Refuelling Malaysia’s oil fund

THE National Trust Fund (KWAN) is a huge missed opportunity for Malaysia.

After nearly four decades of existence since its establishment in 1988, the natural resource fund’s asset size has only grown to RM15.5bil by 2022.

This is a tiny fraction of the dividends Petroliam Nasional Bhd (PETRONAS) has paid so far to the government to partly finance the annual budgets.

According to StarBiz 7’s calculations, PETRONAS’ total dividend payout to the federal government since its inception in 1974 has touched RM669bil, including the RM32bil pledged for 2024.

Even if we exclude the dividends paid before KWAN was formed, the amount still stands well above the RM600bil-mark.

KWAN was established to conserve Malaysia’s wealth from depleting petroleum and other natural resources for future generations

The idea was to save a portion of the revenue from petroleum and other natural resources to be used once the country’s natural resources, especially petroleum, are depleted.

To date, PETRONAS remains the sole contributor to KWAN.

KWAN was established just two years before Norway started its Government Pension Fund Global (GPFG), also known as the “oil fund.”

The GPFG was set up after Norway discovered oil in the North Sea, and today, it is the world’s largest sovereign wealth fund (SWF).

It owns almost 1.5% of all shares in the world’s listed companies, meaning it holds stakes in around 9,000 companies worldwide.

The SWF only invests in international markets, including Malaysia, making it independent of the risks associated with the Norwegian economy.

The first money was deposited into the GPFG in 1996. As of 2024, the fund’s size has crossed 20,000 billion kroner or RM8.3 trillion.

To put this into perspective, the size of the Malaysian economy in 2024 was RM1.93 trillion, less than a quarter of the GPFG’s asset size.

Of course, it is not fair to compare the oil funds of Malaysia and Norway, considering that Norway sits on larger oil reserves.

With bigger reserves come bigger profits.

According to the US Energy Information Administration, Malaysia had “proved” oil reserves of 2.7 billion barrels in 2023, making it the second-largest oil reserve in South-East Asia.

Norway’s proved oil reserves, on the other hand, totalled seven billion barrels as of end-2023.

Putting aside the size of oil reserves, a key point to note is that Norway has a better system to manage its oil wealth compared with Malaysia.

Norway allocates most of its revenue from oil and gas into the GPFG and only spends the real returns from the fund for its annual budgets.

In contrast, the Malaysian government takes chunky dividends from PETRONAS and makes small annual contributions to KWAN.

For example, in 2023, the national oil company paid the government a dividend of RM40bil, on top of federal government taxes and export duties totalling RM27.3bil.

As for KWAN, only RM2bil was injected into it.

Unlike Norway’s GPFG, where the capital is preserved, KWAN’s main funds have been used for specific purposes.

For instance, a total of RM42mil was taken out from KWAN to finance the Malaysia Wetland Sanctuary project in Kuala Langat, and RM4.98bil was used for vaccine acquisition and vaccine-related expenses during the Covid-19 pandemic.

Funds from KWAN were also used to purchase a stake in Putrajaya Holdings Sdn Bhd, the master developer of the federal administrative capital.

Today, KWAN holds a 20% stake in Putrajaya Holdings.

It is also noteworthy that KWAN’s asset growth has been slowing down since 2015.

This means that while the asset size is still growing, it is at a much slower rate, and the growth rate has turned negative.

This highlights the urgency for a renewed direction to strengthen KWAN for the benefit of future generations.

The recent news about “right-sizing” PETRONAS’ workforce amid declining profit margins, along with the emergence of state-owned Petroleum Sarawak Bhd, limits the national oil company’s ability to pour in more money into KWAN, while maintaining its annual dividend payments to the government of at least RM30bil to RM40bil.

A feasible way forward would be for the government to take a smaller dividend from PETRONAS and instead pump in more money into KWAN.

Regardless of changes in the ruling government, there must be legislation that mandates the development of KWAN into a mighty oil fund.

If the current generation fails to leave behind strong oil wealth, it will be a great disservice to future generations.

There must be a drastic change in how KWAN is managed.

Currently, it is primarily managed internally by Bank Negara, and KWAN predominantly invests in low-return fixed-income instruments.

To be fair, while Bank Negara has effectively managed the country’s monetary system, it is not designed to be a wealth manager or investor.

KWAN needs to be placed under a different “manager”, such as the fund managers of the Employees Provident Fund, with a mandate to invest predominantly in higher-return assets like equities.

As of 2022, only 40% of KWAN’s assets are invested abroad.

This percentage should be raised, even though the prime minister wants government-linked funds to invest more domestically.

Exceptions should always be made when necessary.

If the government is serious about making more drastic changes for the benefits of future generations, it could consider demerging Khazanah Nasional Bhd into two entities.

One entity would focus on maximising real returns for the nation, while the other would invests in strategic long-term economic areas that may not necessarily be lucrative.

The entity focused on maximising real returns could then be merged with KWAN.

By doing this, the merged entity can have a clearer mandate: to maximise profits.

Whatever approach the government considers appropriate, the ultimate goal should be to ensure KWAN – or even Khazanah – to achieve its true potential.

The bottom line is that it is not too late to rebuild KWAN.