THE idea of having investment income as another revenue pillar for the government is not new. Norway’s oil wealth is saved in a fund that can be tapped to supplement the annual budget, if necessary.

Singapore’s annual budget, for example, has been enjoying what it calls a net income return contribution (NIRC) since 2000, which covered nearly 20% of the city state’s government expenses last year. The NIRC includes 50% net investment returns from Temasek Holdings Pte Ltd, GIC Pte Ltd and the Monetary Authority of Singapore. GIC manages Singapore’s government reserves while Temasek is Singapore’s investment arm.

Malaysia’s total income from interest and return on investment stood at RM29.52 billion or 12.7% of total revenue, if one only counts the RM24 billion “normal” dividend from Petroliam National Bhd to the government for 2019.

The RM30 billion special dividend (to repay the RM37 billion in owed excess taxes) pushed contribution from investments to 22.7% of total revenue and more than 90% of investment income estimated for this year in Budget 2019.

If the extra RM30 billion from Petronas — which caused its credit rating to slip to just one notch above the country’s sovereign rating from two before — did not have to go to repay excess taxes owed by the previous administration, 2019’s development expenditure of RM29.235 billion for the economic sector could have doubled. The RM30 billion could also have raised development spending allocated to the social sector (RM15.183 billion) and defence sector (RM7.08 billion) by 50% each and there would still be enough left to raise the development allocation to the economic sector by nearly two-thirds.

As it is, more than 80% of Malaysia’s interest income and return from investments are dividends from Petronas.

The remainder are dividends from Khazanah Nasional Bhd (tentatively RM1 billion for 2019), Bank Negara Malaysia (tentatively RM2 billion for 2019) and other unnamed financial and non-financial institutions (RM2.5 billion). If these institutions can successfully generate more income to strengthen the government’s hand, a portion of Petronas’ dividend — essentially the country’s oil wealth — could well be kept for future generations.

It remains to be seen if Khazanah, Bank Negara, Petronas and other government institutions are able to free up substantial amounts of cash that can be pooled to earn more money to sustainably supplement the government’s annual budget.

As most of Petronas’ dividend has been spent in the annual budget, there is likely less than RM20 billion of oil money currently saved in the National Trust Fund (NTF) or Kumpulan Wang Amanah Negara (KWAN), the country’s natural resource fund managed by Bank Negara. Petronas has been the sole contributor since the fund’s inception in 1988, with an accumulated contribution of RM9.2 billion as at 2017. As at end-2017, KWAN’s assets stood at RM16.9 billion, according to its annual report that year.

A listing of Petronas to raise cash is unlikely, observers say. The listing of some of its assets and the paring down of some of its holdings at its subsidiaries to pay more dividends to the government or to contribute to KWAN for further investment is deemed more likely. A unit of the oil corporation that manufactures and distributes lubricants as well as South African-based downstream unit Engen Ltd are said to be potential candidates for flotation or monetisation.

About RM10 billion could be raised by Petronas if it were to pare its holdings in five listed entities to 60% compared with 60.66% to 75.47% now, according to Bloomberg data at the time of writing. The five are Petronas Chemicals Group Bhd (64.35%), MISC Bhd (62.67%), Petronas Gas Bhd (60.66%), Petronas Dagangan Bhd (69.86%) and KLCC Stapled Group (75.47%).

The potential receipts could be nearer to RM22 billion if Petronas were willing to pare its holdings to 51%, back-of-the-envelope calculations show. Its stakes in these five companies alone are worth over RM100 billion at prevailing market prices, with the most bullish analysts valuing the individual stocks at between 4.8% and 43.1% more, significantly above consensus, Bloomberg data show.

Based on its current shareholding, Petronas received just over RM4 billion in dividends from the five companies alone, about 64.5% of the total RM6.2 billion paid out by them in FY2018, according to Bloomberg data. If Petronas were to trim its equity holdings in the five to 51%, it would have lost about RM837.3 million in dividends for FY2018. Trimming its holdings to 60% would have caused Petronas to lose nearly RM359 million in dividends for FY2018.

Tapping Petronas for funds to make more money is different from asking it for money to pay operating expenses because the former enhances the prospects of future earnings.

Cash could also be raised for further investments by Khazanah via capital market instruments such as exchangeable bonds. In July, Khazanah had a 3.45% stake in CIMB Group Holdings Bhd transferred in relation to a US$500 million convertible bond issuance.

There is also value at Khazanah despite the sizeable cash needs of national carrier Malaysia Airlines Bhd. As at end-2018, Khazanah’s realisable asset value (RAV) — the market value of all its equities and cash — stood at RM136 billion. Net of liabilities, its net worth adjusted (NWA) portfolio value was RM91 billion as at end-2018.

Assets in its commercial fund, which can be monetised if the price is right, include its holdings in CIMB Group (23.54%), Axiata Group Bhd (33.93%), IHH Healthcare Bhd (26.05%), UEM Sunrise Bhd (66.06%), Astro Malaysia Holdings Bhd (20.7%), UEM Edgenta Bhd (69.1%) and Time dotCom Bhd (20.4%). Its holdings in just these seven companies are worth about RM50 billion based on open market prices at the time of writing. Khazanah also owns a small stake in Alibaba Group Holdings as well as private holdings in The Holstein Milk Company, Sun Life Malaysia, WeLab and Palantir.

Even part of its holdings in its “Strategic” basket — Tenaga Nasional Bhd (27.27%), Malaysia Airports Holdings Bhd (33.21%) and Telekom Malaysia Bhd (26.16%), worth another RM30 billion at prevailing prices — could be leveraged to gain cash for investments without an outright sale.

Money could also be potentially raised from ValueCAP Sdn Bhd. Incorporated in 2002, ValueCAP — equally owned by Khazanah, Kumpulan Wang Persaraan (Diperbadankan) (KWAP) and Permodalan Nasional Bhd — saw its assets under management peak at over RM17.2 billion in 2010 and it has paid at least RM8.4 billion in dividends to shareholders, according to its website. In September 2015, the government said ValueCap would be allocated RM20 billion to invest in the domestic capital market. While the value of its portfolio is not immediately known, its stakes in companies such as Malayan Banking Bhd (0.71%), CIMB Group (0.96%), KLCC Stapled Group (2.08%), Sime Darby Plantation Bhd (0.74%) and Telekom Malaysia Bhd (1.61%) alone are worth about RM2 billion at prevailing prices.

KWAP’s portfolio value is larger at RM140.8 billion as at end-2017, up from RM41.9 billion in 2007. As it is, KWAP manages the payment of pensions and gratuities to civil service retirees by disbursing government allocations from the consolidated fund (having taken over the functions of the Public Service Department’s post-pension services division in 2015). KWAP also manages a pool of money that is meant to one day cover at least part of the public pension burden. The limited size of its portfolio, however, means it will take a long time before it can play the role it was created to do in 2007.

According to the Public Accounts Committee’s debt and liabilities report issued earlier this year, the country’s total pension and gratuity liabilities total RM306 billion, based on a projection in 2015. The report did not elaborate on how the figure was arrived at. There are reportedly 1.6 million civil servants and 834,000 pensioners and beneficiaries in 2019. To generate RM25 billion a year to pay pensions requires a RM500 billion fund earning 5% net returns every year, simple calculations show.

Some observers reckon that operating cost could be saved by merging KWAP with the Armed Forces Fund Board (LTAT), which manage the pension funds for public sector employees and servicemen.

Cost savings could be generated too by cutting duplication of services if the Employees Provident Fund were to be merged with the Social Security Organisation (Socso), both of which are statutory bodies serving the private sector. Their assets belong to their members and not the government.

Datuk Shahril Ridza Ridzuan told The Edge in an interview in February that part of his mandate as managing director at Khazanah was to rebalance its portfolio and turn it into a significant income generator for Malaysia — one that can sustainably supplement the government’s annual budget within five to seven years.

Doing so would top his feat at the EPF, where he successfully rebalanced the EPF’s portfolio of assets to earn a lot more income, including investments that provide a steady stream of income without taking on excessive risks. The EPF, with an RM800 billion fund size, paid out RM47.32 billion in dividends for 2018 from RM50.88 billion in gross investment income — illustrating the sizeable benefits the government could have if it had a similar investment income-making engine.

To supplement annual spending, the fund size needs to be bigger as EPF dividends are not taken out but largely reinvested, with withdrawals by members still less than incoming deposits every year.

If Malaysia can successfully revamp its institutions by pooling resources and cut excesses to boost sustainable income generation capabilities, there will be less pressure to come up with new taxes or raise existing taxes.

If its revenue can grow by at least 10% a year (instead of a 10-year CAGR of 3.87%), the opex trio of pensions, emoluments and debt service charges — the three biggest components — can remain at 60% to 70% of government revenue or lower, back-of-the-envelope calculations show.

If government revenue grew only by 8% per annum through 2029, the opex trio could require 82% of annual income if they continue growing at the current rates.

Finance Minister Lim Guan Eng has declared that there will not be any new taxes in the upcoming Budget 2020, which he is slated to table in Parliament on Oct 11.

Yet without new revenue sources or significantly lower expenses, the need for more tax revenue will be inevitable. The new sugar tax and departure levy are unlikely to fill the gap. “In their current form, not even close [to what’s needed],” one observer says.

There is limited room to squeeze companies and individuals for more income tax — a small base that together contributed 45.4% of normalised federal government revenue this year. Malaysia cannot raise the corporate tax when neighbouring countries are cutting it to lure investments and also hopes to make individual income tax rates more competitive to retain talent.

Rather than an increase in tax rates, government tax receipts would automatically rise if companies and private sector employees earn more income. The closing of tax leakages by a more efficient civil service, without scaring away the right kind of investment, would be ideal. The tweaking of the tax regime to improve tax collection and the redistribution mechanism would also aid the fiscal space, though it may not yield the necessary 10% growth or more that a more effective and acceptable new tax or revenue source could.

Unless sizeable new revenue can be found, one seasoned economist reckons that the government will likely use its fiscal bullets, such as targeted tax rebates, in areas that can yield the desired outcomes from investments, technology transfer, productivity gains as well as the creation of high-paying jobs and hiring of fresh graduates and retirees. Investments or flexible work arrangements that allow care providers for children, older folks or persons with disabilities to also earn an income and contribute to the economy may also be areas that can be potentially rewarded.

Monetisation of other assets?

To be sure, any asset monetisation by the government and government-linked institutions and agencies need to be done well so that value is not lost from such a move.

Assets such as hospitals, golf courses or even prisons can be sold for redevelopment or monetised in sale and leaseback arrangements or income trust structures. The airport real estate investment trust mentioned in Budget 2019, which is still pending implementation, should follow the same rationale.

Civil service loans or even student loans could be securitised and sold to institutions seeking stable yield. If done, the exercise needs to be structured to have net benefits for the country and not just kick the can down the road to trip future generations. Money raised has to be invested in areas that will continue to add to the country’s coffers and generate benefits to the economy and not just for a select group of well-connected individuals who reap the benefits and require a bailout after the fruits have been harvested.

Speaking to civil servants on Aug 22, Prime Minister Tun Dr Mahathir Mohamad declared the government’s love for the people and civil servants but pointed out that the whole country is now paying for past unmeasured spending, including salary hikes of as much as 25% given by the previous government in a bid to win votes.

“If we use money that is borrowed or stolen to show that we care, in the end, we will face a huge problem,” Mahathir was quoted as saying. “If too much is spent on operations (operating expenditure), then there is not enough for development so we will have to borrow money and the country’s financials will be in a deficit.”

Expectations are that Budget 2020 will continue to run a deficit of 3.2% to 3.5% of GDP next year instead of the 3% target mentioned last November. It remains to be seen if policymakers can deliver the boost businesses and the man on the street are hoping for.

What is certain is that apart from finding new revenue sources, the government also needs to stem the growth of operating expenditure without hampering public service delivery or putting an undue burden on civil servants.

Whichever the path, it is always better to bite the bullet before one becomes desperate, as can be seen from how overspending resulted in billions in taxes (refunds) being owed to the people.

Had taxes not been owed to the people and businesses, and if cash transfers to the lower- and middle-income group had been better organised, then GST may not have been hated as much by the public and the business community, whose cash flow was hit by delays in refunds. After all, GST is implemented in at least four other countries in the region with lower and higher per capita than Malaysia’s. The people, unfortunately, associated GST with the pain of the higher cost of living that was a result of higher property prices, lower purchasing power from a weaker ringgit and inadequate transfers to cushion the impact for the middle income group. That ship has sailed. It remains to be seen if the new Sales and Services Tax (SST) regime can be successfully revamped to fill the gap without drawing ire.

If Malaysia fails to effectively employ its resources well, policymakers may no longer be able to cite the country’s strong underlying fundamentals as an incentive to attract investors by as early as the coming decade.