Wednesday, May 27, 2009

State fund to focus on tourism, oil and gas

SHAHROL Azral Ibrahim Halmi, 39, was initially sceptical when he first heard about Terengganu Investment Authority Bhd (TIA).

He wondered, not unlike many others, if the scheme was just another way for a select few to experiment and benefit from the state’s oil money at the expense of the state and its people.

So, two months ago, when the executive partner at Accenture Malaysia was approached and offered the job of TIA CEO, he thought the decision would be easy, given his misgivings.

But he had a change of heart after an audience with the Sultan of Terengganu Tuanku Mizan Zainal Abidin, who is also the Yang di-Pertuan Agong.

Shahrol Azral

“I consider myself an idealistic person wanting to improve things for the country. The turning point came when I saw Tuanku’s passion and what he wanted to achieve with TIA,’’ he tells StarBizWeek in an interview.

“I keep telling people this is a unique opportunity to make a difference in the country.’’

While Shahrol may be convinced, he now shares the heavy load of convincing sceptics, of which there are many, about TIA’s mandate to bring socio-economic development to the state and its people and its ability to invest prudently to generate recurring income, while upholding the strictest form of transparency and corporate governance.

TIA will have an initial fund size of RM11bil, of which RM5bil will be raised via a government-backed 30-year Islamic medium-term note – the first 30-year paper ever issued in the country – and RM6bil via a derivative programme that essentially sells forward the state’s oil royalties for immediate payment today.

When you view that against the fact that TIA, as it stands now, has a paid-up capital of RM1mil and a few staff at its initial stages, it would be hard to believe that it can pull it off.

Shahrol points out that TIA will raise its paid-up capital to RM200mil very soon and RM1bil in due course. The agency has also embarked on an aggressive recruitment to hire up to 100 employees within the next year.

Funding structure

TIA executive director of business development, Casey Tan, says the money being raised by selling forward the oil royalties is net of what the state would use for its developmental budget.

“It will not stretch the government’s finances. Funds for TIA will be raised from domestic and international investors,” he said.

He is eager to point out that the funds raised from the assignment to TIA of some of the future oil royalties currently due to the state is “not borrowed money”, as they are essentially “sales proceeds from the sale of receivables”.

He explains that TIA has monetised the royalties in a way that will allow it to enjoy the upside if oil prices rise while limiting the downside losses if oil prices fall.

“If the oil prices fall below the floor, the investor who bought our derivatives will have to absorb the losses. If it goes higher than specified, then TIA and the investor will be able to share in the upside,” he says.

As for the other part of the financing which involves the issue of RM5bil debt papers, the book-building process closes on Monday at 5pm. The lead manager and underwriter for the medium-term notes is AmInvestment Bank while Goldman Sachs and JP Morgan are advisors for the financing structure related to the future oil royalties.

So far, the signs are encouraging. Shahrol says the take up rate for the bonds have exceeded RM8bil in value and the yield on the 30-year bonds is 5.75%, which an analyst says is quite good considering the fact that it’s a long-term paper. So far, some 55% of the subscribers involve foreigners.

Tang also explains that the Government guarantee was needed for the bonds to lower its cost of borrowing.

“The Federal Government does not come up with the cash. But it allows TIA to rely on its credit rating to raise the funding from public markets at a lower cost of capital,” he says, adding that this way, it subjects TIA to the “discipline of managing the funds prudently and professionally to ensure that the investment returns exceed the ongoing costs of the financing.”

Shahrol adds that the Government guarantee enables TIA to raise the money, as it is a new fund without a track record, and also helps lower the cost of financing.

He points out that the interests of the Federal Government and TIA are fully aligned as Minister of Finance Inc (MOF Inc) will be issued with a special share that entitles it to certain special approval rights as well as 10% of TIA’s annual after-tax profit.

“MOF Inc will enjoy profits derived from TIA’s entire capital base, although the Government guarantee covers RM5bil. And the profit share will remain in force even after the Government guarantee has expired, so long as MOF Inc continues to hold the special share,” he says.

But why the rush to raise money now? “Given the current volatile market conditions, timing is of essence. We want to capitalise on opportunities as they arise ... whether it means taking advantage of fund-raising windows in the market or pursuing quality investment opportunities at attractive valuations,” says Shahrol.

Given that the fund is borrowing to invest, some observers have said that it should be referred to as a hedge fund instead of sovereign wealth fund. Tang replies: “We don’t borrow to do a portfolio allocation. We are putting the money into productive projects which have to be viable and have an economic agenda that creates jobs and foreign direct investment.”

He says TIA’s hurdle rate for investments is 8% and it has a internal rate of return target of between 15% and 20%, which some have described as rather ambitious, especially amidst the current environment.

“It’s a little on the high side ... unless the fund is also involved in the market trading, although that would mean it is exposing itself to the vagaries of the financial markets,” says an observer.

The mandate

The idea for TIA was mooted by Tuanku Mizan, who had visited Abu Dhabi and was keen to set up an agency akin to Mubadala, that country’s strategic investment arm.

“We are modelling ourselves after Mubadala and are differentiating ourselves against Abu Dhabi Investment Authority, Temasek or GIC because the idea is more towards catalysing economic growth in certain regions,’’ says Shahrol.

Although Terengganu has a large portion of the country’s hydrocarbon reserves, it remains one of the poorest states.

Nonetheless, its GDP is over 75% dependent on oil and gas and the plan is to lower that portion. That can be achieved by growing other sectors of the state’s economy, and that is what TIA aims to do.

“We want to catalyse economic growth in the different sectors and make their contributions to GDP bigger and also drive sustainable growth when oil and gas runs out,’’ says Shahrol.

“The target is for the state to be self sufficient in 2020,” says Tang.

Tang says that by the matching FDI concept, the RM11bil TIA raised would actually be worth RM22bil in investment, which changes the scope and type of investments TIA will handle. The matching investment from Mubadala and other foreign investors is expected to start rolling in from July onwards.

He points out that TIA needs to have a sufficiently large capital base to make significant high-impact investments, capitalise on economies of scale and minimise concentration risk while taking on large scale long-term projects.

The investment proposition

“We have the projects and they have been planned for over a year. We are in execution mode and our partners are all ready,’’ he says.

The plan, says Shahrol, is to “create the largest independent oil and gas exploration and production company” in the region and for this purpose, TIA is in final stages of negotiation with Mubadala, which is keen to expand its energy assets in the region via Pearl Energy. TIA expects to invest some US$1bil while Mubadala, if all turns out as planned, will invest some US$1.2bil in the venture, he adds.

The other plan involves boosting tourism, already one of Terengganu’s main strengths, by developing several islands off the coast into world-class resorts through partnerships with several foreign parties.

To get better yields, he says, TIA will not just focus on the hotel business but is “taking a masterplan approach to build a resort with private villas and other amenities as well as retirement homes”. Towards this end, TIA will invest some US$1.8bil while it expects the sum to be similarly matched by a foreign investor for the project.

“It will be a tourism play. The land will be acquired from the state and sold at a higher price to the master developer. There could also be opportunities later to package it into a real estate investment trust (REIT) to get the desired returns,” says Tang.

But observers say such a massive tourism play may also be fraught with difficulties. The year-end monsoon has traditionally curtailed large-scale tourism projects in the East Coast and there are a number of holiday spots in the region, such as Bali and Phuket, that offer competition.

Also, connectivity to Terengganu needs to be improved.

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IT ought to be one of the country’s greatest paradoxes – that oil and gas rich state Terengganu is one of the country’s poorest states. And the main culprit is without a doubt the political wrangling over the state’s major lifeline – oil royalties – and the cloak of uncertainty over its disbursement and utilisation.

There are still some outstanding issues, both legal and otherwise, involving Terengganu’s most hotly disputed oil royalty of an estimated RM1bil a year, but even as that plays out, the clearest evidence that something is amiss is that the over a million population in the state have yet to truly feel the benefits of the oil riches.

Think about it – oil was first discovered in the eastern coastal state over three decades ago and apart from the major shift in the state’s main economic engine from farming and fishing to oil and gas over that period, it still ranks poorly in the social development indices.

Toss in the fact that the state’s mean household income is one of the lowest in the country, second only to Kelantan and it can be appreciated that oil is a major slippery point for many.

Against that, it is easy to understand the overwhelming scepticism triggered by the establishment of the Terengganu Investment Authority Bhd (TIA), the country’s first state-owned sovereign wealth fund, which plans to kick off soon with an initial fund size of RM11bil, of which RM5bil involves government-backed debt papers and another RM6bil to be sourced from the assignment to TIA of some of the future oil royalties. TIA is wholly owned by Menteri Besar, Terengganu (MB Inc).

The most vociferous protests stems from two points – TIA is starting from the position of debt (government-backed at that) and it is merely creating another layer of oil royalty recipient to feed vested interests, again, at the cost of the state’s natural resources.

There is also the worry of whether or not the returns from TIA’s investments will be able to match or exceed the cost of financing (estimated at between 5.5% and 6%), which in a nutshell is the single most critical point in which TIA’s performance will be judged as a success or a failure.

Fanning such scepticism is, of course, the blemished track record of many state-controlled investment agencies which more than adequately highlight the perils of getting involved in business without the necessary professional expertise nor proper governance structure in place.

The thing is that the state is currently faced with a development logjam – there is no clear plan on how to bring prosperity to the people or how best to use the oil royalties it will soon be able to enjoy as an annual payment made directly to the state. The urgency is apparent – what will the state do when it runs out of oil? And that’s not too far off. It is estimated that it may even take place as soon as 15 years from now.

Clearly, in an attempt to fill in this void is TIA, the architect of which is the Sultan of Terengganu and Yang di-Pertuan Agong Tuanku Mizan Zainal Abidin and its much-vaunted promise that it will prudently manage the state’s oil wealth for the long term, encourage a flow of talent, economic activity and most importantly, prepare the state for the post-oil era.

That agenda is accompanied by another promise – to uphold the best form of governance. Towards this end, it has structured a triple-tier check and balance system comprising the board of directors, a board of advisers and a senior management team with relevant industry experience.

And while the board of directors will comprise representatives from the three stakeholders – MB Inc, Minister of Finance Inc and TIA Foundation (each own a preference share) – it promises too that none of the board members can hold positions in the government or occupy any political positions and that they will comprise “professionals with extensive experience in industry and priority investment sectors”.

Truth is, the bar, at present is so low and in the absence of any concrete plan elsewhere, it may be worth giving TIA a shot. As it stands now, the discrepancies on the data on how much oil royalties have actually been paid out to the state varies depending on who you ask. Clarity on this issue is imperative.

TIA’s newly appointed CEO Shahrol Halmi appears genuine when he promises transparency on the use of the funds and its investment decisions. “We intend to incorporate best practices of sovereign wealth funds from around the world,” he says.

The fund is fashioning itself after Mubadala Development, Abu Dhabi’s Sovereign Wealth Fund (SWF) which not too long ago surprised the world by making public for the first time, its annual report and by doing so, furnishing details that matched up to the disclosure levels of public listed companies.

It marked a refreshing break from the general perception that most SWF’s operations are shrouded in secrecy. Mubadala hopes that in sending out the signal, that it has nothing to hide, the world will be more embracing as it pushes forth its strategy to expand overseas. Indeed, a move worth following for TIA.

A main element of TIA’s strategy involves a tourism slant and that may not be too hard to wing considering the state’s long coastline is already a sweet tourism spot and some of the islands are touted to be some of the world’s most popular diving destinations.

But the overriding factor in judging TIA is the extent of financial discipline it will employ to meet its financial obligations, its returns on investments and its commercial integrity even as it pursues the developmental agenda which is to ensure the future prosperity and long-term sustainable economic development of the state and the well being of its people.

TIA seems to have everything in place, on paper, that is. Now all it needs to do is live up to its word. Otherwise, the issue of royalty that has long been an issue in Terengganu, will have an added dimension.

Source : STAR & STAR
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