M. Bakri Musa
www.bakrimusa.com
www.malaysiakini.com
June 6, 2008
With Malaysia forced to end or at least reduce its petroleum subsidy, it
is well to learn from the experiences of other oil-producing countries.
There are enough lessons in the world today on how we should
manage our precious God-given oil bounty. Prudently done, as in Alberta
(Canada) and Norway, it would bring peace and prosperity. Anything less
and it would be a curse; the new wealth would breed corruption and tear
the socioeconomic fabric of society, as seen in today's Iraq and Nigeria.
I would rather that Malaysia emulates and enhances the
Albertan and Norwegian models. Malaysia should, like Canada and Norway,
remove all subsidies on petroleum products. This would encourage
conservation. It would also prod Malaysians into the global economic
reality instead of being insulated from it.
In order for this giant step to be accepted, the government
must divert the savings into a separate trust fund for use by future
generations when our oil would run out, with a small portion devoted for
current use in subsidizing cooking gas for the poor, and users of public
transportation.
The Lessons from Norway and Alberta
Norway, with a land mass slightly larger than Malaysia and a population
only twice that of Perak, 'sterilizes' its oil revenue by diverting it
into a separate trust fund for use by future generations. The wisdom of
that initiative is that the new wealth did not disrupt the social and
economic fabric of Norwegian society. There was no runaway inflation as
in Nigeria, and the Norwegians did not become lazy profligate consumers
dependent on their new oil wealth, as with the Arabs.
The Norwegians pay the same world price at the pump for their
petroleum, currently at about RM 7 per liter, nearly three times the new
Malaysian price. One consequence is that while they have one of the
highest per-capita incomes, car ownership among Norwegians is one of the
lowest in Europe. To them, a car is simply a means of transportation,
not for ostentation. Everybody knows that they are already wealthy; they
do not need to flaunt it. Further, the cars on the streets of Oslo are
mostly fuel efficient brands like Volkswagen rather than luxurious
Mercedes. In fact there is a stiff tax for gas-guzzlers.
Among the many positive consequences are that their roads are
not congested and their air less polluted.
Today the Norwegian Petroleum Trust is the world's second
largest sovereign fund, and fast expanding. It may have already exceeded
half a trillion (500 billion) dollars. When the oil wells run dry, as
they inevitably will, the Norwegians could still enjoy their present
lifestyles as the Trust Fund's income could cover the country's budget
till perpetuity.
Like everyone else, the Norwegians do not like paying high
prices for petrol, or anything else for that matter. However, they
willingly do so because they see the direct and tangible benefits of such
an enlightened policy.
The Albertans too pay world price for their energy, with their
government diverting the extra bounty into a separate Heritage Fund.
Unlike the Norwegians who invest in global stock markets, the Albertans
invest in their schools, universities, and hospitals. Consequently, as
noted in the Economist and also from my firsthand knowledge, Alberta is
the only place where the rich send their children to public schools! The
University of Alberta (which happens to be my alma mater) is now regarded
as one of the finest, thanks to generous funding from the Heritage Fund.
Malaysian Petroleum Trust Fund
Malaysia can improve on the Norwegian and Albertan models. We must commit
to remove all subsidies on energy, and do so in a phased and predictable
manner, perhaps over a couple of years. This must be coupled with a
properly thought out plan to protect the poor.
For example, there must be subsidized cooking gas for the
poor, and only for them. We can easily estimate the energy needs for the
typical poor family, and limit the subsidy or even direct grants only for
that amount, and nothing more. It should be fairly easy to devise such a
poverty-ameliorating program with minimal leakage. We could model it
after America's "food stamps" program.
Likewise, we should subsidize and thus encourage public
transportation. In British Columbia, season pass holders (rich and poor)
for public transit get a rebate from the government. There is a public
good in this; for by not using their cars for commuting, the air is less
polluted and streets less congested, and thus require less maintenance.
The money saved from removing the subsidies should be diverted
to a special Petroleum Heritage Fund. The corpus (or principal) would be
invested locally in a broadly diversified portfolio to include stocks,
bonds, real estate, and venture capital. The fund should be passive
investor, concerned only with profit making.
The Norwegians limit their holding in any company to no more
than 5 percent, meaning, they are in it purely for the profit potential
and not to seek control or management. It is for this reason that unlike
other sovereign funds (Singapore's Temasek and China's many funds), the
Norwegians are the most sought after investors.
Like the Alberta Heritage Fund, the income from the Petroleum
Fund should be used to improve our schools and universities, as well as
providing affordable housing and better health care. Just as the corpus
must be invested locally, the income too must be spent locally. Thus no
scholarships to send students abroad, instead the money should be spent
to improve local universities so as to benefit the greatest number of
students.
The country now has many such trust funds, from Tabong Haji to
Employees Provident Fund. All too often they serve as nothing more than
as sources of cheap funds for the politically well connected. They are
also not well managed.
To sell this idea, the Petroleum Fund must be professionally
managed and free of political interference. This is a very high but
achievable order. This means its governing board must have wide
representations, including nominees of the opposition political parties
and NGOs. Anything less and it would be hard to sell the policy.
Pakatan Rakyat's leader Anwar Ibrahim rightly expressed the
public fear and mistrust that the funds saved from reducing or abolishing
the subsidy would be used to benefit Abdullah's political cronies and
family members. Anwar and Malaysians generally have good reasons for
this suspicion.
I am not impressed with Abdullah's proposal to provide tax
rebates for car owners. If they can afford to buy a car, then they do
not need any subsidy or rebate from the government.
Abdullah must also spend the petroleum dollars locally to
benefit especially the residents of the oil-producing states. It is
morally indefensible and politically foolish to see residents of the
three states where oil is produced (Trengganu, Sabah, and Sarawak) among
the poorest in Malaysia.
If Abdullah does not handle this petroleum subsidy issue
wisely, it could prove to be the final straw to his downfall. On the
other hand, if he could learn (a big if) from the Norwegians and the
Albertans, he could not only salvage his political future but more
importantly, leave a significant legacy.
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