Some viewed it as another vehicle that would be used to squander the billions that the state gets in oil royalty. Others felt that since TIA had no track record, such a large sum of money should not be placed in its hands. But TIA has been sanctioned by Sultan of Terengganu Tuanku Mizan Zainal Abidin, who is also the current King.
That has somewhat silenced the politicians and other critics. Nevertheless, questions remain as to why TIA was given a RM5 billion government guarantee and what will happen if its projects fail to meet expectations.
Below are TIA’s replies to some of the criticism that the sovereign wealth fund faces.
The Edge: Why does TIA need to have a fund size of RM11 billion? Why not just raise the RM6 billion on the back of Terengganu’s oil royalty?
TIA: TIA needs to have a sufficiently large capital base to make significant high-impact strategic investments that drive sustainable economic development. Meanwhile, it wants to capitalise on economies of scale, have the ability to be a long-term investor, minimise concentration risk while taking on large-scale long-term projects. It wants to be a credible player among other sovereign wealth funds by attracting blue-chip investment partners. The partnership between the federal government and the state as stakeholders in TIA is also unique to TIA and a key source of competitive advantage for it.
Why should TIA get a federal government guarantee to raise RM5 billion?
The federal government agrees that TIA will be an effective organisation to prudently manage Terengganu’s oil wealth for the long term and also act as a catalyst for the state and the East Coast’s economic development. The potential for TIA to attract foreign direct investment into Malaysia is also there. Hence, the federal government decided to partner Terengganu in setting up TIA by matching the state’s commitment with a federal government guarantee for TIA to raise up to RM5 billion to help it achieve its objective of having an initial fund size of RM11 billion. The RM11 billion raised and put to work by TIA will provide an immediate stimulus for the economy and create new jobs, supplementing the first and second economic stimulus packages announced by the federal government.
The federal government guarantee enables TIA to raise the money as it is a new fund without a track record. It also helps lower the cost of financing. If it is ever called upon, the government will step into the shoes of the bond holders and have claims against TIA. We expect that in such a case, TIA will be able to pay back the government over the long term with oil royalty revenue and returns from its investments; hence, the risk to the taxpayers’ fund will be minimised.
The interests of the federal government and TIA are fully aligned as the Minister of Finance Inc (MoF Inc) will be issued a special share that entitles it to certain approval rights as well as 10% of TIA’s annual after-tax profit. In detail, MoF Inc will enjoy profits derived from TIA’s entire capital base of RM11 billion (including the additional RM6 billion to be raised backed by the state’s oil royalty revenue) although the federal government guarantee covers RM5 billion. Meanwhile, the 10% profit share will remain in force even after the government guarantee has expired, so long as MoF Inc continues to hold the special share in TIA.
Why the rush to raise RM11 billion? Why not wait after TIA is operational and then raise funding?
Given current volatile market conditions, timing is of the essence. We want to be in a position to capitalise on opportunities as they arise, whether it is taking advantage of fundraising windows in the market or pursuing quality investment opportunities at attractive valuations. However, this will not be at the expense of following a robust process to set up TIA. We have engaged reputable international advisers to develop detailed plans for the establishment of TIA.
Will other states demand federal government guarantees to raise money to set up their own investment funds?
TIA understands that its set-up may prompt other states, besides Terengganu, to demand federal government guarantees to assist in setting up state sovereign wealth funds. In fact, should TIA perform well, the structure and approach should not deter other states from using the same model with prudent financial practice, as long as the federal government is comforted that its objectives are to create a long-term sustainable economy and income stream for the betterment of the people of the state and Malaysia as a whole.
This allows states to manage their finances more prudently, and in the long run, reduces the burden on the federal government to provide large subsidies and cash handouts to the state. In this case, the federal government is effectively spurring developments in Terengganu and other states in Malaysia, hand in hand with the states.
Why can’t TIA raise the RM5 billion in tranches? Previous bond issuances have been smaller, or issued in multiple tranches even though the guarantee itself may be large. Why can’t TIA do the same?
Firstly, TIA would likely not be able to raise its required RM5 billion for its first phase of investments. If the government guarantee were to be provided in tranches, it would not be attractive to investors and not cost effective. To be credible as a sovereign wealth fund, TIA must have a certain fund size. We believe an initial fund size of RM11 billion is appropriate and achievable. Given that TIA believes the oil royalty that will be assigned to it will allow it to raise RM5 billion to RM6 billion, TIA would like to raise a similar amount guaranteed by the federal government.
Secondly, TIA has already identified several potential high-impact investment projects in partnership with leading international sovereign wealth funds to kick-start its plan. These projects involve significant foreign direct investment and will provide immediate stimulus for the Malaysian economy.
Will TIA’s role be a duplication of existing organisations in the development of Terengganu?
We believe TIA fills a current gap. It is widely acknowledged that the existing infrastructure to develop Terengganu has not been able to drive changes at a fast enough rate. Despite its rich oil and gas reserves, Terengganu remains one of the poorest states in Malaysia; the benefits of the oil riches have not trickled down to the people of Terengganu.
TIA will be a professionally managed company and will adopt global best practices. As a newly established entity, it has the opportunity to be more nimble and move quickly to ensure the benefits get to the people. This is not to say that TIA can succeed alone. We believe in the benefits of partnership and cooperation and envisage TIA playing a coordinating role in engaging with all relevant organisations to ensure the success of its projects and generate strong returns.
How different is TIA from Khazanah Nasional?
TIA is different from Khazanah. Firstly, it focuses on securing long-term sustainable economic and social development projects. Secondly, its core geographic focus differs from Khazanah’s, where it will focus on sustainable investment projects directly linked to or with large spillover effects for Terengganu primarily and the rest of Malaysia. Thirdly, TIA’s operating model is different in the sense that it will form partnerships with world-class sovereign wealth funds to invest in catalytic development projects in Terengganu and other parts of Malaysia. In this sense, we believe that TIA’s role is complementary to Khazanah’s and look forward to exploring opportunities to work together in future with organisations such as Khazanah and Tabung Haji. Finally, TIA does not invest, and is not looking at investing, in the equity of listed companies.
This article appeared in the Cover story page of The Edge Malaysia, Issue 756, May 25-31, 2009.