Making the most of oil windfall

(Business Times Singapore) KUALA LUMPUR, June 29 — Petronas posted a higher revenue of RM264.2 billion for the year to end March 2009 mainly because of bigger sales volumes and the stronger US dollar. In the previous year, its revenue had amounted to RM223 billion.

But lower global prices and higher operating costs led to a 14 per cent drop in net profit to RM52.5 billion from nearly RM62 billion before.

Given that the average price of oil this year is likely to be softer than last year's average of US$88 per barrel, its oil revenue and profit in the coming year is likely to be weaker. According to projections by Standard & Poor's equity research, prices are likely to average US$56 this year and US$63 in 2010.

Given that Malaysia has gotten used to the idea of Petronas as a cashcow — its payments last year contributed a whopping 45 per cent of federal government revenue — the revenue shortfall could be painful.

In the last fiscal year, including royalties, taxes and dividends, the oil major paid a total of RM74 billion to the federal and state governments, a fifth more than the previous year's of nearly RM62 billion.

Over the years, nearly every other economist and analyst has warned about the disproportionate importance of Petronas' earnings on government revenue and the general economy. But the addiction to easy oil money is hard to shake — and doubly harder when those managing it lack the fiscal discipline to ensure the country derives maximum returns from it.

Indeed ratings agencies often cite the shrinking oil revenue but increasing Budget deficit as reasons why Malaysia's sovereign ratings do not warrant a higher grade.

With the Budget deficit ballooning to 7.6 per cent of gross domestic product this year after the government set aside an additional RM67 billion to stimulate the economy, many question how the deficit — expected to swell to over 8 per cent next year — is going to be pared when despite the oil boom years, it only had partial success.

Last week, Petronas revealed over 2003 to 2008, it had paid a whopping RM268 billion to the national offers or 57 per cent of all it has paid since its founding 35 years ago. Why Kuala Lumpur has not managed a more balanced budget, but instead needed to run successive deficits since the last Asian financial crisis in the late 1990s is incomprehensible.

Because of the hefty payments to Treasury, Petronas' reinvestments have dipped over the years, and in its last fiscal year it only reinvested 21 per cent of its profits. In comparison, the oil majors managed an average 57 per cent and other national oil companies, 72 per cent.

Meanwhile content with the easy pickings, not enough emphasis has been placed on developing other areas of the economy. At the same time, much of the windfall returns from oil appears to have been channelled into the operating expenditure, which sky-rocketed from RM45.6 billion in the 1998 national Budget to RM154.2 billion in 2009.

If asked, Malaysians would be hard-pressed to say where the oil revenues have been invested since development spending that is tangible to the average person is not evident. Sadly, the oil producing states of Terengganu, Sabah and Sarawak remain the most lacking in infrastructure.

Take the most basic: public transport. “Inefficient public transport hits you right in the face every morning when you leave your home to go to work, when you wait to take the bus, commuter train or the light rail transit or drive your car in congested smog-filled roads and highways,” the NST wrote in its editorial yesterday, noting the mess was in part a consequence of affirmative action being the Commercial Vehicle Licensing Board's prime consideration.

While it mainly referred to Kuala Lumpur and the general Klang Valley — the lack of good public transport is a sore point everywhere in the country and rankles all the more because it is such a basic requirement that touches nearly everyone.

It is precisely these sorts of productive public-centric development projects that the administration ought to be able to point to if asked to account for the windfall in petroleum revenues. Petronas' prudent stewardship of public monies ought to translate to more. Much more.