TERENGGANU HAS SOME BOLD TARGETS AMIDST MUCH SCEPTICISM

SIDEWAYS By ANITA GABRIEL
(The Star)
(Saturday May 23, 2009)

IT ought to be one of the country’s greatest paradoxes – that oil and gas rich state Terengganu is one of the country’s poorest states. And the main culprit is without a doubt the political wrangling over the state’s major lifeline – oil royalties – and the cloak of uncertainty over its disbursement and utilisation.

There are still some outstanding issues, both legal and otherwise, involving Terengganu’s most hotly disputed oil royalty of an estimated RM1bil a year, but even as that plays out, the clearest evidence that something is amiss is that the over a million population in the state have yet to truly feel the benefits of the oil riches.

Think about it – oil was first discovered in the eastern coastal state over three decades ago and apart from the major shift in the state’s main economic engine from farming and fishing to oil and gas over that period, it still ranks poorly in the social development indices.

Toss in the fact that the state’s mean household income is one of the lowest in the country, second only to Kelantan and it can be appreciated that oil is a major slippery point for many.

Against that, it is easy to understand the overwhelming scepticism triggered by the establishment of the Terengganu Investment Authority Bhd (TIA), the country’s first state-owned sovereign wealth fund, which plans to kick off soon with an initial fund size of RM11bil, of which RM5bil involves government-backed debt papers and another RM6bil to be sourced from the assignment to TIA of some of the future oil royalties. TIA is wholly owned by Menteri Besar, Terengganu (MB Inc).

The most vociferous protests stems from two points – TIA is starting from the position of debt (government-backed at that) and it is merely creating another layer of oil royalty recipient to feed vested interests, again, at the cost of the state’s natural resources.

There is also the worry of whether or not the returns from TIA’s investments will be able to match or exceed the cost of financing (estimated at between 5.5% and 6%), which in a nutshell is the single most critical point in which TIA’s performance will be judged as a success or a failure.

Fanning such scepticism is, of course, the blemished track record of many state-controlled investment agencies which more than adequately highlight the perils of getting involved in business without the necessary professional expertise nor proper governance structure in place.

The thing is that the state is currently faced with a development logjam – there is no clear plan on how to bring prosperity to the people or how best to use the oil royalties it will soon be able to enjoy as an annual payment made directly to the state. The urgency is apparent – what will the state do when it runs out of oil? And that’s not too far off. It is estimated that it may even take place as soon as 15 years from now.

Clearly, in an attempt to fill in this void is TIA, the architect of which is the Sultan of Terengganu and Yang di-Pertuan Agong Tuanku Mizan Zainal Abidin and its much-vaunted promise that it will prudently manage the state’s oil wealth for the long term, encourage a flow of talent, economic activity and most importantly, prepare the state for the post-oil era.

That agenda is accompanied by another promise – to uphold the best form of governance. Towards this end, it has structured a triple-tier check and balance system comprising the board of directors, a board of advisers and a senior management team with relevant industry experience.

And while the board of directors will comprise representatives from the three stakeholders – MB Inc, Minister of Finance Inc and TIA Foundation (each own a preference share) – it promises too that none of the board members can hold positions in the government or occupy any political positions and that they will comprise “professionals with extensive experience in industry and priority investment sectors”.

Truth is, the bar, at present is so low and in the absence of any concrete plan elsewhere, it may be worth giving TIA a shot. As it stands now, the discrepancies on the data on how much oil royalties have actually been paid out to the state varies depending on who you ask. Clarity on this issue is imperative.

TIA’s newly appointed CEO Shahrol Halmi appears genuine when he promises transparency on the use of the funds and its investment decisions. “We intend to incorporate best practices of sovereign wealth funds from around the world,” he says.

The fund is fashioning itself after Mubadala Development, Abu Dhabi’s Sovereign Wealth Fund (SWF) which not too long ago surprised the world by making public for the first time, its annual report and by doing so, furnishing details that matched up to the disclosure levels of public listed companies.

It marked a refreshing break from the general perception that most SWF’s operations are shrouded in secrecy. Mubadala hopes that in sending out the signal, that it has nothing to hide, the world will be more embracing as it pushes forth its strategy to expand overseas. Indeed, a move worth following for TIA.

A main element of TIA’s strategy involves a tourism slant and that may not be too hard to wing considering the state’s long coastline is already a sweet tourism spot and some of the islands are touted to be some of the world’s most popular diving destinations.

But the overriding factor in judging TIA is the extent of financial discipline it will employ to meet its financial obligations, its returns on investments and its commercial integrity even as it pursues the developmental agenda which is to ensure the future prosperity and long-term sustainable economic development of the state and the well being of its people.

TIA seems to have everything in place, on paper, that is. Now all it needs to do is live up to its word. Otherwise, the issue of royalty that has long been an issue in Terengganu, will have an added dimension.
Business editor Anita Gabriel hopes the newly set up state-owned fund would walk its talk and more importantly, bring in the desired results. For the time being, her optimism outweighs scepticism.