Ensuring Our Oil Bounty Would Not Be A Curse

First posted in my column, SEEING IT MY WAY in

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 I dea, 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.