This article first appeared in The Edge Malaysia Weekly on January 24, 2022 - January 30, 2022

DATUK Amirul Feisal Wan Zahir, who took over as managing director of Khazanah Nasional Bhd in mid-July 2021, tells The Edge that the great reset forced by Covid-19 has allowed the institution to rethink the way things are done. Having had time to ponder deeply over Khazanah’s mandate, he and his team are all excited about leveraging the sovereign wealth fund’s (SWF) unique position to deliver sustainable value for Malaysians — be it via the RM6 billion Dana Impak for catalytic sectors to open new growth opportunities, spurring economic growth as an active shareholder in Corporate Malaysia or building capacity here by tapping into its global presence and network.

All that, Feisal says, is encapsulated in two words: “Advancing Malaysia”.

He rightly points out that as the country’s strategic investment arm, Khazanah still has significant influence over a sizeable basket of key Malaysian-listed companies (making up 14% of market capitalisation), even though it is no longer the largest SWF in terms of asset size.

Indeed, with assets under management of about RM120 billion at end-2020, Khazanah is behind Kumpulan Wang Persaraan (Diperbadankan)’s (KWAP) RM150 billion, although six times that of Kumpulan Wang Amanah Negara’s (KWAN) RM20 billion, according to unaudited estimates of the country’s three SWFs released under the Perkukuh initiative, launched on Aug 13 last year to push for optimal capital allocation and rebalance focus between financial returns and socioeconomic deliverables.

Of the three SWFs, whose funds are 100% government money, expectations are that Khazanah would also bear the burden of being that patient capital in which more strategic and targeted investments are made in key growth areas. This is given that KWAP was set up to eventually take over the burden of public pensions while KWAN was conceived to ensure future generations continue to benefit from proceeds from the country’s natural resources.

Yet, for all three SWFs to deliver on their full potential and purpose, Malaysia needs to add more funding to enhance the current formula. That is because, in reality, all three funds seem constrained in size and, thus, are not fully living out their potential — owing largely to limited resources and scale even before the Covid-19 pandemic greatly shored up the need for more government spending.

In December 2015, The Edge highlighted the need for Malaysia to save more oil and resource-related wealth for future generations under KWAN, whose sole contributor remains Petroliam Nasional Bhd (Petronas). Since then, we know that the government last year asked to withdraw RM6 billion from KWAN to fund Covid-19 vaccines and vaccine-related expenses.

Likewise, in June 2017, when The Edge wrote about public pension reforms and the need for KWAP’s fund size to be much bigger to deliver on its purpose, the government’s public pension liability was already over RM300 billion. The burden is likely larger today as society ages, going by how the federal government’s annual operating expenditure on public pension and gratuities alone are estimated to rise to RM28 billion in 2022 from RM21 billion in 2016.

Instead of being aided to grow faster, at least RM19.5 billion has been “withdrawn” from KWAP to help pay the annual civil service pension bill, starting with RM4.5 billion in 2018. KWAN also contributed RM5 billion a year to Budgets 2020, 2021 and 2022. For the record, civil servants do not contribute to KWAP as theirs is a defined-benefit pension fully funded by the government whereas private sector wage earners contribute to the Employees Provident Fund under a defined-contribution plan, where the onus is on EPF members to save for retirement.

In a recent interview with The Edge, Finance Minister Tengku Datuk Seri Zafrul Aziz said there were “definitely economies of scale in the sharing of resources”, when asked about opportunities to grow or even combine the three SWFs to supplement Malaysia’s annual national budget with a larger sustainable investment income stream, but stopped short of saying whether he was for such a move.

Asked about the set-up optimisation of SWFs under Perkukuh and whether he would support a merger to create a larger entity to generate better returns, Feisal said Khazanah “would support something that makes sense from the purpose of the fund and who is best equipped to manage it”, and flagged other ways SWFs could grow bigger.

Singapore’s sovereign wealth fund GIC, for instance, is set to receive US$137 billion more funds and grow to US$880 billion, following the passing of a law that allows the reduction of the foreign reserves held by its central bank, the Monetary Authority of Singapore (MAS), to 65% to 75% of GDP from 111% of GDP (US$419 billion). The move allows Singapore to grow excess reserves via investments with higher returns by GIC rather than kept in liquid assets that are less risky but provide lower returns.

Singapore’s fiscal strength comes from its budgeting discipline as well as how it manages and sweats its reserves. The three entities managing Singapore’s reserves (investment assets plus official foreign reserves) — MAS, GIC and Temasek Holdings Pte Ltd — contribute to the city state’s annual budget via the Net Investment Return Contribution (NIRC) framework that reduces reliance on tax income in the island republic that is also seen as a tax haven. It also creates a sizeable pool of funds that can be tapped during crises such as Covid-19 when other regular revenue streams fall.

Constituting about one-fifth of its national budget, NIRC has been bigger than corporate income tax since 2018, almost big enough to cover development expenditure. Whether or not its creation was spurred, in part, by not having a Petronas, the discipline and framework are areas that countries seeking to bolster their fiscal strength can take a leaf from.

As the country’s investment arm, Khazanah cannot entirely avoid being compared with its larger Singapore counterpart, Temasek. But it is worth noting that Temasek started earlier in 1974 with an initial portfolio of S$354 million, comprising assets previously held by the Singapore government, including a bird park, hotel, shoe maker, detergent producer, naval yards that became ship repair businesses, a start-up airline and an iron and steel mill.

The Singapore government has also injected capital into Temasek “from time to time as part of its asset allocation decisions”, information on its website shows. As at March 31, 2021, Temasek’s net portfolio value stood at S$381 billion.

According to Feisal, Khazanah was seeded with RM2.6 billion worth of government assets in 1994, of which RM100 million was cash. Its portfolio, measured by realisable asset value (RAV), grew from RM65 billion in 2004 (with RM17.8 billion in debt) to reach RM157.2 billion at end-2017, when its total debt stood at RM49.9 billion. The value of its portfolio has since been reduced to about RM120 billion, following sizeable impairments, including for Malaysia Airlines in 2018 and 2019. Total debt fell from RM55.2 billion at end-2018 to RM43.1 billion at end-2020, implying 2.9 times RAV cover — within the 2.5 to 3 times Feisal calls a “good cover”.

Still, the fact that Khazanah funds most of its growth via borrowings means the returns need to be much higher to make debt servicing costs worth the investments. For 2020, interest cost on debt alone was about RM3 billion — more than its RM2 billion dividend to the government that year. Between 2004 and 2021, Khazanah paid some RM15.6 billion in dividends to the government, averaging RM1.3 billion a year over the past five years. In Budget 2022, dividend was pencilled in at RM1 billion, as it was for Budget 2021.

Bank Negara Malaysia and KWAP are to contribute RM5 billion each in 2022, according to government revenue estimates. Collectively, the RM11 billion is about 4.7% of federal government revenue and “normal” operating expenditure and 3.3% of the RM332.1 billion record-sized Budget 2022 with additional Covid-19-related expenses that forced more debt to be taken.

A 5% to 10% annual return from the RM20 billion cash in KWAN, for instance, would give the government an additional RM1 billion to RM2 billion a year that would not need to be reduced by debt servicing, back-of-the-envelope calculations show. According to KWAN’s 2019 annual report, the return on investment was 4.1% in 2019 versus 1.5% in 2018.

To be sure, given the need to preserve growth long term, regulatory safeguards and transparent rules on oversight need to be put in to strike the right balance between generating more returns to expand the government’s fiscal space and ensuring capital preservation for future generations.

As witnessed by how fiscal strength allowed the Singapore government to pump cash to support the broader economy as well as strategic entities such as Singapore Airlines and Changi Airport during the pandemic, one does not need to be an accountant or a former banker like Feisal to know Khazanah would be able to do a lot more if its hand were bolstered with cash injections from its shareholder or if it had not been tapped to nationalise Malaysia Airlines in 2014 after paying RM1.4 billion for the 30% stake it did not already own.

Feisal chooses not to complain, though: “If not Khazanah, it would be another [government-linked entity].”

Instead, he says, many people who took a job at Khazanah did so because of its unique position of being able to work closely with a wide range of stakeholders, “whether it is pointing out certain gaps in policies or processes to policymakers in government” or working with the private sector to build strategic advantages and deliver commercial returns.

Barring financial boosts from its shareholder, Khazanah will just have to punch above its weight and find clever ways to maximise impact with whatever it has to work with.

Local farmers and communities, for instance, can also see significant impact from relatively small investments, Feisal says, citing Khazanah’s investment a decade ago in The Holstein Milk Company Sdn Bhd, the people behind Farm Fresh milk who brought 60 Holstein Jersey cows from Australia to Johor and made fresh milk more accessible to more Malaysians in a marketplace dominated by reconstituted milk. To meet growing demand, it also acquired two dairy farms and a processing plant in Australia sold under its Yarra and Henry Jones brand, according to Farm Fresh’s website. Its investments are about to see greater financial returns, with Farm Fresh going for an initial public offering soon. A draft prospectus has already been filed for exposure on the Securities Commission Malaysia’s website.

The RM6 billion to be invested over five years via Dana Impak (loosely translated as Impact Fund), for instance, is one avenue in which Feisal says Khazanah will be putting money and resources to raise Malaysia’s economic competitiveness and build national resilience.

Khazanah will announce more projects for Dana Impak when the time is right and welcomes partners. Having assessed global megatrends and national priority initiatives, Khazanah’s six themes for Dana Impak are ensuring Malaysia remains globally competitive in a multipolar world; building climate resilience; food, water and energy security; decent work and social mobility by harnessing digitisation and technology advancements; ensuring equal access to quality healthcare and education amid global demographic shifts; and building a digital society and technology development hub to boost efficiency and bolster economic growth.

On its portfolio of listed companies, Feisal says Khazanah will be “a bit more active to create value” as well as to leverage its position as the Malaysian government’s investment arm to assist its investee companies with any issues faced in regulated industries abroad.

“I wouldn’t discount [the possibility of more mergers and acquisitions],” he says, without going into specifics, but adds that its board nominees would ensure that there is a clear linkage between a company’s strategy and value creation. A high-performing board would also make sure “the management team is right”, he adds.

Khazanah may reconstitute assets that were previously split into two baskets — Strategic and Commercial — says Feisal, given that all investments, including those with strategic (non-financial) importance, should deliver commercial returns over time.

While “Advancing Malaysia” may be Khazanah’s new mantra, Feisal says its overall mandate has never really changed, though its focus may have differed during various phases of development.

To Malaysians and stakeholders, Feisal has this to say: “Look forward to actual value being created [at Khazanah]. Let’s focus on coming together and look at opportunities to create value.”

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