SABAH is about to get a huge windfall: monies owed to it since the formation of Malaysia in 1963. As part of the deal, the state gets 40% of the tax revenue raised from it by the federal authorities.
How much exactly is yet to be determined. There has been no mention of the amount.
In a recent article The Challenge of Estimating How Much Sabah Is Owed In Federal Taxes, we outlined the challenges involved in trying to make an estimation, particularly in terms of statistics that differ from one source to another, and of using key factors that are short term in the use of their creation for such long-term statistics.
Nonetheless, using the methodology we chose, a gigantic figure of RM136 billion emerged, which is more than 20 times Sabah’s annual budget and around a third of the federal budget.
In economics school, we were often reminded of how such huge windfalls can cause calamity and even destroy empires.
The biggest case in point has been the Spanish Empire of old, when the discovery of gold and silver in the New World (South America) brought so much wealth to the country that massive spending sprees occurred.
The thing was, apparently, instead of perpetuating that wealth by building up agriculture and industry, they spent it buying from other countries. It was far easier but the gold ran out soon enough and with it came poverty and civil war.
The sting of it came so eerily to me when I stood in front of a field that locals whispered, “Frente a ustedes están enterradas 40,000 personas asesinadas en nuestra guerra civil.” (In front of you are buried 40,000 people killed in our civil war). I was stunned silent for days.
So how does Sabah perpetuate the benefits of such a windfall? As soon as one asks this, the debate of how the windfall should be utilised begins.
Certainly, some of that amount must benefit the current generation of Sabahans, even bringing up to speed the level of development that previous generations from 1963 had missed.
At the same time, one needs to lay the foundation for future generations’ well-being. Is there a standard methodology for this? Of course not. The needs of peoples are different from one group to the other.
The needs of the Palestinians today are so very different from the needs of Sabahans; indeed, the needs of the West Bankers and those in Gaza are themselves so different.
So how does one do this? One can hazard a guess that it would be best to split the incoming windfall into two: half for making life better today and the other half kept in a fund for future prosperity. Let’s proceed with that.
Google’s AI bot noted that Sabah is Malaysia’s poorest state and that its reasons are unique: poor infrastructure and underdeveloped basic facilities.
In our July 7, 2008, The Edge Malaysia article The Many Tasks Of A New Nation – Part 1, we noted that in general, a new nation needs, among other things, the provision of food, supply of clean water, health and sanitation, proper and sufficient housing, supply of electricity, and employment opportunities to make a dignified living.
Thus, infrastructure building must be a priority. However, experience throughout the world shows that doing that without a final target that can generate returns to provide for further infrastructure expansion and economic growth is pointless; that is, it becomes a sunk cost.
Sabah’s great resource is its land. Almost 74,000 sq km, with the main Crocker Range only some 3,600 sq km (including its biosphere); meaning, there is a lot of flat land (Peninsular Malaysia is 132,000 sq km in total).
With Malaysia’s drive to increase food self-sufficiency, Sabah is ripe for a veritable explosion in agriculture.
To this end, half of the incoming windfall can be dedicated to building the necessary infrastructure to enable new agricultural plantings and rearing areas, which include roads to get the produce to markets, irrigation, power supply and little townships for the agriculturalists that would provide housing, schools, medical facilities and good sanitation, among others.
If feasible, these townships could also host food-processing plants, which would herald the beginning of industrialisation for Sabah with all its benefits and growth potential. Imagine Made-In-Sabah tractors, harvesters and giant cannery ships being manufactured there.
It must be noted that distances are so great in Sabah that stringing long-distance power lines risks huge electricity loss.
Thus, a hub-and-spoke model may be better with the power plant as the hub. A similar concept for water provision would benefit from this.
What about the other half of the windfall? The Norwegian Government Pension Fund Global (GPFG) model has often been quoted as a great future savings platform.
However, many are unclear as to all the little details that actually make this model the real success that it is.
Much has been written about the GPFG like in Cleary’s Trillion Dollar Baby: How Norway Beat The Oil Giants And Won A Lasting Fortune (2016) and the key lessons are thus:
- The source of funds forms the “capital” of GPFG. It shall not be spent.
- What is spent is the “income” from investing the capital.
- Not all of the total income can be withdrawn. What is not withdrawn becomes the next period’s capital.
- Most importantly, the Norwegian government must balance its budget before it can make an application (to Parliament) for a portion of the GPFG’s annual income.
From that point on, the GPFG fund basically grows based on compounding, further income retained and new capital injections.
As it gets bigger, then the income available for future generations gets larger. Imagine a 5% annual income on the GPFG’s current US$2 trillion (RM7.86 trillion) fund; it is US$100 billion or almost half the current national budget.
Let’s be clear; when the GPFG’s source of funds, the North Sea oil money, first came to the country’s coffers, it behaved just like how others would — it spent.
However, as oil prices fluctuated, so did the amount of funds it received. This led to boom-and-bust cycles that were terrible, to say the least.
Then, it decided to tame the beast and now we have the envy of the world, the GPFG.
Since Sabah’s windfall is itself finite in amount, prudence and discipline are called for.
When all the arrears have been paid and what is left are the current year’s entitlements, the stepdown is going to be felt.
If one has squared away savings, then one is in a good place. If one instead spent it all and then is faced with a smaller income, calamity ensues.
The worst-case scenario is to tie that temporary windfall to fixed long-term expenditure when one’s annual income without the windfall cannot support paying for it. Poverty ensues.
This is indeed a huge moment for Sabah and one hopes that it will take the windfall with calm, measure and discipline.
Prosperity awaits with the right decisions.
Huzaimie is the chairman and CEO of Ingenium Advisors, Malaysia’s financial macro-economics advisory. This appeared in the Edge.
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