At its annual report launch last week, Bank Negara deputy governor gave a relatively healthy assessment of the country’s economy. So glowing was the report, however, that several members of the audience felt compelled to ask his opinion of 1MDB, the proverbial elephant in the room.
He essentially responded by saying that ‘sovereigns’ (meaning government-backed entities) are not monitored as closely as are ‘corporates’ (meaning the private sector) in their respective issuance of bonds and similar financial instruments. This is presumably because a bond or debt obligation issued by a government authority is usually assumed as low-risk, given that they are backed by the taxing power of the said government.
What Bank Negara said was essentially correct, since its responsibility is limited to ensuring the stability of the banking sector. As long as 1MDB – which is a government entity, given it is wholly owned by the Ministry of Finance – is able to pay back loans owed to local banks (like Maybank and RHB), then the banking sector is safe. But ay, there’s the rub.
As at March 2014, 1MDB’s accounts showed a whopping debt of RM41.9 billion. (Which is, by the way, just short of the entire 2015 budgetary allocation to the country’s development, totalling RM50.5 billion. It is also eight times more what is allocated to safety and security in 2015, totalling RM4.9 billion).
Ultimately, if it is unable to pay off its multiple loans owed both locally and abroad, does it not mean that the government would have to cough up the sum? And this is already happening as events continue to unfold on a daily basis.
Most recently, Putrajaya confirmed RM950 million was given as a standby credit for 1MDB, which is basically when a fixed amount of credit is made available to the borrower as and when required for a given period of time. These are monies that could have been put to better use, surely.
Worse, frustration with the powers that be will surely grow if the additional RM5.6 billion revenues collected from the goods and services tax (GST) that is about to be implemented are shown to be used for such unpalateable purposes. Just this week, former finance minister Tengku Razaleigh Hamzah said in Parliament that the people had the right to know if GST “benefited the country or (would be) used only to pay the interest to debtors and bondholders”.
In one of the many conversations I had recently on the “1MDB losses”, a friend reminded me of a joke that is hauntingly relevant. A woman invested RM100 into the bank, expecting her funds to be safe and secure. Upon finding out the money was gone, she screamed hysterically to the bank officer, “You’ve lost my money!” to which he politely replied, “Your money is not lost, ma’am. It’s just somewhere else.” Likewise, the question we ought to be asking ourselves is: where did the money go?
That is something the Auditor-General’s office will have to answer as they dutifully scrutinise the accounts of the much talked-about entity over the next few weeks.
Even if some of these funds can be restored, the concern still remains: how should government finances remain sustainable over a long term period? IDEAS in a policy paper we released this week makes some suggestions, pertaining to an existing but very little-heard of national trust fund called the Kumpulan Wang Amanah Negara (or KWAN, for easy reference).
The KWAN was set up in 1988 with the original intention of saving for the future, especially from our depleting national resources. However, its total wealth for all of its 26 years of existence comes up to only RM9 billion. This is a relatively meagre amount when compared with the Norwegian Global Pension Fund, which has more than double that amount despite having started later than the Malaysian KWAN. In fact, it only represents 1.5 percent of the total petroleum revenue accumulated over the last 26 years.
Although our dependence on the oil and gas sector has fallen slightly over the last few years, its revenues still contribute some one third to our overall national income. Credit is due to the non-resource sectors (manufacturing and services), given their continual growth as a proportion of total GDP, which is encouraging. ‘
But given the spendthrift tendencies of our government of late (our operational expenditure expanded on average 11 percent annually from 1971 to present, and more alarmingly by more than 20 percent in 2011), it is important to strengthen existing infrastructure. For instance, we propose that the KWAN governance mechanism needs to be made much more robust in the way the fund is managed, how deposits and withdrawals are regulated, and finally, how it is accountable to taxpayers.
Some of the key disciplines of a well-governed fund (as outlined by the Natural Resource Governance Institute and the Columbia Center on Sustainable Interest) are that it should have clear and well-enforced objectives, fiscal rules, investment rules, division between the authority and various managers, and finally have regular and extensive disclosure to the public whilst ensuring independent oversight bodies exist.
Many of these governance mechanisms do not exist for the KWAN. For instance, the deposit and withdrawal rules are too general and need to be more quantifiably specific. Other oversight agencies ought to be brought in; currently only the Ministry of Finance and Bank Negara are involved – Parliamentary Committees should also be included as an additional measure. Finally, its reports should be publicly downloadable online and a website should be dedicated to publish all relevant details of the fund.
It is not just 1MDB or Pembinaan PFI or KWAN that must be examined closely; all other state-owned enterprises and funds (and there are many) ought to be monitored with a fine toothcomb. The adage is true: it really is your and my money. As taxpayers, we should demand nothing less.
Tricia Yeoh is the Chief Operating Officer of IDEAS