I have always tried to be frank on business issues. I have no problem highlighting business missteps and poor business decisions and strategy.
Over the last two weeks, following the hike in fuel prices in Malaysia, there has been a lot of public anger and frustration looking for the right punching-bag. Petronas is now a prime target for the general public and political opposition to focus their venom at.
Is it fair? Has Petronas been badly managed? If they had been poorly run, then yes, bash away. Let’s be clear. Don’t whack first and then ask questions later.
Petronas has always published solid annual reports in accordance to international accounting standards and reporting requirements. It’s all there on their website. The information provided is deemed sufficient to raise billions of dollars from international banks. Or else, banks will not be lining up to provide credit to the corporation.
So far, it appears that what most of the criticisms have been focused on are the “additional information” – do they have planes?; how much do they spend on the philharmonic orchestra?; and what’s the senior executives pay? – to name a few.
We have to remember that how much they pay to the government is not determined by Petronas. It’s decided by the government. Hence if you want to attack Petronas, it ought to be on how well they manage the operations, and did they fritter away funds at unnecessary expenses.
Whether the funds had been deployed properly by the government is a separate issue and that does not involve Petronas.
Let’s get the nitty-gritty out of the way.
Executive planes – even if they have it, it’s a necessary business investment for a company like Petronas. Petronas is not a Malaysian oilfield business entity but has operations in over 30 countries. Its not like the executives are flying to LA to buy art or visit their second home.
Philharmonic orchestra – If Petronas had not invested, we would not have a world class concert hall and an orchestra that is of international standards. Should we even have a world class concert hall? That’s like asking if we need to have good museums.
If we had a few great concert halls and a half decent orchestra that is of international standards, then yes, Petronas would have been throwing funds at superfluous needs.
Some critics scoffed when they heard that members of the orchestra are paid between RM20,000 to RM30,000 a month, and the majority of them are foreigners. When building something of international stature, then international benchmarks (which includes salaries) will have to be used to draw them in.
Then you ask, “Why so many foreigners?” One would be naive to think that we can start an international standard orchestra dominated by Malaysians. This is not another Malaysia Boleh project.
The idea is to get the best from abroad and hope that by doing that, we can groom Malaysians in their footsteps. Think of it as a grand CSR project.
That’s pretty good but revenue and profit are still not good enough. I would look at return on capital employed as that shows how effectively the company has invested – 2003: 25.6%; 2004: 28.7%; 2005: 38.5%; 2006: 41.6%; 2007: 40.9%. The figures should speak for themselves.
To the general public, it may appear as if Petronas is staffed by fat cats sitting around twiddling their thumbs, signing joint ventures with foreign big oil companies to drill for oil in Malaysian waters. They pump, we sell – surely its easy money. If Petronas had done just that, we would have been a net importer long ago.
Petronas had reinvested well, with solid operations in Turkmenistan, Egypt, Cuba, Chad, Vietnam, to name a few. Petronas is to these countries, what Shell and Exxon are to Malaysia.
Petronas has generated total profits of RM570bil since formation in 1974 to last year, of which RM335.7bil had been given to the Government (in taxes, royalties and dividends). Effectively, that’s a 58% tax on Petronas’ profits.
The other often cited criticism is how other oil producing nations can still maintain selling fuel at deeply subsidised rates to their people. Why can’t Malaysia do that anymore? Answer – it’s a simple maths equation which has not been properly communicated.
It depends on the ratio of total net export to domestic consumption. If it’s 1:2 it means if we consume 1 million barrels, we are net exporting 500,000 barrels, which is not a lot of net exports. Some countries have a ratio of 5:1 which is to say they may be consuming 1 million barrels but they are net exporting 5 million barrels. Suffice to say, some countries benefit a little but some benefit enormously. Malaysia is at the shorter end of the curve.
The second and more important reason has to do with tax.
As shown from the table above, the effective tax rate is between 40%, and 58% if you include special dividends and royalties. If Malaysia subsidises 35% of the real price of oil, then we would NEVER have to remove the subsidy because what the government gets from oil tax will always be greater than the subsidy amount. But we all know that we subsidise a lot more than 35%, maybe 60%-70%.
Collectively the government has taken a 58% cut of Petronas’ profits. Not all of that goes to subsidy as the funds need to be diverted to other expenditures.
The government could have preempted the problem by having a graduated tax scale. For example: for amounts up to US$40, impose a 60% tax on profits; amounts from US$41 - US$80 impose a 70% tax; and amounts more than US$81 impose an 80% tax. That way, your subsidy should always be handily covered.
If oil stays at US$150, a lot more reinvestment will have to be done to dig deeper and it will incur more capital deployment to use more expensive equipment and technology for oil. Higher price of oil means the low hanging fruits have been mostly harvested. To find more oil now requires getting to the more difficult locations and methods.
To keep subsidy on would mean whacking Petronas with a bigger windfall tax stick, but at the same time reducing its ability to invest properly in its global business.
The other thing critics cry foul at is in relation to executive compensation. My guess is that the top guys get fetch salaries in the region of RM1mil - RM6mil a year. Before you get all knotty about those figures, it is fair to say that they are still underpaid compared to their peers in the industry. (Note: Well get this, TNB fresh graduate executive gets RM 3k as starting salary, EPF around RM 2.8k and guess how much PETRONAS is paying its fresh graduates? RM 2.6k! So not sure where GUAN ENG gets his figures from! It’s a joke Guan Eng! PETRONAS STAFF are also MALAYSIA’S RAKYAT, why you even dare to go that extent?
Petronas Malaysia is by and large regarded as one of the best managed companies in the industry.
At the end of the day, the people need to be clear on how RM234.3bil (retained profits) had been spent through the years. It’s just a matter of coming clean if you have nothing to hide.
But don’t make the mistake of interchanging Petronas with the Government. The uprising criticisms against Petronas Malaysia is largely misdirected. Aim your arrows elsewhere.
By S. Dali from http://malaysiafinance.blogspot.com/
article ni lepaskan geram ker….marah ker…..frust ker……fade up ker……apa apa ker?……rasa nya tak der apa nak komen balek..semua da termaktub dan tertulis…….kita lihat dan baca..serta fahamkan……:))
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I clear with your issue on oil price. I heard it a lot nowadays even in khutbah at jamek last friday. but i just confused what your side on gov subsidy cut. not political side but rather economy side whether gov should cut it or not. i wondering cause from your last post, some agree but some seems not agree. after all, it’s good you want to educate people on this issue.
Dah banyak dengar people lepaskan geram kat Petronas. Tapi ape yg aku ragukan, siape the top boss of petronas? Kalau tak silap akula, dulu petronas ditubuhkan sebab nak tolong rakyat, especially in a case like now. Satu lagi….ape tujuannya hired foreign musicians for our own international orchestra? Kalaulah kononnya supaya nanti ada local musicians can follow….aku tak nampak ape rasionalnya sebab people like me and you wouldn’t enjoy orchestra, would you? Yg aku nampak Malaysia ni kalau ada je bende baru, mesti nak explore tanpe memikirkan kesannya jangka masa panjang. Nanti jadi hanye hangat taik ayam, je.
Thanks blogger..my position is clear from the beginning. If you were to look closely, there are two people posting on this blog. We have two different opinions and complement each other.
Again, the article above was written by S Dali, an independent blogger.
Economically, a price hike is something that can’t be avoided to correct the economic imbalance. It is times like this, that government has got no choice but to improve public transport system which in the long run will benefit the low income group greatly. You have already heard plans about the speeding up of the construction of LRT extension etc.
Frankly, having an Philharmonic Orchestra is wastage. It’s a luxury that appeals to certain group of people only. But it’s not PETRONAS’ call, it’s government. So in short, it’s wrong to bash up PETRONAS who has been providing and subsiding electricity, NGV and all sorts of things to Malaysia’s low income earners.
PETRONAS’ job is to manage and create value out of Malaysia’s natural hydrocarbon resources, and they have done it extremely well to the extent that the money given to Government by PETRONAS is more than 25% of Malaysia’s government total income. This income is meant to help the rakyat directly and indirectly. Some indirect because it gives money for government to build public initiative projects..Some of this money also goes towards partly to JPA sponsoring students, almost free education in Malaysia, better healthcare..tgkla kat hospital gomen, banyak alat yang canggih2 semua..ini semua duit petronas..
PETRONAS is also leading the biodiesel initiatives..
More enlightening article on PETRONAS
petronas? apa yang ada dengan petronas selagi usd masih menjadi dominan? kalo tukau kepada euro 2008 mungkin boleh turun harga tak?
kalo tak boleh turun harga jugak kita beli dengan duit euro aje laaa
aku bengang la, apsal kerajaan kata tak mampu subsidi sebab takde duit tp nak reward atlit sampai RM1,000,000 kalau dapat emas? kalau nie cara nak motivate atlit then its wrong. Kalau negara kita dah takde duit, then buat cara takde duit. Jangan la left hand donno what right hand is doing.
of course la petronas a properly manage company tp jgn lupa, dia ambik hasil bumi Malaysia, so mmg berhakla segala pertolongan yg kita dapat tue. Walaupun Petronas starting salary slightly lower than market, tp diorng juga dapat bonus menggila berbanding ngan tempat keje lain.
Segala hasil bumi sabah sarawak,terengganu yg disapu tue, kita wajarlah reward negeri empunya jugak.
What has been said by in this blog is very much true. All the taxes paid by PETRONAS has been used by government to subsidised petrol price, agricultural sector, human capital development and so forth. But all of us must see that this fuel price hike were caused by speculators, war threats against Iran and great demands for oil from India and China. Now, if the government keep increasing the subsidy, that may caused our country economy to stall which at the end would caused us the citizens of Malaysia to suffer. The action taken by the government was right because the goverment can’t afford the sudsidy burden.Even though it’s hard to swallow but that’s the damn reality nowadays.
BTW, some people may say that our country is an oil producer country but why we must follow the world price while Saudi Arabia managed to keep the oil price around RM0.98 per litre for its citizens. The explanation to this is simple. Malaysia’s oil reserve is about 5 billion barrels that may last for next 20-22 years according to current production rate and our oil is highly in demand because of light sweet crude properties and the resource is limited. Meanwhile the Saudi Arabia has reserved for about 250 billion barrels that may last for the next 100-150 years. So, there is nothing to be surprised IMHO if their government could heavily subsidised the oil price because their resource is abundant. Now while we are still producing the oil all the people of Malaysia has felt the pinch, then wait till we become net importers in next 20-22 years. At that time, there’s no way for us to escape from the real world oil price.
To the people that have been bashing PETRONAS for recent oil hike, I think the government that you should be bashing at because PETRONAS as a corporation, it had done what have been instructed by the government to build this nation and its citizens. I hope people of Malaysia understands that this phenomena is caused by global factor not by local factor.
NTAH AJAIB .. CnC pun rasa RM1m s a reward tu .. ishh … ‘trlampau trlebih’ .. mmglah depa bwa nama negara tpi knalah ingt mslah kt dlm ngara ni dulu ..
waw, you can hear about Petronas evrywhere now, isnt it crazy?