Chief Minister Lim Guan Eng said the state government would write to Prime Minister and Finance Minister Datuk Seri Najib Razak seeking a RM5 billion federal government guarantee which it would utilise to raise funds via the issuance of Islamic bonds.

The state will then seek to double the amout to RM10 billion by getting in foreign direct investments (FDIs) to invest in areas that would have high economic impact in Penang and around the country. The name of the proposed RM10 billion fund is Penang Investment Authority (PIA).

“Just as the federal government has given its backing for the Terengganu Sovereign Wealth Fund via a government guarantee of RM5 billion, we hope Penang’s proposal will also be given equal consideration. We are not asking for RM11 billion, but RM5 billion federal government guarantee to raise the funds via an Islamic bond.

“All we are asking for is equal treatment. We hope that for every ringgit that is guaranteed by the federal government, we will raise the same amount to make the fund RM10 billion in total,” he added.

Lim later gave a copy of the letter written to Najib to reporters. The letter stated the proposed PIA would focus on several key high-impact economic projects in the areas of manufacturing, biotechnology, information and communications technology, research and development, and tourism in Penang and around the country. PIA would invest directly and alongside strategic international partners.

The objective of PIA is to move up the electronic and electrical value chain in the state, diversify the manufacturing sector to a more balanced composition between electrical & electronics and non-electrical & electronics sectors and attract FDIs into new industries such as avionics, oil and gas related, pharmaceuticals and medical devices.

PIA’s plans also include reviving Penang as an international tourist destination by leveraging upon the state’s world heritage trust status.

The proposed PIA’s set-up is similar to the TIA, where it is managed by a board with features that ensure the federal government gets a return on its profit for the guarantee provided.

The TIA is 100%-owned by the Mentri Besar of Terengganu Inc with the Ministry of Finance Inc (MoF Inc) and TIA Foundation each holding a preference share. The preference share comes with special privileges such as appointment of directors to TIA and 10% share of the profit after tax.

Similarly, the PIA is to be 100%-owned by the newly set-up Chief Minister Incorporated, with the MoF Inc holding a preference share that entitles it to certain approval rights with respect to appointment of directors and also 10% of PIA’s annual aftertax profits. Also, the board of TIA will be actively advised by a board of advisers.

Lim offered Najib co-chairmanship of the advisory board with him consisting of Malaysians and non-Malaysians with international investment experience, capability and credentials that will advise the PIA board of directors.

“The returns of the PIA are expected to be 10% to 15% per annum with the investment portfolio bearing a modest risk profile, and at all times, the investment strategy to be prudent and diversified, with low risk and secure returns being the foremost priority,” he added.

Lim said the PIA will adopt world-class, best practices consistent with its CAT philosophy of the state, incorporating the tender process for all projects approved and procured.

“With Najib’s 1Malaysia policy, we in Penang should also be treated equally,” Lim said at a press conference.

He said the state government had identified economic activities as key growth drivers for Penang over the next five to ten years, which would be PIA’s main focus.

Plans are also afoot to improve intermediate and final services such as logistics and port services to serve as a hub for the Northern Corridor Economic Region, northern Sumatra and southern Thailand growth triangle.

“The economic impact and consequent multiplier effects of the various investment activities of the PIA will be beneficial and provide the much-needed relief to the rakyat in the present uncertain economic climate,” Lim added.

He said the state government would seek an appointment with Najib to make a full presentation of the structure, strategy and mechanics of the PIA and to seek formal approval for the RM5 billion federal guarantee for the financing of the investment body.

This article appeared in The Edge Financial Daily, May 26, 2009.