Who really benefitted from petroleum wealth?

About 99% of Malaysians will agree they do not experience benefits from Malaysia’s petroleum income. This is attributed to the poor conditions of public hospitals, burdening students’ loans, rising inflation and stagnant civil servant wages for 20 years. A complex framework of political, and financial policies had allowed personal accumulation of the petroleum wealth.

Malaysia took two strategic energy security initiatives in response to the 1973 Oil Crisis. Firstly, Petronas was incorporated in August 1974 to increase domestic production to reduce oil imports. Secondly, the Petroleum Development Act (PDA 1974) was passed in the federal parliament granting Petronas absolute privilege to explore, develop and produce petroleum.

Table 1: Categories of Petroleum Income for Putrajaya

TypeBreakdown
Direct Tax RevenuePetroleum Taxes, Stamp Duties, Sales Taxes
Non-Tax RevenueDividends, Royalties
Off-Book RevenueRevenue Forgone, Subsidies, Sponsorship

The petroleum income for Putrajaya can be categorised in three ways; direct tax revenue, non-tax revenue and off-book revenue. Income from petroleum operations is taxed at a rate of 38% under the Petroleum (Income Tax) Act 1967. Off-book revenue represents potential government revenue from petroleum that was transferred to other entities.

In 1997 government introduced regulated gas pricing (RGP) to cap fossil-gas price sold by Petronas. From 2017 onwards, Incentive Based Regulation (IBR) replaced the regulated gas pricing. According to the Malaysia Gas Association (MGA), PETRONAS had to forgo cumulative revenue worth RM241.4 billion under RGP.

Unsurprisingly, a large portion of this lost revenue was enjoyed by Independent Power Producers (IPPs). In 1992, a lightning strike near Teluk Kalong caused a power grid collapse but was restored under 10 hours. Future incidents can be prevented by investing in the power grid. Instead, Mahathir introduced Independent Power Producers.

The first five IPP holders such as YTL Corp, Ananda Krishnan and Genting had no experience in the power sector but received 21-year concessions. The “take and pay” regime provided the IPPs with an internal rate of return between 15% to 18%. Hence, TNB paid between 12.4 sen/kWh to 15.5 sen/kWh which was higher rate than any of TNB power plants. Petronas sold fossil-gas below market rates to cap electricity tariffs.

In 2008, the almighty IPPs came to their knees under public backlash. The IPPs’ refusal to neither renegotiate nor pay windfall taxes triggered public backlash as residential electricity tariffs were increased by 18% on 1st June 2008. The electricity prices were brought down on the 1st of July 2009. The 2nd Electricity Regulator Period (2017-2020) ended the need to give up gas revenue for the power sector.

Impact of Tax-And-Transfer System on Inequality

The B40 of Malaysians does not feel the impact from petroleum revenue because there is no substantial impact from anti-poverty measures. The OECD Economic Survey (2019) confirms that government subsidies programmes have no material impact on addressing inequality. In 2018, lifestyle subsidies such as petrol and highway compensation made up nearly 90% of universal subsidies. Food item subsidy such as cooking oil, sugar, and rice makes up about 5%.

At a micro-level, a single mother in B20 without a car gets nothing but a CEO family in T20 with multiple luxury cars gets several thousand Ringgit. There are about 25 million people above the age 16 years old. However, there is less than 15 million registered cars. T20 people tend to own many large cars and travel longer distances for leisure which utilises fuel and tolls.

At a macro-level, these lifestyle subsidies grant easy profits for highway concessioners. The highway concessions receives both compensation and toll collection privileges for several decades. Putrajaya paid an annual compensation worth RM2.25bil for highways concessions. The cost of abolishing daily commuting highways is RM21 billion.

Since 1980, the contribution of petroleum revenue to the federal government breached 20% but failed to trickle down to Malaysia’s people. The increase of petroleum income was offset by reducing taxes on super rich. Government had abolished of the inheritance tax, reduced the highest tax rate, and never enacted capital gains tax.

Average Tax Rate In Malaysia, By Monthly Income Group (2010, 2015 & 2020)

Between 2005 and 2013, the rising global oil prices had increased the oil-related revenue share between 30% to 40%. During the same period, the top marginal income tax rate dropped from 28% to 26%. There is minimal increment between average tax rate for those earning nearly RM1 million and RM3.8million.

From 2014 onwards, the sharp drop in petroleum income was compensated with the Goods and Services Tax (GST). The prosperity from rising petroleum income was not shared with the lower income people but drop in petroleum income was shouldered by lower income people through GST and subsidy eliminations. As of 2019, Malaysia’s tax to GDP ratio is 12.4% below the OECD average of 33.8%.

Conceding Sarawak’s petroleum wealth to federal had prevented federal enforcement agencies from stopping Taib to plunder Sarawak for 30 years. The combined net worth of 20 Taib family members is about RM86.4billion. Meanwhile, Sabah’s petroleum wealth was further minimised through diversion of petroleum landing and operations activities into Federal Territory of Labuan.

Petroleum wealth was misused for flamboyant activities particularly motorsports. Between 2010 to 2020, Petronas had paid RM1.5 billion as brand name advertising to the Mercedes AMG Formula 1 Team. This amount could be utilised to build at least 12 public hospitals with 100 beds. This excludes billions spent by Petronas on the Sepang F1 Grand Prix between 1999 until 2017.

In conclusion, at least RM500 billion worth of public wealth had been systematically accumulated into the hands of Top 1%. Interestingly, a large portion of petroleum wealth accumulated was done legally within the free-market framework.

SHARAN RAJ
Central Committee
Parti Sosialis Malaysia (PSM)
&
State Secretary
Parti Sosialis Malaysia Negeri Melaka (PSM Melaka)

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