Necessary amendments of the Federal Constitution and Federal Acts

Alex Ling

Part III

Why Tun Razak needed 80 per cent O&G revenues of the Borneo Territories since 1975?
The Review of MA1963 headed by Tun Ismail ended when he passed away a few months later in 1973. In that year, OPEC which had rocketed the oil price by two folds and over 10 folds later was like ‘Manna Falling from Heaven.’ That was the much needed economic turbo charger and national catalyst to build up the financial reserves confirmed by Tun Tan Siew Sin , the first federal minister of Finance to propel the projected Rostov-take off of the Malaysian economy which actually occurred later, as the federal government was barely until late 1970’s able to fulfil and sustain the commitments to the development of Peninsula Malaysia and the federal government itself under MA 1963, but sadly leaving behind the development of the Borneo States for the last 45 years despite the Assurances of the first two premiers.

That rationale was understandable and quite evident looking at the exports and traditional sources of revenues from the commodities such as palm oil, tin, rubber, a handful of small industries, small fishing industries, small shipyards, machineries’ dealers, agriculture, investments, tourism, small scale timber industries, financial institution and including taxes raised in 1960ies and 1970ies and the cash flows required. “I have to grind and bear, cut here and patch there……never enough for the total deficit budgets,” as Tun Tan Siew Sin would say. Sulu attacks in Sabah were costly after the British left, as predicted.

Why promises of offshore oil and shares of Petronas unfulfilled?

Tun Abdul Razak Hussein

In early 1966, that was when Tun Tan SS, under the directive of Tun Razak assured Sarawak that all the offshore oil proceeds of Sarawak would be given to Sarawak provided the Sarawak Capitation Grant of RM27 million [actually only 10 per cent less than the previous year is allowed under Article 109(1) of the FC] was to be reduced to RM12 million and the Special Grant (balancing) of RM 5.8 to be waived under the Federal Rule in Sarawak, represented by Datuk Harun Ariffin. YAB Datuk Tawi Sli, the second Chief Minister, was told by them to explain that to the Sarawak state cabinet. This was also confirmed in ‘The Rising Moon,’ by Michael Leigh. The shares in Petronas was offered to Sarawak and then withdrawn in the final 1975 negotiation at the eleventh hour, confirmed by the DCM of Sarawak, Tan Sri Stephen Yong in his memoir, ‘A life twice lived,’ for obvious reason of the tremendous profit of Petronas with OPEC’s cartel rocketing prices of O&G from US$6 bbl to US$10 bbl then over US$15 until US$120 bbl around 2000 even petroleum tax was at 46 per cent then. US$50 bbl would be the minimum realistic benchmark. As a corporate shareholder in Petronas, Sarawak would know the actual profits even not disclosed to parliament following Singapore GIC. Sarawak would have asked for the increase of royalty earlier and on the right to issue the licences and dominion of its O&G.



In 1969, that Annual Special Grant of RM 5.8 million requested by Tun Tan Siew Sin was abolished but not replaced by another grant under Article 112D(1) nor given all the offshore O&G proceeds as assured by the PM and the federal finance minister as the quid pro quo. The Annual Escalating Grant was revised once with the last payment of RM16 million in 1973 and not renewed every 5 years nor at all till today. But where was the offshore oil promised? In fact, the Petroleum Mining Act 1966 (‘PMA 1966’) and the Continental Shelf Act 1966 (‘CSA 1966’) were also promulgated in 1966, followed by the Emergency Ordinances (‘EOs’) in 1969. These were important historical facts and proofs of big annual deficit budgets which O&G of the Borneo Territories indeed were the saviour of MA 1963 and Malaysia but at the expense of the Borneo Territories which unfortunately received disproportionally and inequitably in the ratio of 5 per cent to 10 per cent for Sarawak to the ratio of 80 per cent for the federal and Petronas with their other entrenched rights whittled away by the federal government.
Any justifiable fear on defaults of payments?
That is why and what Tun Mahathir and his recovery team with the national rescue packages of our bloodstream are very concerned on the RM1 trillion debts, shortfall after GST being abolished and tax refunds with cumulative budgets for the Borneo Territories unfulfilled and bigger deficit annual budgets onwards with necessary more taxes to be levied compounded with a series of punctual repayments to maintain Moody’s rating, apart from PH’s promises. Understandably, for a safety cushion they would want as much as possible from what the Federal/Petronas (wholly owned by the Federal government) can ‘squeeze out’ of the O&G belonging to the Borneo Territories especially in the 30 per cent to 53 per cent plus 5 per cent cash payment balance of pure revenue or share profit or split barrel of O&G for the federal government under the PSCs apart from other taxes trying to fulfil the total budgets along with the four taxes and profits and dividends of Petronas for the national rescue with financial packages of retail bonds, Samurai Bonds and others under national interest.In the US-China trade war, the market is nervous and volatile.
Any comment on the Budget 2019?
In the positive and progressive budget for 2019, Sarawak was naturally disappointed for not getting its fair share of the budget again, though under the present difficult time burdened with the past legacy, for its national service and continuous great contributions already for the last four decades with tens of billions annually from the three profit centres, namely the 22 per cent taxes, 35 per cent to 53 per cent of pure federal revenues from share profit or split barrels of Borneo States’ O&G and from the taxable profit and dividends of Petronas. Sarawak contributes about 10 per cent-12 per cent of Malaysia’s GDP annually.
No budget will satisfy everyone. Nevertheless, the allocation of RM12 million for the first time for the Chinese independent school is quite encouraging along with RM50 million for the mission school as ‘Education is the debt of the present generation to the future generations.’ The dilapidated schools and requirements for health care are still glaringly insufficient. Meanwhile, the state will have to do its stop-gap part. Hope Vision 2020 budget would be better for the Borneo States due to their huge contributions to the national service from their O&G.

In brief, the budget is to promote more foreign investments, digital economy, balanced growth, partnership of public and private sector while abolishing mega and wasteful projects and adopt corporate governance, institutional reform, right fiscal policies and expenditure under the Rule of Law.
20 per cent royalty is still quite affordable with transparent accounts for negotiation. Is that correct?
Yes. Still, the federal government can afford, as shown already, to pay the minimum 20 per cent royalty or equivalent under local sale tax now for Sarawak’s dominion, and more after plugging the financial hole of about RM1 trillion, partially as a ‘compensation’ in the future over the net loss of the disproportionate Borneo States’ revenues for the past 4 decades as the political and financial sacrifices for the national interests in the annals of our Malaysian history.
It would be fair and best for the detailed audited financial accounts of Petronas to be revealed under the Rule of Law for transparent and good governance in parliament and SSM or at least during the meaningful negotiations with the state government and Petros including the production costs, sums and parts and sales prices. The rationale of non-disclosure of accounts would be quite different from GIC Singapore which is involved in new innovative projects with long gestation periods or no positive or immediate results in R&D, a rare opaque trait of parliamentary democracy, compared to the commercial arm of Temasek whose financial detailed results are disclosed.
Has Petronas profit to be fully disclosed under the Companies Act?
Yes. Unfortunately, that non-disclosure in SSM of actual revenues in the annual audited accountswould make Petronas, a public company and its directors, not through their faults, in breach of the Companies Act and laws, asit showed only a revenue of RM204,908 for Petronas (20076-K) in 2018 against a reported profit of RM45.4 billion in 2017. The Borneo Territories’ dominions on their respective O&G are entitled to the production records with financial details for calculation in imposing the royalty or equivalent local sale tax based on the fluctuating O&G prices daily on transactional basis in real times not on six month average to be shown in the records and accounts verified by the auditors for legislative councils’ answers and proper understanding to prevent allegations and inaccurate records for the Hansard.

Basically that would be the downstream investments and moratorium on PSCs.Investments in the O&G should bring more profits including in the mid-stream and downstream when opportunity arises, say in Train 9 and Sarawak PLNG Iafter due diligence, when opportunity arises for CNG if materialised, apart from levying local sales taxes on exported O&G and by products for sustained rural and other developments, backed up by an oil sovereign fund akin to Norway model.
Sarawak should discuss with the federal government and Petronas on a moratorium on no more PSCs or other licences to be issued between now and the end of the next year, apart from agreed taxes/impositions on O&G or else back to back with Petronas’s format and formula for reissuing the licenses or PSC.
The present O&G reserves about 20 per cent plus could last over 15 years or more, but more needed to be proven up in the Baram Delta, Central Luconia, Luconia and Balingian formations for the upside which looks quite promising.
Let Petrosand its subsidiaries work closely with Petronas, Carigali and Vestigo Petroleum at different levels giving the pre-emption right to Petros and the state government in the existing and future PSCs to be reissued or issued by Petros.
Any other suggestion for Sarawak?
A local university’s courses should offer petroleum engineering, geophysics and geology on oil and others; vocational schools on training technicians relating to O&G industries will be an asset to upgrade the local skill force from the Supply Base, onshore to offshore operations, including ‘rough necks’.
Failure would not be an acceptable option for the Sarawak state to increase royalty to 20 per cent or local sale tax equivalent, voted unanimously by the Council Negeri including DAP and PKR YBs with all the necessary amendments of the FC and Parliamentary Acts under the Rule of Law. So the alternative fiscal system would be by imposing the equivalent amounts under the local sale taxes, namely under Item 7 of the Part V of the 10th Schedule and under Article 95B(3) of the FC on the productions from its offshore and onland O&G.
We hope the perspicacious premier will hopefully accept the 20 per cent royalty now under the Rule of Law to re-establish a proper constitutional parliamentary democracy under the 7FCs, 7PMs and entrenched provisions of the Malaysia Bill (‘MB’) to make Putrajaya shining on the hill as his legacy and a new dawn in the heart of Borneo on the implementation of 20 per cent royalty first and the restored, revised and reformed MA63 Agreement.

Reported By : Alex Ling, MA LLB (CANTAB)
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