Tuesday, July 8, 2008

IPP association urges govt to reconsider windfall levy

Meanwhile, the TheEdgeDaily reported that the Association of IPPs in Malaysia has urged the BN federal government to review and defer the imposition of the windfall profit levy on them, pending a more exhaustive economic impact assessment on its far reaching implications for the country as well as the independent power producers (IPPs).
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The IPP Association said it had consulted key financial institutions and experts and the feedback on the move to impose the Windfall Profit Levy (Electricity) Order 2008 would not only be detrimental to the IPPs, but to the overall economy and investor confidence. A windfall tax of 30% is to be charged on any excess return of assets over the threshold of 9%.
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It said in 2006, the value of ringgit bonds and notes issued by the IPP sector was estimated to be in the region of RM20 billion, making the sector one of the largest issuers of Islamic bonds in the country.
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It added that the market's acceptance and confidence in the bonds were premised on a clear understanding of the IPPs' operating environment, business models and contractual obligations. The IPP Association cautioned that any changes to those fundamentals could precipitate a default in bond payments and this in turn would have an adverse impact and "multiplier effects" on the country's financial markets.
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The IPP Association said bonds issued by the IPPs would immediately face downgrading; IPP bond investors, including many domestic institutional investors, may in turn be forced to liquidate their bond holdings; and the resulting loss of investor confidence in the capital market would cause further downgrading of other securities precipitating a major sell-off.
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The market reaction on the proposed windfall tax has already impacted Tanjong plc whose share price has dropped from a high of RM19.90 about this time last year to the current RM12.20.
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The dire warning by the IPP Association belies the fact that IPPs represent an artifice created during the era of privatisation. The Power Purchase Agreements (PPA) that has benefitted the IPPs at the expense of Tenaga Nasional and end-consumers have been conveniently forgotten.
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A truer picture will emerge if the IPP Association is prepared to release copies of all the PPAs for public scrutiny. I suspect that the Association will say that the PPAs are subject to the odious Official Secrets Act while the BN federal govt will say that it needs to consult the IPPs before considering whether to release bits and pieces of information on the PPA.
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If the IPPs are prepared to be responsible corporate citizens and, if the BN federal govt truly understands the message of the electorate in GE2008, they will mutually agree to release to the public copies of the PPAs.

5 comments:

ben said...

BN will have to decide between a handful individuals (IPPs) vs 28 million RAKYAT.

If BN still have to any think-tanks left, after the GE 803 political tsunami, then they'll favour 28m RAKYAT. Otherwise, a change of govt is inevitable.

As for IPP Association, they can't have the cake and eat it. They're using fear tactic!

CT Choo said...

That's my point. The IPP Association is saying the things that we expect from an industry lobby group.

My concern is that the momentum built by the MPs be kept up & not lose steam. This issue must be addressed as it is long neglected.

lasersharp said...

It is true that the revision to the PPAs and material windfall tax may impact the local bond market. Unfortunately this is the problem created by the "privatisation" of the power generation sector where (1) large construction profits were made upfront, enriching certain parties (2) high dividends payout over the good years. There's no way to claw back these excessive profiting, so only the lenders who financed up to 95% of the value of IPPs will suffer the consequences of this wonderful, privatisation policy.

CT Choo said...

lasersharp's observation basically posits a mutually exclusive outcome i.e. no windfall tax & bondholders benefit or windfall tax & (hopefully) additional revenue to the federal govt to alleviate the problems associated with consumer price inflation caused by fuel price hike & rising food prices. The logical Kaldor-Hicks outcome should be to impose windfall tax.

lasersharp said...

Well it wont happen and is back to the drawing board since the IPPs and banks that hold the IPPs bonds are such powerful influence in Malaysia. Flip flop again i guess