State fund to reduce dependence on oil revenue

  • Business
  • Saturday, 13 Dec 2008

NEWLY set up state investment fund Terengganu Investment Authority (TIA) will help reduce the state’s dependence on oil revenue, fund managers said.

But they cautioned that raising RM10bil for the fund from capital markets would expose it to higher investment risks.

It has been reported that TIA intends to raise RM10bil from local and foreign capital markets, backed by a portion of the state’s oil income and a proposed Federal Government guarantee of up to RM5bil.

It is also learnt that Yang di-Pertuan Agong Tuanku Mizan Zainal Abidin was briefed on the nature and operations of sovereign funds during visits to the Middle East and is seeking to established a highly reputable board of advisors for TIA. It is understood prominent global personalities may get an invite.

One key feature of the TIA is the separation of powers. Tuanku Mizan and state politicians will be on the board of advisors, which is envisaged to be more proactive in strategising, and the TIA board of directors and management would be apolitical.

The masterplan for TIA is expected to be gazetted to ensure adherence to its purpose and the debt to be issued to raise the funding for the TIA would be expected to be long-dated, probably 15 years at least.

TIA will also ensure thorough risk management framework is in place and that financial prudence, integrity and corporate governance play a very important part.

The price of oil used in TIA calculations is US$40 a barrel and the only federal government involvement is in the guarantee it provides.

According to Phillip Capital Management Sdn Bhd chief investment officer Ang Kok Heng, the fund is a logical idea because the state can generate long-term income as oil revenues will run out one day.

Bank deposits would not be fruitful due to the present low interest rates, he said, noting that some state investments in the past had not performed as well as private funds and that would be a concern for the new fund.

Kumpulan Sentiasa Cemerlang Sdn Bhd head of research Choong Khuat Hock said the risks lay in the volatility of oil revenue as well as the cost of capital and repayments to bondholders.

“Presumably some of the funds will go into Terengganu but the investments would have to generate sufficient returns to repay bondholders,” he said.

He suggested that the fund take a portfolio approach by allocating assets to the state, other parts of Malaysia and overseas markets.

“Now is quite a good time for making investments due to the low asset prices,” he said.

A fund manager at a boutique asset management house said it was risky for TIA to raise funds from the capital markets to invest.

“If the fund is investing within the state, it will be a way to draw foreign investment,” he said.

“But if TIA did not have excess funds and is borrowing, the investment decision itself is uncertain and (it may incur) additional cost of funds.”

Riche Capitale investment consultant Richard Chua said raising the huge sum through borrowings was a concern.

“The fund may be raised from some land acquisitions and it may (also) ask Petronas to pay royalty in advance,” he said, adding that the Eastern Corridor Economic Region could back the fund raising exercise.

Jupiter Securities head of research Pong Teng Siew said the fund could be used for new business ventures or to buy strategic stakes in businesses with long-term prospects.

“Besides oil, the state has iron ore mines that are not fully tapped. This would be a draw for foreign investors,” he added.

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