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Election Watch

Promoting Revenue Transparency in Malaysia

Since the significant hike in petrol prices by 41% recently, there has been great public speculation generated as to the workings of the oil and gas industry in Malaysia. Most scathing have the remarks been about the ways in which the country manages the wealth generated from its natural resources. In an indication of progressive democracy, a live debate was aired on 15th July 2008 on national television between Information Minister Shabery Cheek and de-facto Opposition leader Anwar Ibrahim. Despite disagreements on policy and decisions to reduce petrol prices, the consensus however was – and is – that it is the country's responsibility to optimally and sustainably manage its resources for the public good.

Politics aside, and focusing on the issue of revenue management in Malaysia, this article serves to clarify some issues that seem to be shrouded in mystery. This factual analysis would then open up opportunities for further policy discussion. It attempts to make sense of the process of revenue management in Malaysia.

Responsible management of resources has not always taken place around the world. The "resource curse" or the "paradox of plenty" has been used to refer to the phenomenon by which countries take for granted their natural resources – most commonly oil and minerals – and instead of translating wealth into better development for its peoples, this instead leads to wastage and corruption. In Angola for example, $1 billion disappeared from its oil and gas accounts due to corruption. In other countries, there has been low government accountability on its resources since governments do not have to necessarily satisfy its public when it receives lucrative streams of income elsewhere.

The paradox is this: that natural resources do not necessarily bring greater growth and development to a country, and in fact the reverse may be true. For example, between 1960 and 1990, per capita incomes in resource deficient countries grew two to three times faster than resource-export driven countries. Based on the IMF definition, a country is considered resource-reliant if at least 26% of its national revenues come from the extractive industry (oil, gas, minerals and so on).

Malaysia is therefore a resource-reliant country, with 44% of its national budget derived from revenues from the oil and gas industry. Have these massive revenues been collected, managed and distributed responsibly?

The oil and gas industry in Malaysia is overseen by Petronas, its national oil company set up in 1971 to steward the resources of the nation. Petronas is governed by the Petroleum Development Act 1974, under which a clause specifies that the entity reports directly to the Prime Minister. This has been criticized mainly because some feel in order to achieve better accountability, Petronas accounts should be tabled to Parliament instead – an institution of greater oversight.

There has also been a lot of confusion as to the actual wealth generated, and the process this comes about, by the oil and gas industry in Malaysia. To clarify matters, perhaps some organized analysis may be helpful to track money streams. This could easily be divided into two sections: Revenues (revenue generation) and Expenditures (revenue management) handled by the government.

Revenue Generation

Oil production in the country makes use of the "Production Sharing Contracts" (PSC) model, in which Petronas agrees with an international oil company like Shell or Exxonmobil to jointly extract the oil. Eventually, Petronas and the international oil company each receives a portion of profit agreed upon in the PSC. Petronas also generates income from international exploration. There are numerous technical terms enclosed within contracts, which this commentary will not attempt to elaborate upon.

Each respectively gives payments over to the Government in the forms of royalties, taxes, dividends, bonuses and additional payments. For example, in its recent financial statement Petronas paid a total of RM67.6 billion to the Government for the year ending March 31st 2008. The amount of oil and gas-related money actually received eventually by Government is reported in official Budget documents, which is available on the Treasury's website (from both sources of Petronas and international oil companies, although these figures are not broken down in extensive detail in the documents).

Revenue Management

Once revenues have been generated by the oil and gas companies and paid over to the Government, the more important issue is how they are managed. In Malaysia, revenues from all industries are "pooled" together. This means that oil and gas revenues are not differentiated from revenues from any other industry. There is no real way to calculate how much oil revenues feed into projects per se. Federal government then decides on how to spend the money.

The Government then decides how it divides up its revenues into three broad areas: Subsidies, Savings and Expenditure (maintenance and development).

  • Subsidies

    How subsidies work in the country is this: Crude oil ("upstream") is bought at market price by both Petronas and the international oil companies. However, it is sold at petrol kiosks and pumps ("downstream") at a lower-than-market-rate. The difference between the two prices (market price per litre minus RM2.70 per litre, multiplied by the volume of litres sold) is then paid for by the Government to the international oil companies. A second form of whopping subsidies is also paid to the likes of Tenaga Nasional Berhad, for its gas supply to power plants.

  • Savings

    The Government also has the option of putting its revenues into savings for the future. In many resource-reliant countries, it has been important to set up National Endowment or Oil Funds or trust funds so that money from natural resources is treated differently, and set aside for a rainy day. These funds are earmarked to ensure sustainability of resources for future generations. In Malaysia, there is one such fund called the "Kumpulan Wang Amanah Negara". Set up in 1988, the fund was supposed to fulfill exactly that purpose – ensure sufficient money is set aside for the future of Malaysia.

    Based on recent responses in Parliament, there is a remainder of RM3.8 billion left in this fund, which is a relatively small amount considering its existence for 22 years. Other countries like Kazakhstan that has had an oil fund set up since 2001, has USD14.1 billion remaining in its accounts. According to Malaysian law, the KWAN is supposed to table reports to Parliament annually but recent searches have the most recent report tabled in 1995 and none beyond. Further, the issue is whether or not the KWAN fund truly has sufficient funds to cushion the country from external financial blows in the long run.

  • Expenditures

    Third, the Government allocates through its annual budget a portion of expenditure for national development. Developmental economists would state the need for advanced developing countries like ours to invest into projects that will promise long term sustainable development. One of the issues of contention is therefore that national wealth should not be spent on megaprojects with no return or benefit to the people themselves. Wise, optimal investment should take the form of quality education to achieve quality human capital in the long run.

    In order to optimise resources so they are being spent efficiently, public accountability needs to be ensured. Citizens need to be given as much information as possible. This includes detailed and broken down figures from Petronas' accounts, and Budget documents (at both Federal and State levels). Other information includes Petronas' operations internationally, where foreign investments largely take place in Sudan, Chad and Burma, which opens up another set of skeletons altogether.

    In a recent "Promoting Revenue Transparency" report conducted by Transparency International and Revenue Watch Institute, Petronas unfortunately was categorized into the "low" category as an international oil company but performed slightly better as a "middle" as a national oil company. It was noted however that cooperation was given and that the company used the opportunity to review its data and documentation processes, a positive step. Indeed, it could certainly use opportunities like these to demonstrate to the region its forward-looking strategy in providing access to information at international standards, thereby elevating its status as an international company worldwide. It should adhere to international company reporting standards and aim to maximize the amount of comprehensive information provided to the public.

Responsible Management requires Transparency

Finally, whilst there are differing arguments about whether or not petrol pump prices should be reduced or maintained, the following is true.

First, economically speaking, pure subsidies are not sustainable in the long run, where better use of the money would take the shape of specific poor-targeted developmental projects. However, this is only feasible if development projects are carefully chosen and efficiently managed, without wastage, abuse and corruption. If Government decides that it should reduce subsidies, allocated amounts for development must be truly used in their proper manner. Alternatively, subsidies can be sustainable if they are explicitly directed to serve poor-targeted policies – this is usually a sign of a progressive social structure.

Secondly, the more urgent issue is that of managing the country's wealth for the benefit of future generations. If it is true that the country will eventually become a net oil importer by 2012, then can a minimal RM3.8 billion in an Oil Fund sustain the country in the long run? What are updates on the National Depletion Policy? Should the Government minimize the significant roles Petronas and KWAN currently play in megaprojects (Putrajaya) and investments into GLCs? Again, full lists of investments of each arm should be given to the public. The issue returns to the need for transparent information. The recent confusion where the Deputy Minister in the Prime Minister's Department SK Devamany gave wrong profit figures of the Independent Power Producers (as clarified by the Association of Independent Power Producers Malaysia, Penjanabebas) exacerbates the problem of faulty information provided to the public, a ridiculous phenomenon which should not be taking place.

Tan Sri Hassan Merican, President of Petronas, recently cautioned that the country is overly reliant on its oil and gas revenues. In many other countries this has resulted in the crowding out of the non-oil sectors. Fortunately, the government recognizes the need to cultivate a mixture of industries. It is true that Malaysia would be in dire financial straits if not for revenues from Petronas. Nevertheless, a country that feeds its gluttony of convenient oil revenues must learn to wean itself off them.

In order for Malaysia to responsibly manage the revenues derived from its natural resources, transparency and public accountability are key principles to adhere to. These are the more urgent and pressing issues that face our generation and those to come, lest the nation's wealth is drained by the same levels of corruption and mismanagement that has cost our country even greater economic success than it has achieved.

* * * * * *

Tricia Yeoh is the Director of the Centre for Public Policy Studies. She believes that the country's natural resources should be better managed for long-term sustainability and for the sake of our future generations to come. Contact her at tricia_yeoh@cpps.org.my. Part of this commentary was quoted in The Star's 'Resource curse' Leads to Wastage.

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