In 2008, a movie was even produced with the title Curse of the Black Gold to depict how Nigeria, at a production rate of 2.1 million barrels a day and the sixth largest oil-producing country in the world is still subject to abject poverty and have not developed into a rich nation with the abundance of natural oil & gas resources at its disposal.
I thought it would be a good start to this column as Malaysia is also blessed with quite an abundance of oil and gas as well. And whilst there’s been tonnes of in-depth articles written on this matter by oil and gas experts, I want to approach it from a simple angle on how this information will impact fellow Malaysians, encompassing the majority of those who don’t work for the oil and gas industry.
Politicians who govern countries that are blessed with natural resources always face a dilemma of the distribution of those resources either directly or indirectly to the state and to their citizens. For one, let’s begin with pledges that some of our politicians have made in public towards the run up of our most recent election. One article wrote about the oil royalty increase should the state of Sarawak be governed by the Pakatan Harapan party should they win the election. As most of us know, oil producing states within Malaysia receives 5% oil royalty from the Federal Government, which goes into the state’s coffers. The Pakatan Harapan manifesto was to increase this royalty quantum to 20% from the current 5%. Whilst we won’t be discussing on what is the right quantum of 5% or 20% (that in itself will be another topic altogether), I want to address the example mechanism of which it was to be distributed to state citizens. In this case, assuming price of a barrel of oil hovers around US$50-US$55 (RM195-RM215) per barrel, 100% of oil & gas revenue will be about RM30 billion and a 20% royalty was equivalent to about RM6 billion.
Let’s say at it’s divided equally among all its state citizen, with a population of about 2.5 million from the last Sarawak census done in 2010, each will reap about RM2428 for a year. Think of it like a BR1M, only this time it’s to all Sarawakians. Two questions arise, one, is this a sustainable way of wealth distribution or nation growing for that matter? And secondly, how long can RM 2428 be able to sustain a family?
For the answer to the first question, let’s take a step back and see how the government gets money and how long can they continue to dish out money. Governments derive their main revenue base from taxes (either through individual or corporate taxes) and then allocate those revenue resources gathered to create an ecosystem for businesses to thrive to generate more continuous revenue in years to come. I ideally like to think of governments as social enterprises, with a sustainable revenue for both the capital expenditure (e.g roads/schools/infrastructure projects) it will undertake and the operating expenditure it needs to maintain the government machinery (e.g staff salaries/emoluments/maintenance cost etc).
So how broad is the government’s tax base today, both as individual income taxes and corporate taxes (including oil and gas tax/royalty).
As of November last year, only 2.27 million Malaysians were individual income taxpayers from a population of 14.9 million employed. Only approximately 15% of the working population pays some form of income tax.
As for corporate taxes, approximately only 170,000 companies pay taxes out of 1.2 million companies registered in Companies Commission of Malaysia. With such a narrow individual and corporate tax base, how else can the government fund its social enterprise?
For one, it relies on Petroleum Income Tax that is imposed at a rate of 38% in malaysia. But with low oil prices, can the Malaysian government rely on Petronas or other oil operators for sustainable tax revenue to cover a big chunk of their expenditure? With the abolishment of GST which was a broad based consumption tax, of which I thought was good, the government could at least wean off the petroleum boys revenue to line their coffers. But alas that will not be the case. The key word here is sustainability, because if we relate this to finite resources (think oil or gas that will have a finite lifespan), there needs to be continuous replenishments. Therefore, if the government were to distribute all monies derived from Petroleum resources, what is there other things?
Can things be done differently then you may ask? Let’s just say we start building universities, and taking a sample from Xiamen University, the entire campus would cost RM1.3bil. Using the proceeds of Sarawak as an example from the above, RM6bil could build you roughly 4-5 university campuses or even skills based training centers like polytechnics.
So let’s say we build 1 university and 1 polytechnic and to make things simple, both cost the same at RM1.3billion. If they produce a combined 1000 graduates a year and they start contributing to individual income tax, wouldn’t that be a more sustainable way to line up government coffers? Malaysians are already blessed with multilingual capabilities and coupled with skills acquired through either tertiary or vocational education, they will be able to earn better income. This is music to the taxman’s ears.
Investments into education can also broaden and enhance the skills of our workforce today. If we looked at the data of median income of Malaysian employees, there is a substantial gap between those who've completed their tertiary education compared those who didn't.
On average those who completed tertiary education (32%) earn a median of RM3,274, whereby those who only completed secondary school earn half of that at RM1,600.
Will there be debates on the efficiency on the execution of building these education centers? Sure. But we as a country really need to think of how to build a sustainable revenue generation model to the country’s future. By short term subsidies and handouts, while it may ease the pain in the short term, is not a viable long term solution for the country in the long run. While targeted subsidy like BR1M for the B40 would help alleviate their burden for the year, but honestly how far can RM2,500 take a family for a year? With the rising inflation, the purchasing power of these handouts will diminish year-on-year.
I look forward to sharing with you next on our country’s economic export and our dependence on the oil and gas sector. Most Malaysians may feel that we are very reliant on our oil and gas sector for our exports. That may not be entirely true.
*John Huo began his career with Shell Exploration & Production, building offshore oil and gas facilities. After 10 years with Shell’s upstream business, he joined data driven Investment platform company, EquitiesTracker of which he is the Chief Operating Officer currently.
**The views and opinions expressed in this article are those of the author(s) and do not necessarily reflect the position of Astro AWANI.