This article first appeared in Forum, The Edge Malaysia Weekly on February 20, 2023 - February 26, 2023

The listing of Petroliam Nasional Bhd (Petronas), or any company for the matter, should be for the right reasons. Among the sound reasons are the owners’ desire to realise part of the wealth, raise money for expansion or to have easier access to funding in the future.

A listing to raise money and reduce debt is not exactly the best reason for any company to list. That goes for Petronas too.

A listing of the national oil company to raise funds to pare down government debt is merely a quick relief for what is a structural problem with government finances.

The national debt of RM1.5 trillion is a result of successive prime ministers not reining in spending and not increasing revenue. Year in and year out since 2000, Malaysia has run a budget deficit. In good times and bad, the government tends to spend more than what it gets in the form of taxes, duties and dividends.

Prior to 1999, the federal government budget ran into deficits during tough times. But when the economy improved, the budget was in surplus or balanced.

The weakening financial discipline has resulted in a whole generation of Malaysians who are in their 30s taking it for granted that the country has always run a budget deficit. This generation has not tasted what it is like for the ringgit to be at 2.50 against the US dollar.

If at all Petronas is listed, the proceeds will certainly be hefty enough to bring down government debt. But it will enable the government to continue adopting populist policies and further delay hard decisions such as cutting down on subsidies. Most importantly, it will not address the root of the problem, which is the need for financial discipline and reforms.

The idea of listing Petronas is not new. It has been bandied about but ended up being just a topic of discussion without any fruitful outcome. With assets of RM725 billion and handsome annual profits of some RM80 billion, the company is easily worth about RM800 billion.

A Petronas listing is something that investment bankers, auditors and corporate lawyers would want to see happen because of the hefty fees that they could potentially earn. Corporate governance “gurus” would advocate a listing because it enhances transparency.

But there is a high possibility a listing will do Petronas more harm than good.

First, where will it be listed? Will it be on Bursa Malaysia, or will it have a dual listing, with the secondary listing in an international financial centre such as Singapore, Hong Kong or London?

The golden rule of corporate finance is that companies should list where they get the best value. In the case of Petronas, that will only be found on Bursa Malaysia because domestic investors have a better understanding of the company.

Which leads to the second question: Will a listing of Petronas bring new capital into the system? Or will familiar names such as the Employees Provident Fund (EPF) and Permodalan Nasional Bhd be forced to subscribe for the shares?

If the primary listing is in Malaysia, the exercise is not likely to attract the big names in the high-powered world of international finance. There are several reasons for it. Primarily, it is due to Petronas always being viewed as an entity that is obliged to do “national service”.

For instance, it carries out a Vendor Development Programme (VDP) for just bumiputera companies to help them build their capabilities in the area of oil and gas. In this respect, contracts are channelled to companies under the VDP programme. Petronas also has a special arrangement with the government to supply gas to Tenaga Nasional Bhd to ensure that the domestic electricity tariff is controlled.

International investors do not like companies that are obliged to do “national service”. Moreover, with there being greater awareness of hydrocarbon pollution, oil and gas companies need to do a lot of work on renewable energy if they are to attract international capital.

Thirdly, a listing of Petronas on the local bourse will add to a lack of liquidity and imbalances in the weightage of stocks that determine the key index on Bursa Malaysia.

At the moment, Malayan Banking Bhd, with a market capitalisation in excess of RM100 billion, is the most expensive stock on Bursa Malaysia with a weightage of 10%. Public Bank Bhd carries the second highest weightage with 7.9%. When these stocks move up or down, it will cause a big change in the performance of Bursa Malaysia.

Assuming Petronas is valued at RM800 billion, eight times more than Maybank. Its weightage on the exchange would be huge. All it takes is some tinkering with its share price to manage the performance of Bursa Malaysia.

Is that what we want to see happen?

Also, there are already several Petronas subsidiaries that are listed on Bursa Malaysia and are among the top 10 stocks in terms of weightage. Petronas Chemical Bhd and Petronas Gas Bhd carry a weightage of 6.4% and 3.4% respectively. Apart from these two, MISC International Bhd and Petronas Dagangan Bhd are also listed.

How much more value can a listing of Petronas add to the domestic capital market?

Finally, there are many other ways to reduce debt.

Petronas declares a healthy dividend every year. Subsidies that form a substantial portion of government expenditure should be cut down. Instead, it is better to increase wages gradually so that the population at large is able to cope with the increased cost of living.

Leakages in government spending are huge. There is no official number but it is said to be between 10% and 20% of government spending. The federal government budget runs in excess of RM350 billion. Even a 10% plug in the leakages will make a big difference.

A listing of Petronas will certainly see the government realise an enormous amount of wealth. But it will be a one-time gain and a bane for many years to come.

Petronas will never be treated as a commercial entity because it is majority-owned by the government and will be called on to do “national service” from time to time. Even declaring bumper dividends when it cannot afford to do so is a form of “national service”.

And if anybody thinks that Petronas can resist the pressure to do “national service” when called upon by the government, they are grossly mistaken. As such, it will never command the valuations of other oil majors such as Shell and ExxonMobil.

For instance, when Saudi Aramco was listed in late 2019, it was the biggest initial public offering in the world, valued at some US$2 trillion. The Saudi Arabia government was seeking a valuation of US$2.3 trillion. Today, the company’s market capitalisation is just below US$2 trillion (RM8.9 trillion).

The listing did not add any value to shareholders. And there are myriad reasons why Saudi Aramco is treated as a government entity and not a commercial company even though it is listed.

On that score, it is best that Petronas be left in its current form.

M Shanmugam is a contributing editor at The Edge

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