invested in building human capacity, particularly in Education and Training, above and beyond their normal budget allocation

As an example, PETRONAS Group profit before tax, duties and royalties is forecasted to be RM84 billion for 2010 Budget. Based on the DAP’s proposal, RM50 billion (60% of RM84 billion) will be paid to the Federal Government. A fixed amount of RM30 billion out of the RM50 billion will be channeled directly to the normal national budget. The remaining amount of RM20 billion will be spent according to the proposed legislation, in which at least RM4 billion will be streamed each to Khazanah Nasional, National Stimulus Fund, and Human Capacity development (i.e. Education & Training) respectively.

9.2.3 Khazanah Nasional: Building New Capacities & Capabilities

1. Adopting Best Practices of the Petroleum Fund of Norway

   “Norway’s sensible approach to oil wealth management deserves the attention it has received in other resource-rich countries around the world.” The Petroleum Fund of Norway, which is derived from the surplus wealth produced by Norwegian petroleum income, provides a role model for our oil wealth management. This Norwegian fund has exceeded US$388 billion by the end of 2007, which is equivalent to around US$75,000 per Norwegian, up from US$1,500 per Norwegian in 1996. Most importantly, the fund is driven by great transparency and trust, in which it distinguished itself from other sovereign wealth funds in the amount of information it makes public. Its performance and risk exposure are reported quarterly and its holdings in about 3,500 companies are detailed annually.

2. Transforming Khazanah Nasional

   Judging from the remarkable performance and high reputation of the Norwegian fund, there is a strong case for Malaysia to adopt the best practices of this open fund in the process of propelling our national economy forward. It is important for our nation to capitalise on the windfall revenues by building new capacities and capabilities. The DAP proposes to channel at least 20% of the surplus payment directly to Khazanah Nasional, the investment holding arm of our Government. For the 2010 budget this amounts to at least RM4 billion. The DAP perceives this mandate as an opportunity and strategic timing for Khazanah to transform itself into a world-class government investment arm that boasts a high level of transparency and professionalism.

   Since its establishment, Khazanah has been empowered as the Government’s strategic investor in new industries and markets. Moreover, Khazanah is also tasked with nurturing the development of selected strategic industries in Malaysia with the aim of pursuing our nation’s long-term economic interests. Given Khazanah’s experience and expertise in promoting economic growth and making strategic investments on behalf of our Government, the DAP proposes to give Khazanah the mandate to utilise the allocated resources to equip our country with new capacities and capabilities, by investing in projects and companies in key areas such as Renewable Energy & Energy Efficiency (RE&EE), and Green Technology.

   The focus areas will be reviewed every five years to enhance our global competitiveness. Through channelling our oil wealth into building new capacities and capabilities, the depletable revenue stream from our natural resources will be converted into a perpetual income flow. Consequently, Malaysia will be better prepared in optimising unexpected opportunities and facing uncertainties of future leadership.

3. Expediting the Growth of Renewable Energy & Energy Efficiency

   RE&EE is identified as one of the key development areas for our new capacity and capability building. Against a backdrop of robust industrialization and development globally, the world energy demand has set on a rapid-growing trajectory. According to the Energy Information Administration (EIA), world energy consumption is projected to increase by 44% from 2006 to 2030. In the meantime, renewable energy is the fastestgrowing source of world energy, with consumption increasing by 3% per year.

   While an increasing number of advanced economies are gearing towards the use of renewable energy, Malaysia is seemed to be lagging behind the train of growth in this aspect. Based on the Ninth Malaysia Plan, the projected energy demand in 2010 for Malaysia will consist of 61.9% petroleum products, 15.8% natural gas, 18.9% electricity, and 3.4% coal & coke; the demand for renewable energy is negligible. Meanwhile, less than 3% of the energy supply will be derived from renewable energy. In view of this, it is essential for our country to boost investment in renewable energy and energy efficiency. Expediting the growth of renewable energy and energy efficiency will certainly help Malaysia to enhance its long term energy security and sustainable development.

4. Tapping into the Green Technology

   Another focus area is Green Technology. The new millennium has witnessed a surge of government investments in Green Initiatives around the world. The commitment and endeavor of South Korea in pushing the frontier of Green development is particularly noteworthy. The success of the USD900 million urban renewal project in restoring the Cheonggyecheon River has ignited a string of green innovations in the country. In 2009, South Korea has pledged to invest USD32.7 billion (approximately RM111 billion) in the “Green New Deal” over a four year period. In particular, South Korea will create lowcarbon emitting railways, construct nationwide bicycle path, build dams, reservoirs and various water management facilities.

   As part of the Green Technology programme, Khazanah will co-invest with the Selangor state government RM2.5 billion over 5 years to the urban renewal of the Klang River, to emulate the success of Cheonggyecheon River project in South Korea. The Klang River clean-up and rehabilitation project which will ultimately cost RM20 billion over 10 years, will enhance real-estate development along the river and land reserves, provide business to companies and jobs for the people as the river together with its many tributaries was over 250km long. Along the global tide of Green development, Malaysia has the potential to build significant capacity and capability in Green Technology. Khazanah will channel the funding into appropriate Green Technology investment that can be leveraged on our national core competency. As an example, Malaysia can take advantage of its vigorous palm oil industry, which generates vast amount of palm biomass to develop a palm-oiloriented recycling industry. This direction is coherent with the push for recycling and renewable industry in both South Korea and Hong Kong. For instance, South Korea is spurring its recycling and renewable industry, in particular through investment in facilities converting trash into fuels and bio-gas. Currently, 75% of renewable energy in South Korea is derived from waste. Similarly, Hong Kong is developing a regional hightech recycling industry in the Pearl River Delta.

9.2.4 National Stimulus Fund
The National Trust Fund, or Kumpulan Wang Amanah Negara (KWAN), which was set up in 1988 under the Act 339 will be remodelled and substituted by the National Stimulus Fund.65 This new fund will be established to drive fiscal spending and to provide financial assistance to all Rakyat during economic downtimes when the GDP grows at levels below 2%. This fund will have a crucial role in stabilising revenues and helping all Rakyat to through economic hard times.

The DAP proposes to mandate the EPF as the manager and custodian of this newly established National Stimulus Fund. Guided by the clear mission of securing the continual prosperity and sustainability for our national economy, the EPF will channel this fund into stable long-term investments such as well managed funds.

In the years of booming economy and windfall revenues, the surplus payment from PETRONAS will be deposited in the National Stimulus Fund, which focuses on low risk investments with steady rate of return. This practice will not only better prepare our country for unforeseen circumstances and future uncertainties, but also prevent the scenario of overheating and overinflating our economy during good times. Based on the estimated revenue projections from PETRONAS, at least RM4 billion will be deposited into the National Stimulus Fund in 2010 based on the DAP Alternative Budget.

DAP believes that oil revenue windfall should be shared and enjoyed by all Rakyat in order to cultivate greater stewardship and to cherish the labour of all Rakyat. This sharing of wealth can best achieve its objectives by rendering financial assistance to all Rakyat directly during economy slowdown when our Rakyat need the support the most.

1. Malaysia Reversed Bonus

   Table 6: Malaysia Reversed Bonus for different Income Tiers

   Estimated Monthly Income (RM)	Estimated Number of Workers	Malaysia Reversed Bonus (RM)	Bonus Distributed (RM)
   Working Rakyat:
   <RM2,000	6,319,152	900	5,687,236,800
   <RM4,000, but >RM2,000	2,492,703	600	1,495,621,800
   >RM4,000	2,358,945	300	707,683,500
   Total	11,170,800		7,890,542,100
   Homemaker:
   <RM2,000	3,814,552	900	3,433,096,586
   Grand Total	14,985,352		11,323,638,686
   Average (RM)			756

   This financial assistance will be distributed under the Malaysia Reversed Bonus Scheme. Every working Rakyat and homemaker in Malaysia will be entitled to the Bonus varied according to their monthly income level on a progressive basis. The Bonus for different tiers of income is detailed in the Table 6 above. The Bonus will be available for immediate withdrawal among all working Rakyat and homemakers when GDP growth is below 2%.

   Under the Malaysia Reversed Bonus scheme, approximately RM11 billion will be distributed to the Rakyat in combating economic downtimes. The Rakyat will receive an average bonus of RM756. The Bonus distributed directly to the Rakyat via their EPF accounts to enable them to make sensible spending in easing their financial predicament with immediate effect, while spurring our economy out from the gloom at a greater pace.

2. Special Risk-sharing Initiative (SRI)

   To fully achieve the stimulus impact of our Fund, a Special Risk-sharing Initiative (SRI) similar to that proposed by Singapore in its 2009 budget will be launched in conjunction with the Malaysia Reversed Bonus. It is undeniable that banks tend to cut credit lines during a crisis, exacerbating the downturn as even good businesses have to curtail activities due to lack of financing.

   To address this issue, our Government will share the risk of loans to SMEs should they turn sour. Under this SRI, banks will still be responsible for assessing credit and sourcing the customers, but our Government will share 50% of the risk of these loans. This initiative will improve banks’ willingness to grant credit and hence alleviate the credit crunch faced by Malaysian SMEs. Assuming SMEs account for 25% of the total loans valued at RM130 billion and the unlikely event they all go sour, the total exposure of our Government will reach an estimated RM16 billion (RM130 x 25% x 50%).

   Assuming the GDP of Malaysia is to grow at 3.8% in 2010 as projected, which is higher than the 2% proposed threshold that defines economic downtime, the Malaysia Reversed Bonus and SRI schemes will not be implemented for 2010 Budget. In fact, the 20% legislated surplus payment from PETRONAS that amount to RM4 billion for 2010 will be deposited directly into the National Stimulus Fund to be saved and invested for future disbursement. The new direct payment from PETRONAS, together with the estimated RM3.8 billion existing saving in the KWAN, will boost the reservoir of our National Stimulus Fund to at least RM8 billion.

9.2.5 Human Capacity Development
As revenue from oil and gas constitutes more than 40% of the overall Government budget, there is a serious challenge in sourcing alternative sources of revenue to sustain our Government expenditure at current levels. The most promising alternative source of revenue is encapsulated in building a strong base of human capital for our country. With the right quality of human capital, many countries around the world, which are deprived of natural resources, have recorded significant growth above and beyond what we have achieved.

In light of this, the DAP will legislate that at least 20% of the surplus payment from PETRONAS shall be allocated to enhancing human capacity, particularly in Education and Training, on top of their normal budget allocation. This will ensure that our windfall revenues will be productively invested in our most important assets, especially the young Malaysians. Based on the estimates of revenue from PETRONAS for 2010, at least RM4 billion will be additionally allocated towards projects involving human capital development.

The allocation will be spent to accelerate the process of revamping our educational system and elevating the quality of our Education and Training. We can model this spending after the Education Investment Fund of Australia, which provides significant capital investment in Australian higher education as well as vocational education and training. This Education Fund selectively finances innovative and transformative projects proposed by eligible education providers and research institutions that could help equip Australians with the high-level skills and knowledge necessary in an increasingly competitive global economy. Through proper implementation and execution of a similar programme, the declining quality of our education system can certainly be reversed.

9.2.6 Delivering State Oil Royalties as Legislated
To prevent any unlawful dismissal of state governments’ claims on oil royalties and to protect the right of the Rakyat of the state, the state oil royalties will be paid directly to respective states based on the vesting deed agreement signed by the former PETRONAS chairman Tengku Razaleigh Hamzah, which “entitles the state to five per cent of any revenue derived from hydrocarbon deposits found on or offshore of the state.” Therefore, the state of Kelantan will receive its royalty as per the agreement signed on May 9, 1975 which amounts to approximately RM250 million per annum.