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| Cover Story: TIA setting a precedent |
| Written by Siow Chen Ming | |||
| Monday, 25 May 2009 00:00 | |||
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Its formation only came about at the behest of the Sultan of Terengganu Tuanku Mizan Zainal Abidin, who is currently the Yang di-Pertuan Agong. Fed up with years of obscure spending from the oil royalty that the state receives annually, the Sultan initiated TIA with a view to ensuring a portion of the money goes towards building an economic base for the state when its natural resources dry up. TIA is tagged as the first state-established sovereign wealth fund (SWF) in the country and is setting a precedent on how state governments ought to manage their resources. In the past, finances were generally controlled by the federal government. But the way TIA is operating, it is effectively returning the powers to the state and its ruler. The formation and operation of TIA are unique in some sense. The idea was mooted by the Sultan and the people putting it to work are a group of largely low-profile and young professional managers. Politicians and serving or retired civil servants are out of the picture. But while it is not a state or federal government initiative, TIA started its operations with the federal government providing it a RM5 billion guarantee on a bond issue. The money is to be used in several high-impact investment projects in Terengganu and around Malaysia that the fund has identified. TIA has wasted no time in raising the funds. Just days after the government guarantee, it went to the capital market on a fundraising exercise to raise RM5 billion in the form of a 30-year Islamic Medium Term Note (IMTN). The IMTN has attracted a lot of interest. “As of now [last Friday noon], tenders for the IMTN have exceeded RM8 billion; 55% of them were received from foreign-owned institutions and 45% from local institutions. They are mainly insurance companies and banks. The tenders close this Monday,” says a banker familiar with the exercise. Malaysia does not have 30-year ringgit papers. So, pricing the bonds was not easy. But finally, the IMTN was priced at 5.75% — 50 basis points higher than the extrapolated returns on 10-year Malaysian government securities (MGS). The fundraising effort does not stop there. Besides the RM5 billion, TIA is to raise at least another RM6 billion by year-end. This is to be done by forward selling the oil royalty to be received by Terengganu over a number of years, mainly to investors from the Middle East. To facilitate the exercise, Terengganu will assign a certain portion of its future oil royalty streams to TIA over a number of years to raise the RM6 billion. Note that while the state will set a price floor based on prevailing oil prices in a mechanism to raise the amount, it will still enjoy a further upside in oil prices. With RM5 billion already in the kitty and another RM6 billion on the way, TIA has become the talk of the town, attracting a lot of attention from politicians, bloggers and investors. Many questions have been raised, mostly on the merits of its formation and purpose (see the Q&A). The fact that it is managed by relatively unknown faces adds to the intrigue. “TIA’s key objective is to generate long-term sustainable and recurring returns and ensure the development of long-term sustainable economic and social development programmes for Terengganu,” says Shahrol Azral Ibrahim Halmi, the CEO of TIA and member of TIA’s board of directors, in an interview with The Edge. Before joining TIA, Shahrol was executive partner of the “public service operating group” of Accenture Malaysia. It is said that he headed key assignments, including initiating a multi-year transformation programme at the Employees Provident Fund, as well as planning and executing the merger of Sime Darby, Guthrie and Golden Hope. The 39-year-old graduate of Stanford University says he prefers to let the results do the talking. He gives the assurance that work is already underway to make the money work. “We are very mindful that we don’t get the RM5 billion [from IMTN] and then only start thinking what to do with it. There is a cost to it from day one and the clock is ticking. So, we had actually done a lot of work before we started the fundraising programme,” he adds. TIA has identified several key projects to be implemented over the next 12 months, which will involve significant foreign direct investment (FDI), says Shahrol. First will be a resort development project on Terengganu’s Bidong Island and on the adjacent mainland, covering more than 3,000 acres. The project, comprising hotels and villas, is to help develop the state’s tourism sector that has been identified as a key investment sector for TIA. According to Shahrol, TIA will develop the project with the Mubadala group, an investment and development firm owned by the Abu Dhabi government. Under the joint venture (JV), TIA will inject the land (to be acquired from the state) into a JV vehicle while Mubadala will invest about US$1.8 billion (RM6.3 billion) over seven years. Besides boosting Terengganu as a tourist destination, the Bidong resort project is expected to generate good returns for TIA by unlocking the value of the land held by the state government. As the value of the land is expected to appreciate, it will reflect the resort’s potential and, at the same time, benefit the state. There is expected to be little quibbling over the modus operandi because the state itself owns 100% of TIA. The Minister of Finance Inc and TIA Foundation (a body established to undertake social development programmes in the state) each owns a preference share in TIA that comes with certain rights to appoint directors and a 10% share of TIA’s after-tax profit (see the governance model of TIA). Apart from the Bidong Island project, TIA will jointly form with the Mubadala group a new JV company that will undertake oil and gas (O&G) exploration and production activities in Southeast Asia. TIA plans to take up an initial 20% stake in the company and possibly increase its share to 40%. Other than plans for the JV to become a production-sharing contractor of Petroliam Nasional Bhd, the JV will explore opportunities in the regional O&G fields by riding the expertise of Mubadala’s unit, Pearl Energy Ltd, which is based in Singapore. Mubadala had acquired 100% of Pearl Energy early last year. Pearl Energy has O&G exploration, development and production assets in 21 contract areas and production-sharing contracts covering more than 135,000 sq km in Thailand, Indonesia, Vietnam and the Philippines. The group’s net production capacity was about 19,000 barrels of oil per day at end-2007, from three fields in Indonesia and the flagship Jasmine offshore oilfield in the Gulf of Thailand. According to Shahrol, the Bidong Island project and the O&G venture will take off within six months. Other projects will be finalised at a later stage. These include an agriculture-based initiative whereby Mubadala will enter into a long-term food purchase agreement with Terengganu, as well as other real estate, infrastructure, energy and agriculture projects to be carried out in partnership with the Qatar Investment Authority and the Kuwait Investment Authority. “Because we are bringing in the FDI to match our investments, the impact on the economy will not be just RM11 billion; it may be twice as large, at RM22 billion,” says Shahrol. Certainly, TIA’s management has to tackle some challenges to prove itself — setting a new benchmark in the quality of governance in handling state funds and promoting long-term and sustainable economic and social development activities in Terengganu. At this stage, though, TIA has got off to a good start with its fundraising efforts, which spell certain confidence in the SWF. “Considering that it is a 30-year IMTN programme, the pricing at a 5.75% coupon rate or yield rather than 6% as previously anticipated indicates a very good pricing for TIA. The tenders, with more than half coming from foreign investors, showed that there is confidence in the long-term economic prospects of the country and in TIA’s long-term business model. It is also a testimony to the success of the country’s new policy of liberalisation,” says a banker who is involved in the exercise. Other than strengthening its case to woo foreign business partners, management says confidence is crucial for TIA to attract Malaysian professionals to return from aboard. It adds that so far, 11 professionals have came back to join TIA, which aims to increase its staff strength to 30 by year-end and to 90 to 100 by 2010. Appointments to key posts are by merit, says Shahrol. “Only the best will be chosen. We want to attract the best talent,” he adds. It’s unavoidable that scepticism still abounds due to previous incidents of poor governance concerning state investment funds. A mitigating factor for TIA is that at least with this model, it provides a great degree of transparency and accountability on how the oil royalty will be spent. That very few can quibble about. This article appeared in the Cover Story page of The Edge Malaysia, Issue 756, May 25-31, 2009.
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