Making up for less oil money

In 2019, Petronas paid RM54bil and this year, the national oil company has forked out another RM34bil. However, next year, Petronas dividends to the government are expected to drop to RM18bil, according to the federal government revenue estimates.

AFTER a long time, Petroliam Nasional Bhd’s (Petronas) contribution to federal government coffers would see a steep decline.

In 2019, Petronas paid RM54bil and this year, the national oil company has forked out another RM34bil. However, next year, Petronas dividends to the government are expected to drop to RM18bil, according to the federal government revenue estimates.

Nevertheless, other government agencies have increased their contribution. Notably, Kumpulan Wang Amanah Pencen (KWAP), which never contributed big sums to the government until last year, is forking out another RM5bil this year.

Bank Negara is forking out an additional RM1bil this year to up its payout to the government to RM3.5bil, while Khazanah Nasional Bhd is expected to reduce its contribution to RM1bil next year from RM2bil this year.

Considering that Khazanah has embarked on divesting its investments, it’s surprising that the national sovereign fund is not paying out more to the government.

The RM5bil from KWAP, which is the government agency that was corporatised in 2007 to help handle the civil service pension liability, comes as a surprise, considering that the fund has yet to reach a scale that would allow it to operate on a self-sustaining basis.

Contributions from KWAP started during the Pakatan Harapan (PH) regime. A sum of close to RM5bil was paid to federal government coffers last year, which helped keep its budget deficit at 3.4%.

The PH government set a precedence that was followed by the Perikatan Nasional government.

Since 2016, KWAP has taken over the monthly pension payments to a section of civil servants. It started with taking over the pension bill for 700,000 retirees and this is expected to go up to one million by next year. The Public Service Department (PSD) takes care of the pension payments to the rest of the retirees from the yearly emolument allocated.

The government has been contributing at least RM500mil a year to KWAP, which has a fund size of about RM140bil or more. The idea is for KWAP to eventually build a fund that has a sizeable scale to take over the pension liabilities of the government.

In 2016, when the pension liability was RM300bil, KWAP’s fund size was just above RM100bil.

At that time, the former chief executive of KWAP, Datuk Wan Kamaruzaman Wan Ahmad, who has been credited with the transformation of the agency, said that the ideal fund size should be about RM150bil.

Wan Kamaruzaman’s five-year tenure ended in 2018. During his time in KWAP, the entity’s asset allocation was largely skewed towards equities and fixed income.

But he also had set aside a small sum for alternative investments such as putting money into unlisted entities. KWAP operated just like any other fund in terms of asset allocation.

According to the annual report, KWAP made a gross investment income of RM7.06bil in 2018, which is the second highest in its history. Some of its private investments paid off.

Over the years, whatever profit KWAP makes is ploughed back into the fund to grow its size and make it sustainable to meet the civil service pension liability.

As at end-2017, the pension liabilities were estimated at RM470bil and the fund size should ideally be about RM250bil.

Hence, KWAP cannot afford to contribute to the government on an annual basis. It can only be a temporary measure at a time when revenue from oil is dropping steeply.

Normally, oil revenue and related taxes make up 30% of government revenue. The highest since 2014 was last year when Petronas declared a special dividend of RM30bil. That year, Petronas contributed a total of RM54bil to the government.

Petronas’ special dividend was mainly used to pay off amounts owed by the government to companies from the goods and services tax (GST).

After a long time, next year, Petronas’ contribution to government coffers will drop significantly.

The lower contribution should not come as a surprise, considering that the price of oil is estimated to be around US$40 per barrel this year and between US$45 and US$55 for the next three years.

The biggest contributors to federal government revenue are direct and indirect taxes.

The lockdown measures to contain the Covid-19 pandemic have stifled the economy, resulting in many businesses closing down.

Consequently, tax revenue for this year is down.

Compared to last year, the tax collection is down by 14% to RM227bil this year. Last year, the federal government collected RM264bil.

Next year, the government expects to collect RM236bil, which is higher than this year but still way off the amount collected in 2019, prior to the Covid-19 pandemic.

The government is spending more on infrastructure and other necessities despite the lower revenue.

The shortfall is coming from taking on more borrowings, which is up to 60.7% of the gross domestic product (GDP). Last year, it was RM792bil, making up 52.5% of the GDP.

According to international standards, it is acceptable for countries to borrow up to 55% of the GDP and keep their budget deficit at less than 2%.

But due to the pandemic, the acceptable levels of public finances have been thrown out the window. It is now acceptable for governments to borrow more to spend and revive the economy.

The situation is likely to return to normalcy next year. By then, the views on excessive borrowing to keep the economy afloat will change. It is likely to be frowned upon.

By then, hopefully, the government will have come up with a new way to increase revenue and not depend on the likes of KWAP.

M Shanmugam is the former specialist editor of The Star. Views expressed here are his own.

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