Saturday, July 12, 2008

Windfall tax seen hitting fund raising

Nazir Razak of CIMB is quoted in The Star newspaper Windfall tax seen hitting fund raising as saying that the windfall tax tax would affect raising funds for infrastructure projects.
IPPs accounted for 21% of all ringgit-denominated bonds issued. Said Nazir, “There're no winners in this tax because bond yields have gone up, volume has come down and investor sentiments have been affected”.
Nazir said the implication far exceeded any money the Government could hope to raise from the tax. He said the Government needed to deal with the windfall tax issue quickly because of its possible impact on the bond markets since Malaysia historically had the most successful bond market in the developing world. “This tax is like shooting the goose that lays the golden eggs” he said.
Govt urged to re-look windfall tax
At the same time, The Star's columnist Daljit Desi writes in a column entitled, Govt needs a re-look at windfall levy for IPPs, that it is difficult at this stage to ascertain which option would be better for independent power producers (IPPs) – paying the windfall tax or renegotiating power purchase agreements (PPAs).
Desi writes that if the terms and conditions of the PPAs are not favourable and would affect their earnings, the only option IPPs have is to bite the bullet – the windfall levy.
She also put the view that fund managers said the levy could negatively impact the local investment landscape and, that many feel the Government should defer the levy and conduct a detailed study first as such a tax would affect the confidence of local as well as foreign investors.
Further spin control by proxies of the IPPs?
Nazir, being from CIMB, would naturally be concerned about the impact that the windfall tax may have on the financial markets. CIMB is, after all, the biggest beneficiary of corporate fundraising exercises in recent years.
What I'm rather perturbed by is Desi's observation that the IPPs have 2 choices - either to accept the windfall tax or, renegotiate the PPAs. Are the IPPs being given this choice?
I should hope not! I believe that the IPPs should be subjected to BOTH windfall tax and renegotiation of the PPAs.
Nazir calling the IPPs the golden goose only points to the obvious fact that the IPPs are, indeed, golden geese laying golden eggs only for the financial intermediaries like CIMB and, of course, the owners of the IPPs. Nazir, of course, has the luxury of pontificating while enjoying the largesse of corporate and financial deals from IPPs.
A harmonious solution to the "conundrum"
The solution that benefits everyone including the owners of the IPPs is available. See my humble suggestion in Tenaga to acquire all IPPs . This solution will allay Nazir's fears about CIMB as an intermediary and, it will excite the fund managers since the acquisition of all IPPs by Tenaga Nasional will nicely dovetail into the largest bond and fundraising exercise ever seen in M'sia and, Southeast Asia!
I know it's a radical idea. But if you give it some thought, you may find that it has merits from the economic, social and, even, political angles. The only "losers" are the owners of IPPs. And, they don't lose anything except opportunity because they will be selling their shareholding of the IPPs. They can cry all the way to the bank (CIMB?) and wallow in their misery in their personal bank vaults like Scrooge McDuck!
The end result is that Tenaga Nasional will be left to run the generation AND distribution of electricity. Most, if not all, economists define electricity as public goods. It should NOT be left to the hands of private profiteers. The polyarchy that controls the IPPs must be disbanded through this process to enable the benefits of the electricity generation industry to pass through to the general public.


Anonymous said...

Obviously Mr Nazir is talking his own books! CIMB is one of the biggest bond trading house in Malaysia so any negative implication on the IPPs would directly impact its holdings of IPP bonds (read: writedown and hence losses). Naturally primary activities are down hence impacting business as well.

Being someone who has a little inside knowledge of the Malaysian bond market and has raised monies for IPPs, I am quite aware of how easy it is for banks to make tens of millions in the course of raising money for infrastructure projects.. I am surprised in a way that such a practice was never brought up for discussion! Despite all the smokescreen of how good the Malaysian banks are etc etc they rely on the very old school way of generating excessive profits, by screwing the project companies through the opaque bond market (and they will tell you Msia has one of the most developed bond market in the developing world!).

You may say left pocket to right pocket since a lot of the banks are government owned.. but it enriches those who work for the banks :). So you either work in banks or you can invest in them...

Otherwise how else could some local investment banks made such good returns....??

de minimis said...

Hi again lasersharp. You do live up to your moniker! I've seen fundraising exercises and, I fully agree that banks and financial institutions typically do template documentation and then rely on the fixed cartel rates fixed by the Association of Banks - take it or shove it! Easy money, indeed.

Then there are the banks such as CIMB that has "access" to the powers that be and they hog all the work.

That was the plan for ECMLibra until Dr M (bless the despotic codger!) called time for KJ (who Kit Siang calls "the world's richest unemployed"). After that the field was left open for Nazir and CIMB. Will wonders never cease!

Anonymous said...

CT, I fully agree with you that public goods should NEVER be privatised. The private companies can participate in provision of public goods but only limited to providing their expertise.

eg for power generation, Tenaga will call for open tenders for construction, supply of equipment, etc. They make money from the project period. As far as CIMB and merchant bankers, they can continue to provide their services. The only difference is that it's new customer (TENAGA). So this trumpeting of fear propaganda rings hollow.

Similarly, for toll highways. The desired model would be to separate the construction, toll collection and maintenance. The private sectors will invited to participate in three different phases. But all the tolls collected will go to the govt coffers to retire the bonds. As for the mechanism for fund raising, you've covered very well earlier.

The attitude of if it's not profitable then get taxpayers to foot the bill. Just look at PKFZ and now double tracking. Why not PFIed it Gamuda/IJM ? :-)

Anonymous said...

Ben, the privatisation exercises in Malaysia are the biggest scam ever created to enrich a few! In my years helping companies raise money I just cannot understand our Malaysian model, where project companies (often times without much experience and capital) go on raising capital at a higher cost, which results in higher price to end users (public). The overall project cost will be lower if the government raises the capital to fund them. It just doesnt make sense commercially but then again there are reasons other than commercial.

I was told once a connected individual who secured a lucrative toll road, proceeded to raise capital without much equity, and right after financial close use the bond money to buy a 7 series for more than RM800k!

It is easy for me now, sitting in kiasu land, to make comments but I do feel that these issues need to be raised for the betterment of Malaysia

Anonymous said...

I agree that electricity supply should be "renationalised" or rebought by Tenaga. The current arrangement just doesn't benefit anyone much except the IPPs.

Keep up the good work.

Anonymous said...

lasersharp, we're on the same page on this matter and must continue to highlight these abuses until it's stopped.

If you look at all the privatisations, it's the concessionaires which dictate the terms.

This week Edge Weekly is trumpeting the same fear propaganda. I just understand their argument on the implication to bondholders. If the bondholders are paid according to the terms what's the problem. It's about managing the cashflow, isn't it?

Hasbullah Pit said...

I agree to for Tenaga to buy IPP.

de minimis said...

Some of us, of a certain vintage, may remember the Great Blackout of 1992. That was the catalyst that led to the govt policy to create IPPs. Poor Ani Arope (then the TNB chief) was made the fall guy.

His successor, Tajudin Ahmad, was against the lopsided PPAs. But Dr M sidelined Tajudin by shunting him off to SIRIM.

Then the path was clear for the lopsided PPAs that favoured the IPPs at the expense of Tenaga and us, consumers.

Jed, I'm not being pedantic, but what I'm proposing is not tantamount to "re-nationalising". Tenaga is a corporate and commercial entity and a successor company to the old Lembaga Letrik Negara. The proposal is for a CONSOLIDATION of the electricity generating and distribution sector.

This must be made clear because we don't want the IPPs to scurry around like ants in panic to say "re-nationalising" which will spook investors. Let's not give them that chance to spin control!