1MDB to land power project?

One of the things that should not happen in any economy is a situation where a government-linked entity enters into the commercial sector to compete with private sector players. This has been happening way too often in this country.

So, I read this piece in the Business Times about 1MDB's foray into new power sector projects with very mixed feelings.

Mind you, I have absolutely no love for YTL Power. I am absolutely against any Independent Power Producer (IPP). The electricity power generation sector should have been kept with Tenaga Nasional Berhad as a successor company to Lembaga Letrik Negara (LLN) as a necessary statutory monopoly of a public good. The IPPs and the inherently lop-sided Power Purchase Agreements (PPA) hasn't done our country any obvious good. Instead, it has increased our cost of living.

So, my first complaint is that entities like 1MDB is crowding out the private sector.

My second complaint is that entities like YTL Power and its ilk of IPP players should not be allowed to remain in play.

Everything in the electrical power generation sector should be handed over to TNB. 

As a consumer, I have a healthy respect and appreciation of TNB. It is not a perfect service provider. But, then, which entity is ever perfect? 

That said, TNB is a damn sight far more preferable than 1MDB or YTL Power and its IPP ilk.

If you need a context to what I have written go here.

Time for IPPs to help the rakyat

Kudos are due to Business Times for this op-ed piece. This blog has hammered the IPPs for the lop-sided Power Purchase Agreements (PPA). The BT's op-ed reminder is timely. I implore the government to pay heed to this perspective that come the time to renegotiate the PPAs, the government must support Tenaga Nasional's position and pay heed to the massive burden that the Malaysian consumer has to endure with this example of dodgy privatisation model.

Here's the BT op-ed piece:

Sweetheart deals that the first-generation independent power producers (IPPs) secured in the early 1990s will expire in stages from end-2014 or 2015.

It is often highlighted that these IPPs have collected billions of ringgit from lopsided power purchase agreements (PPAs) that put them in very minimal or an almost zero-risk environment.

The IPPs are YTL Power Generation Sdn Bhd, Genting Sanyen Power Sdn Bhd, Segari Energy Ventures Sdn Bhd, Powertek Bhd and Port Dickson Power Sdn Bhd. They are controlled by some of the country's richest families and individuals.

IPPs don't want to review PPAs

Should anyone be surprised by Penjanabebas' stand that the IPPs are against TNB's proposal to the government for review of the Power Purchase Agreements (PPAs)?

Even the surrogate parent for the birth of the IPPs, Dr M has come out to call for a review of the PPAs because the huge power reserves, which means unutilised power, posed a heavy burden to TNB. Needless to say, what's bad for TNB is bad for consumers and the country.

This is the downside to rent-seeking arrangements endemic during the 1980s and 1990s privatisation drive.

My criticism of the IPPs is set out here. In particular, see my arguments here, if you care to.

In the mean time, the news is that with effect from March 1, electricity tariffs for households will be reduced by 2.54%. Commercial rates will be reduced by 2.7% while industrial rates will fall by 5%. I guess beggars can't be choosers in this economic climate.

Be that as it may, I still maintain that the IPPs should be nationalised. 

TNB paid RM43 Billion to IPPs

It was disclosed in Parliament, yesterday that between 2004 and May, 2008 Tenaga Nasional Berhad paid RM43 billion to the Independent Power Producers (IPP).

Apparently TNB has been paying a lot of money for standby power. But, get this, the international norm for standby capacity is 15% to 20%. What we have in Malaysia is a 40% standby capacity.

It has been reported that YTL Group has a cash hoard of RM11 billion.

It has also been reported that most of the RM11 billion cash hoard resides in YTL Power, an IPP that is 53%  owned by the YTL Group. 

When YTL Group and its Great Helmsman, Francis Yeoh crows about having bargains galore to acquire during the economic turmoil, I'm not sure whether to wave the Malaysian flag in a fit of patriotic fervour or, utter silent curses that while all Malaysians are born equal, some Malaysians are more equal than others. Francis Yeoh certainly counts as one of the primus inter pares (first among equals). 

George Orwell may have been right after all although I must apologise for giving his seminal work on abuse of power by the state a capitalist twist.

This is the peril of privatisation and negotiated tenders.

IPPs, Tenaga and Telekom

This was a post made on November 4 by the new DAP Economics Advisor, Chi Chang. In it he addressed the matter of electricity supply, Tenaga, IPPs and, he also dealt with Telekom and streamyx. Chi Chang knows what he's talking about and, I agree with his analysis:

Electricity tariffs were raised 24% in June. Oil prices have since fallen dramatically and people are now demanding Tenaga reduce power tariffs. But our electricity is generated using gas and coal, for which prices are still high.

In fact, the main beneficiary of the 24% electricity tariff hike is Petronas, which more than doubled its gas price to Tenaga – to RM14.31/mmBTU, from RM6.50/mmBTU! Besides higher gas prices, Tenaga is also incurring higher coal prices, which at about US$95 today are still 25% higher than the average US$76/MT Tenaga incurred in its last financial year ended Aug 08. The pain will be made even worse by the depreciating ringgit.

Some numbers will illustrate this. That 24% tariff hike will add about RM5.5bn p.a. to Tenaga’s revenue. Of that, RM5.3bn goes to third parties, leaving Tenaga with just a measly RM200m of the RM5.5bn additional revenue:

RM4.2bn (76%) goes to Petronas to cover the increased price of gas;

RM1.0bn to cover higher coal prices:

a. RM0.3bn because of the the US$ increase in price to US$95; and

b. An additional RM0.7bn due to the weaker ringgit, assuming an average RM3.70:US$1

instead of RM3.30

RM135m for capacity payments to new IPP Jimah.

In fact, by next year, Tenaga will be in a negative situation again because capacity payments to Jimah will rise to RM 700m! If you want lower power tariffs, the appropriate targets are the IPPs which have earned exorbitant returns and Petronas, not Tenaga.

Tenaga is under-appreciated. Its services have improved tremendously in recent years. So tremendously that we don’t appreciate how much effort goes into delivering that stable and reliable power supply.

If Telekom were running the power sector, we would still be suffering frequent brownouts (noisy fixed lines is the telecoms equivalent), blackouts (unstable Streamyx connections) and some areas without power at all (sorry, tak cukup kapasiti di sana untuk talian baru).

And yet Telekom gets a RM2.4bn handout of taxpayers’ money to do high-speed broadband while Tenaga is pilloried for high power tariffs which are not its fault in the first place.

If there’s one GLC to target for inefficiency, it’s Telekom. Why do we still have to pay Telekom RM25/month for fixed line ‘rental’? My housing estate was built in the 1970s. Surely after over 30 years Telekom has already more than covered its capital cost of laying down the telephone lines. And then there are the huge issues with Streamyx ….

Ani Arope, TNB and IPPs

It is always a good time to re-visit some recent history to obtain some perspective on things. First, read the interview that Tan Sri Ani Arope, ex-TNB boss, gave in The Star published on Tuesday, June 6, 2006. I am relying on the database of Jeff Ooi (I'm sure he doesn't mind).

The interview sheds some light on the circumstances under which the Independent Power Producers (IPPs) came into being. That is the historical context.

This post is pertinent because the Malaysian government is in the midst of preparing a National Energy Policy. The Malaysian public deserves to be involved. When the first draft of the Policy is ready, it should be made public for input. But, will the government do it? Or, will they just ram-rod it through as "business as usual"?

As for the politico-economic context of IPPs, like all important things in Malaysia, I had to dig up an excellent paper written by Jeff Rector of Stanford University, California entitled, The IPP Investment Experience in Malaysia. I implore you to read this paper if you wish to have a good idea of what the IPP issue is all about.

But, to lend you a quickie on the paper, I have extracted below the summation pages of Rector's paper:

ANALYSIS OF THE MALAYSIAN IPP EXPERIENCE

A. Was the IPP Program a Success or a Failure?

Given what we know about the Malaysian IPP experience, we must assess that the experience from the investors’ perspective was very positive.We don’t know exactly how much money the sponsors made,but all accounts indicate that the first wave of investment was very profitable.

One analyst said, “The first batch of IPPs, namely YTL Power, Malakoff, Genting Sanyen, Powertek and PD Power Bhd derived between eighteen and twenty-five percent internal rate of return (IRR). Other observers said that the first five IPPs had been “‘laughing all the way to the bank’ as they had been enjoying favourable terms ‘not found anywhere else in the world.’”

Additionally, all of the original players are still in the business and willingly entering new contracts at rates lower than agreed in the first round of investment. As to the second wave of investment, an analyst said that “the market expectation is that any new PPAs signed with [Tenaga] will give an IRR of only about twelve per cent.”

That Tenaga was willing to threaten unilateral revision of the contracts and withhold payment for two months may have hung a cloud over the sector, but during the crisis period, IPPs were perceived by at least one analyst to be one of the best sectors in which to invest. Publicly listed IPPs have provided a better return than both the Kuala Lumpur Stock Exchange index and Tenaga during the relevant period. Separately, it seems that bondholders and lenders to the project companies were paid according to originally contracted schedules without difficulty.

B. Why did the Contracts Hold?

It is notable that the PPAs were not altered during the economic crisis—a period when there must have been tremendous pressure on Tenaga to unilaterally change the terms of its expensive obligations to the IPPs. The national off-taker was forced to manage a debt crisis while it was hemorrhaging due to the expensive IPP contracts coupled with low power demand.
Nor were they altered in 2001 as some reports have indicated.

This conclusion would be hardly a surprise to those close to the deals but others have somehow been given a different impression. In 1998, IPPs constituted about thirty-five percent of Tenaga’s capacity (and even more of production) and were more expensive than Tenaga’s own generating capacity. Power demand was low and Tenaga was contractually bound to purchase power that it could not sell. The drop in electricity demand brought on by the Asian financial crisis exacerbated these problems, but the fact that fuel for the IPPs was produced domestically and the projects were financed exclusively in local currency significantly mitigated the stress of the crisis.

In light of the breaches of contract and forcible renegotiations seen in the IPP sectors of Pakistan and Indonesia, we might not have been surprised if in a country like Malaysia, with a weak rule of law, the state-controlled power company under serious duress decided to change the rules on investors after the investment was in place and the balance of leverage shifted. But this did not happen.

How was it that the IPPs could withstand Tenaga’s pressure to renegotiate in a time of national crisis? Was it because of the strength of their legal protections, or was it something else?

We offer the following hypothesis, which has two distinct parts.

First, the outcome of the 1998 renegotiation attempt was not the result of a two-party negotiation. Nor was it influenced by the expected value of the legal claims that either party may have brought. While the public position of the government at the time was that the dispute was not a government affair and that it should be resolved by Tenaga and the IPPs themselves, behind the scenes, the exact opposite was true. The outcome of the 1998 renegotiation attempt was determined and orchestrated by one actor, the Malaysian government.

Second, we identify a handful of considerations that might have influenced the government’s decision not to allow a renegotiation of the PPAs. The Malaysian government was the final decision maker and orchestrator of an agreement not to re-open the PPAs. Because the government had connections or control over each major stakeholder, there was no need to resort to the courts. It may very well be that because the courts were not believed to be reliable, an organizational structure that was held together with personal and ownership relationships was deliberately chosen so as to have a mechanism for commitment enforcement and dispute resolution without the courts.

In the aftermath of the crisis, the Malaysian government was involved in each of the key stakeholders in the IPP sector:

1. The government was a controlling shareholder in Tenaga. It appointed the Tenaga board and had final authority over any significant corporate decisions.

2. The government was an indirect shareholder in the IPPs. The government's super majority shareholdership in Tenaga flowed through Tenaga’s ten to twenty percent stake in all but one of the IPPs at the time of renegotiation.

3. The principle lenders to the IPPs were state-controlled. Most of the banks lending to theprojects were state banks. The state pension fund was by far the largest bondholder lending funds to the IPPs. In some cases it was the only bondholder. Needless to say, the government had influence and control over the decisions of state controlled banks and the state pension fund.

4. Finally, the promoters and principal investors in the IPPs reportedly had close personal ties to the prime minister and his close associates. The government was also the regulator of the IPPs and therefore capable of imposing future costs on the IPPs.

Given these extensive relationships, the fallout from the crisis for the IPPs in Malaysia was constrained by a number of factors. These include, concern over the reputation effects of instigating a dispute in the IPP sector, particularly given the troubles that were facing foreign investment throughout Asia at the time, and Malaysia’s successful incorporation of FDI in its own manufacturing sector as a driver of economic growth. Because of the broad reliance on domestic capital markets to finance the IPPs in Malaysia, decisions regarding the IPP sector here affected a distinct constituency than in many other IPP sectors. At the time, foreign equity investment in Malaysia was broadly spread in the power sector—including substantial investment in both IPP sponsors (e.g. National Power’s 15% stake in Malakoff), and in Tenaga itself.

Policy decisions on this front were made in an environment characterized by two factors unique to Malaysia.

First, Tenaga’s obligations (and the project companies’ financial structure) were comparatively less vulnerable to currency risk, due to reliance on local capital and fuel inputs.

Second, the network of relationships that connected equity holders and sponsors to debt holders and other lenders to government policy makers (and to Tenaga itself) likely opened avenues of communication and accommodation that were not available elsewhere in the IPP universe. IPP arrangements in Malaysia thus faced less pressure than in other countries that faced macroeconomic troubles, and were manageable through a range of relationships that also were not common in other countries.

Electricity tariffs: Feeling tricked

I've just paid another round of electricity bills. I can't help feeling very negative about the manner in which this issue has been handled by the government.

For the record, in the Star Online report of Thursday, June 5, the Prime Minister had announced that the electricity tariffs will rise due to, the restructuring of the fuel subsidies and the increase in coal prices, the Government had approved the new electricity tariff structure to allow Tenaga Nasional to absorb the cost for both commodities.

Recently, we are told that, Electricity tariffs will not be cut despite the massive drop in global crude oil prices.

Energy, Water and Communications Minister Datuk Shaziman Mansor said that oil did not directly affect the cost of electricity generation which was mainly sourced from gas and coal.

"We must bear in mind that 60% of electricity produced in this country is generated from gas and another 30% from coal. We cannot expect a reduction in electricity tariffs as there is no direct link here," he said at his Hari Raya open house. This was reported in the Star Online Saturday, October 25.

Read Aliran's analysis of this issue on Friday, June 6 and Saturday, August 5.

The BN government created the IPP monster (click here to see how many posts I have made on IPPs). It has an opaque structure cost structure such that the Power Purchase Agreements is not open to public scrutiny.

No matter how anyone sympathises with UMNO or any BN component parties, it is issues like this that is contributing to the downfall of UMNO and BN.

They can spin this issue all they like. But, come every month, when Malaysians examine their TNB electricity bill, they will be reminded that they are being treated with contempt by UMNO and BN.

UMNO party elections can come and go. MCA elections, MIC elections and, even, Gerakan elections can capture the headlines for as long as they can. But, unless there is proper economic management of issues like the cost of electricity, the rakyat is reminded every month that if Pakatan Rakyat can offer better economic management, then come the next general elections, their sentiments will be even more clearly expressed than on March 8, 2008.

Nationalisation is the new sexy word

Is nationalisation becoming sexy again? Not quite, yet. But given the subprime housing tumult that has been walloping the U.S. economy over the past 12 months, one can easily be forgiven for doing a double-take on a Republican Treasury Secretary, Hank Paulson (which traditionally rely on conservative policies that support small government) contemplating the nationalisation of Fannie Mae and Freddy Mac.

In normal times such a view would be regarded as blasphemous. It would be the equivalent of an UMNO politician spewing racist rhetoric in the presence of a Malaysian Deputy Prime Minister ... sorry! Bad analogy since the latter did happen. The Economist reports that, Politically, laissez-faire is seductive. Congress, which has feasted on the lobbying largesse of Fannie and Freddie for decades, has a vested interest in the status quo.

The article continues on, By allowing the Treasury to make loans to, or invest in, the companies, Congress made explicit what had always been tacitly understood: that it stood four-square behind the two agencies, even though they have private shareholders and managers paid like Wall Street barons. That is capitalism at its worst: it means shareholders and executives reap the profits, but the taxpayer bears the losses. It is also risky. Between them, the firms have more than $200 billion of debt to roll over in the next month, and the markets are queasy. The collapse of just one bond auction could send shock waves around the world.

This view is not unique. Brookings Institution has expressed similar views, that during the good times Fannie Mae and Freddie Mac has benefited shareholders and management. But now that they are ailing from poor business and financial judgment, the government is being forced to bail-out their mistakes.

The article goes on to say, All of which argues in favour of the bazooka option, nationalisation, as the only one that is fair to the taxpayer. Once the two firms’ capital sinks below a certain threshold (which could easily happen with a nudge from Mr Paulson), receivership—as a prelude to nationalisation—is allowed by law. In a stroke, that would lower the twins’ funding costs and, hence, mortgage rates, and show commitment to the stability of the mortgage market. It would, of course, technically add huge liabilities to the government’s balance sheet; but these would be offset by mortgage assets that are almost as large.

Nationalisation need not be the end of the story. The giants’ assets should be liquidated over time, or the entities broken up and privatised. The companies’ size and strange structure carry a big cost for American finance. Backed by cheap government funding, their bosses have speculated with the gusto of hedge-fund managers—and lost, time and again. The two Leviathans have squeezed private firms into the riskiest ends of the mortgage market, such as subprime lending. They have not brought sharply lower mortgage rates to America. Europe, where mortgage markets are fully private, is no worse-off. Read Fire the bazooka at The Economist.

Sound familiar? This self-same view could have applied to MAS's bail-out in the recent past. This view has been expressed in a previous blog entry Malakoff, IPP and Privatisation: Learning from Fannie and Freddie.

The irony should not escape us. The U.S., the most capitalistic and business-minded industrial economy in the world, is now forced to consider nationalising Fannie and Freddy. Nationalisation is the traditional province of socialist governments. In the U.S., the Democrats are the left-leaners, more into socialist-type policies. But, not the Republicans. This shows just how critical institutions like Fannie and Freddy can be.

Just how many Malaysian entities are of the magnitude of Fannie and Freddy and, have the same cataclysmic impact on the Malaysian economy if they fail? And, when they do, won't the bail-out come from taxpayers' money?

Rather than wait for some financial explosion to happen, it is necessary for the government to start reviewing the privatisation projects, not just the ones in the pipeline, like the 2nd Penang Bridge, but, also existing ones. It's cool to nationalise. Just watch what Hank Paulson is going to do with Fannie and Freddy.

Malakoff, IPP and Privatisation: Learning from Fannie and Freddie

As we know, in a fit of anxiety over rising oil and food prices, the Malaysian government recently decided to partially remove oil subsidies to great public opprobrium. As part of the fitful reaction, the government also decided to impose windfall taxes for the oil palm plantation companies and the independent power producers (IPP).

In relation to the IPPs, the opprobrious reaction came from the stakeholders of the IPPs, particularly the bank and investment intermediaries who deal with bonds issued by the IPPs. Of these, the greatest outcry came from Malakoff and its stakeholders. See Malakoff bondholders in a bind.

The bind that Malakoff's stakeholders may find themselves in is due to the fact that the windfall tax will eat into Malakoff's cashflow and profit margins which, in turn, will affect Malakoff's ability to meet obligations to bondholders. Why is Malakoff worse off than other IPPs? The answer may be that Malakoff's numerous corporate exercises and restructuring has generated greater debt obligations when compared to other IPPs. This is one of the downside risks of privatisation; where privatised businesses can get into financial problems.

This leads to the basic issue that I want to raise about the nature of privatisation of utilities, roads and public transportation in Malaysia.

Privatisation was fashionable in the past 2 decades

Despite his Look East and Buy British Last policy in the early 1980s, Dr M was enthralled with Margaret Thatcher's privatisation policies. Starting from the privatisation of Sports Toto in 1985, the Malaysian government quickly became a major adherent of privatisation. Construction of highways were privatised. Utilities such as electricity and telecommunications were privatised. Public transportation was privatised. Waste disposal was privatised.

Privatisation means public goods are carried out by privateers

In essence, privatisation means the transfer of the government's basic obligations to the tax paying public for certain goods and services to private enterprises.

Originally, these public goods such as roads, electricity, telecommunications and water were obligations of the government and government agencies. The conventional wisdom that evolved in the 1980s was that privateers were able to deliver these public goods more efficiently and, more cost-effectively.

Has the Malaysian experience validated this conventional wisdom? I suspect that the answer would be in the negative and, I'll tell you why I suspect so.

Higher costs of living with privatisation

The privatisation of public goods has resulted in higher costs of living for Malaysians. In all privatisation concession agreements there are built-in pricing mechanisms which escalate over time.

The major road concessionaire, PLUS, has such in-built incremental pricing (subject to Cabinet approval, which is a dubious safeguard). The early IPPs have such mechanism in the Power Purchase Agreements (PPA).

By its very nature, public goods have inelastic demand meaning that the consumers of public goods have no choice but to continue the usage of privatised roads, electricity, water and so on. So, any increase in price will be passed on the the public users resulting in higher costs of living.

Where are the benefits to the public from privatisation?

There is a pervading sense that these public goods are mandatory obligations of the government anyway. The government is obliged to provide these public goods. And, by privatising these public goods a middleman has been created to derive a profit from the delivery of public goods.

These middlemen have a singular goal of making profits. These profits go into private pockets. In contrast, a government that delivers these public goods, even if profit was made, goes back into the Consolidated Revenue of the government.

The indebtedness of IPPs as an example of the downside of privatisation

In opposing the windfall tax, the IPPs have argued that an entire superstructure of bonds have been created. The windfall tax will affect the ability of the IPPs to meet payment obligations to bondholders, especially so in the case of Malakoff.

While many of us understand that the construction of electricity power generation plants require debt-financing, loans and capital-raising, we should also wonder why the government does not want to undertake this role? Or, at the very least allow Tenaga Nasional to undertake this role.

This same wonderment applies to all public goods that have been privatised.

Two decades of privatisation experience has shown that there is little public accountability in privatisation activities. There is a club system where tycoons that own privatised businesses are accountable to Cabinet ministers in an opaque structure that even Parliament cannot peer into!

The basic proposition: If any privatised entity experiences financial failure, where will the bailout come from?

This is the basic test of whether privatisation should be phased out: Who will bail out these privatised entities if they experience financial failure?

If the experience of Malaysian Airlines under Tajuddin Ramli is anything to go by, the answer is obviously, the Government of Malaysia.

This leads me to share with you one of the current thoughts about the US experience with Fannie Mae and Freddie Mac. Alice M. Rivlin of the Brookings Institution posed the question about whether Fannie Mae and Freddy Mac, as key players in the US housing market, both of which are adversely affected by the imploding US housing market - whether these entities that have a pervading impact on the socio-economic life of the US, should be placed under public hands, that is, government control? Here's an extract of what Rivlin wrote:

Recent history suggests that we want the mortgage giants to be private when they are making breathtaking profits for their investors and executives. But when the going gets tough, we need Fannie Mae and Freddie Mac to keep the credit flowing to homeowners even if it means putting taxpayer resources on the line. Willem Buiter at the London School of Economics has called this ambivalence “the most deceitful socialism I know.” And he may have a point.

Read the full article here.

Likewise, in the Malaysian context, the question is, Do we want privatised public goods to be public or private?

IPPs exempted from paying windfall profit levy with new agreement

News reports clarify the government's position that where Independent power producers (IPPs) which successfully renegotiate their Power Purchase Agreements (PPAs) will be exempted from paying the windfall profit levy. The exemption starts from the date the terms of the new agreement comes into force.

Second Finance Minister Tan Sri Nor Mohamed Yakcop said in a statement that the new move was to encourage progress in the negotiations.

A committee comprising the Economic Planning Unit of the Prime Minister’s Department, Finance Ministry and the Energy, Water and Communications Ministry would be set up to oversee and arbitrate the negotiations between the IPPs and Tenaga Nasional Berhad. Read the full report here.

So, it WAS a trade-off between the windfall tax and renegotiating the PPAs! It WAS a cojones-squeezing exercise! Ouch! See my earlier entries on the IPP saga Windfall tax seen hitting fund raising , IPP association urges govt to reconsider windfall levy and MALAYSIAKINI: MPs query 'extreme profits' for IPPs .

Well, so long as the resulting effect is the lowering of cost to consumers and greater transparency, I'm all for it, regardless of the approach.

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).
-
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%.

-
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.

-
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.

-
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.

-

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.

-

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.

-

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.

-

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.

MALAYSIAKINI: MPs query 'extreme profits' for IPPs

UPDATE (July 20, 2008): There is an excellent study on the M'sian IPP experience done in 2005 by Jeff Rector at Stanford University.The study is very complete and it is nuanced by including the Great Blackout of 1992 that created the impetus for the privatisation of electricity supply and, some political subtext to the IPP saga. Read The IPP Investment Experience in Malaysia.

The unfair Power Purchase Agreement (PPA) between the Independent Power Producers (IPP) and Tenaga is finally getting Parliamentary scrutiny.

-

In the report MALAYSIAKINI: MPs query 'extreme profits' for IPPs MPs have started to call for a review of the PPAs. I had blogged about this in An economic agenda to consider.

-

The Mkini report by Fauwaz Abdul Aziz states, "I want to ask now whether we will review the extreme revenues going to IPPs or whether, if there are other reasons for this, the government would take over the IPPs that are operating presently," said Ahmad Hamzah (BN-Jasin).

-
In his reply to Lim Guan Eng (DAP-Bagan), Deputy Minister in the Prime Minister’s Department SK Devamany revealed that for the financial year 2006/2007, IPPs Segari Energy Ventures Sdn Bhd and YTL Power Generation Sdn Bhd pulled in pre-tax profits of RM614.883 billion and RM252.033 billion respectively.

-
TNB Janamanjung Sdn Bhd and Tanjung Bin Power Sdn Bhd, meanwhile, earned pre-tax profits of RM860.498 billion and RM332.892 billion, respectively. Among the other big earning IPPs, Powertek Bhd and Genting Sanyen Power Sdn Bhd earned RM372.6 billion and RM312.275, respectively.

-
Devamany also disclosed that 10 IPPs, from May 1997 to March 2008, received RM35.695 billion in gas subsidies from national petroleum firm Petronas. "

-

In my earlier blog entry I had taken a harder stand. I extract below my earlier blog entry:

-

Tenaga to acquire all IPPs
IPPs are protected by the unfair Power Purchase Agreements ("PPA") which forces Tenaga Nasional to purchase all power generated by the IPPs. We are told that Petronas is also subsidising the fuel consumed by these IPPs. Consumers are being forced to absorb the increased costs via higher electricity tariffs. This is classic rent-seeking behaviour.
-
The government must do a work-out for Tenaga to acquire the IPPs. Tenaga can do a massive bond-raising exercise to acquire the IPPs with the government to stand as a sovereign guarantor. The consolidated cashflow from the IPPs and Tenaga's own operations combined with the sovereign guarantee should make these bonds attractive and be given a triple-A rating.
-
I know there are brickbats thrown at Tenaga. But it is still a better vehicle that can be audited as opposed to the opaque structure that currently exists. Furthermore, the PPAs are under the Official Secrets Act, apparently. That is a sham!

An economic agenda to consider

I suspect that the amount of RM380 billion lost in corrupt activities over 20 years (see http://www.malaysiakini.com/news/84954) is only a fraction of the actual amount lost to corruption.

-

Be that as it may, the Malaysian government's approach, whether BN or PR, to economic development and wealth management must be drastically revamped. Here are some possible policy approaches.

-

Petronas funds to be moved from Consolidated Revenue to a Malaysian sovereign wealth fund

Borrowing the Norwegian example (see http://ctchoolaw.blogspot.com/2008/06/managing-malaysias-common-wealth-2.html) a M'sian sovereign wealth fund ("MSWF") must be created to receive at least 80% of the annual profits of Petronas. We have to define Petronas' oil revenues as the common wealth of all Malaysians.

-

Key directors of the MSWF should be Tengku Razaleigh Hamzah, Tan Sri Robert Kuok, Ananda Krishnan, Tan Sri Quek Leng Chan and Tan Sri Teh Hong Piow. These are M'sians who have a proven track record of financial astuteness. These M'sians can be entrusted to have M'sia's best interests at heart.

-

The MSWF will be value-neutral investing only in assets and funds worldwide that will provide the best financial yields. The MWSF is to be preserved for future generations of M'sians. We can work out the details in due course.

-

No longer can Petronas funds be used for subsidies of consumption goods which are short-term and renders the M'sian economy inefficient and uncompetitive.

-

Nationalise toll roads

The M'sian govt must take over the toll operations. This can be done through raising sovereign debt which will have a triple-A rating based on the cashflow from toll collections. By sovereign debt, I mean Treasury Bonds aka Malaysian Government Securities.

-

This move will remove the rent-seeking formula endemic in toll collections. It will ensure that surplus and profits go straight into the Consolidated Revenue. It will help to offset the removal of Petronas funds from the Consolidated Revenue.

-

Reduce the income tax top bracket to 18%

This will stimulate greater private sector-led economic activity and attract more foreign direct investments ("FDI"). The influx of capital will generate economic activity that will offset the lower income tax rates.

-

Tenaga to acquire all IPPs

IPPs are protected by the unfair Power Purchase Agreements ("PPA") which forces Tenaga Nasional to purchase all power generated by the IPPs. We are told that Petronas is also subsidising the fuel consumed by these IPPs. Consumers are being forced to absorb the increased costs via higher electricity tariffs. This is classic rent-seeking behaviour.

-

The government must do a work-out for Tenaga to acquire the IPPs. Tenaga can do a massive bond-raising exercise to acquire the IPPs with the government to stand as a sovereign guarantor. The consolidated cashflow from the IPPs and Tenaga's own operations combined with the sovereign guarantee should make these bonds attractive and be given a triple-A rating.

-

I know there are brickbats thrown at Tenaga. But it is still a better vehicle that can be audited as opposed to the opaque structure that currently exists. Furthermore, the PPAs are under the Official Secrets Act, apparently. That is a sham!

-

Reduce importation of foreign workers

This will force M'sian companies to increase their efficiencies and shift from labour-intensive activities to more capital-intensive ones. It will also force M'sian businesses to move further up the value chain of goods and services.

-

Increase vocational training institutions

To meet the shift up the value chain, M'sian workers must acquire new skill sets. Greater fiscal resources must be directed towards the establishment of more vocational institutions.

-

Reduction of the defence budget

No more hardware acquisitions such as submarines. The reduced defence budget should give priority to the standing Army, smaller surface coastal vessels for the Navy and, only towards replacement of Air Force hardware (no more net increases).

-

Removal of tariffs for automotive industry

This protectionist measure has only benefited an inefficient local automotive industry and the rent-seekers that own it. It has made M'sians pay exhorbitant prices for imported motor vehicles. Worse still, this policy has cost M'sia FDIs from the automotive industry and allowed Thailand to create an automotive hub. A major loss of FDI. And, M'sian automotive workers has the correct skill sets for such FDIs! A wasted opportunity.

-

Increase efficiency of public transportation

Sack most members of the newly-formed Public Transportation Commission. Include more NGO representatives. Most importantly, pinch and entice the key managers of Hong Kong's incredible Transport Department to lead and manage the change. (see http://www.td.gov.hk/home/index.htm and http://en.wikipedia.org/wiki/Transport_in_Hong_Kong)

-

No more rent-seekers to operate public transportation i.e. buses and light-rails. A government-owned Public Transport Authority must be formed to nationalise public transportation. Private-sector rent-seekers are prone to making decisions that are sub-optimal to the public but are super-beneficial to the rent-seekers who don't even use public transportation.

-

Maintain English as a medium of instruction for Science and Maths

No reverting to Bahasa Malaysia for Science and Maths. I am hearing ridiculous pronouncements from Hishamuddin's Ministry of Education about a reversion to BM. If the rural constituents are suffering then create a full BM curriculum for the rural areas. It does not have to be a "one-size-fits-all" education policy.

-

Prior to the 1970s, before the odious Rahman Yaakub became Education Minister, M'sia's education addressed this type of education product differentiation. Hisham should read the history of his own Ministry. He shouldn't have to wait for bloggers to remind him!

-

This is not a full list, of course

There's a lot here to digest and discuss. What I have outlined is not complete. But it is a start. Solutions are available if we all apply our minds to it. But we need a real federal government that is responsive and genuinely concerned about moving Malaysia forward. The rakyat has been sanguine in the past in accepting a paternalistic form of governance.

-

But, the trust is lost. More so because of the present (and past) government's inability to forward-plan. The federal government's obssession is clearly directed at creating rent-seeking opportunities for their cronies. Change is necessary.

-

The economic storm is coming. We are witnessing a phenomenon that was forgotten since the 1970s. It is called STAGFLATION; a stagnating economy with inflationary pressure (see http://en.wikipedia.org/wiki/Stagflation). No more time to lose, people!

The Malaysian problem with privatisation of public goods

Roads, water, electricity and public transportation are public goods. This means that usage of roads, taxis, trains, LRTs and buses by one individual does not reduce the amount of the good available for consumption by others; and no one can be effectively excluded from using those "goods".

-

Privatization is the process of transferring ownership of business from the public sector (government) to the private sector (business). Malaysia's first privatisation was Sports Toto in 1985.

-

Have M'sians benefited from privatisation?

-

Have Malaysians benefited from privatisation? There's no easy answer for that. But benefit we can see (and experience) is the quantum leap in economic development and business activity over the past 2 decades. The impact of privatising "public goods" can be seen in the increase in the number of kilometres of roads which has opened up many parts of Malaysia. This increased accessibility has engendered more economic activity, particularly property development and domestic tourism.

-

But, we have also been sceptical about the necessity of privatising other public goods, in the sense that many Malaysians believe that the government agencies and statutory bodies that were responsible for these public goods could have done just as good a job.

-

For example, in the area of electricity, many of us believe that the old Lembaga Letrik Negara or Tenaga Nasional Berhad ("TNB") could (and, still can) do as good and, as efficient, a job as the Independent Power Producers ("IPP"). Many of us are aghast at the lop-sided Power Purchase Agreements ("PPA") that TNB was forced to sign with the IPPs. We tend to feel that the cost of our electricity has become more expensive due to privatisation.

-

Or, take the case of the privatisation of water. Many of us feel that the quality of treated water has worsened. Certainly, the privateers have not addressed the urgent matter of leaking water pipes that causes wastages. The cost of that inefficiency is being passed to us consumers.

-

We also feel perplexed when the same government that has assiduously promoted car ownership also blames us for selfishly causing traffic jams and, worse still the same government cannot provide an efficient public transportation so that we can leave our cars at home (so as not to cause traffic jams)! How many productive man-hours have been lost in traffic jams? Or, for that matter, how many quality leisure hours have been lost? Those are costs to us as individuals and, for the Malaysian economy and society.

-

Analysing "public choice"

-

The expression "public choice" is actually a socio-economic tool of analysis. Public choice is often referred to when discussing how individual political decision-making results in policy that conflicts with the overall desires of the general public.

-

For example, many special interest and pork barrel (pardon the American lingo) projects are not the desire of the overall community. However, it makes sense for politicians to support these projects. It may benefit them psychologically as they feel powerful and important. It can also benefit them financially.

-

The politicians pays little to no cost to gain these benefits, as they are spending public tax money. Big businessmen are also behaving rationally. They can gain government favors worth millions or billions for relatively small investments.

-

The taxpayer is also behaving rationally. The cost for an individual taxpayer of defeating any privatisation project is very high, while the benefits to the individual taxpayer are very small. Each citizen pays only a few sen or a few ringgit for using any of these public goods, while the costs of stopping or cancelling such projects would be many times higher.

-

So, everyone involved has rational incentives to do exactly what they're doing, even though the desire of the general constituency is opposite!

-

That seemed to be the case for Malaysia until the General Elections of March 8, 2008.

-

Alternatives to privatisation

-

As we know, "privatisation" is a 1980s and 1990s expression. Now they call it "private finance initiatives". It doesn't matter how finance people deny it, as far as I can tell, it means the same thing.

-

Malaysians have always been sceptical about the efficiency of the civil service. But, let us not forget that the revamp of the Immigration Department and National Registration Department was successfully done. No more complaints have been heard. The Road Transport Department is still rubbish, though. But change is possible if there is political will.

-

Let us also consider the corporatisation of the Securities Commission, the Companies Commission and, even the Inland Revenue Department. We cannot deny that performance has improved.

-

So, do we really need privatisation? The answer is a qualified NO! The qualification is that certain things must be put in place in order to get rid of privatisation:-

• Appointment of management and supervisory staff must be strictly on merits, not ethnicity.
• Salaries and wages must be competitively matched against equivalent positions in the private sector.
• Accountability and governance must be strictly monitored. Quarterly audits of finances and management processes by public accounting firms must be made mandatory. Their reports must be made public. No different from companies listed on Bursa Malaysia.
• Regular parliamentary scrutiny must also be made a feature.

That still leaves the matter of how to finance these projects. Let's look at the alternatives to the privatisation financing model:-

-

a. Government or Sovereign Borrowing

• Obtain loans from other countries or international funds.
• Borrowing from private financial institutions or issuing debt instruments like bonds - These transactions create sovereign debts. The only issue is the mode of repayment and, interest and currency risk.
• Issue Treasury Bonds aka Malaysian Government Securities.
  

b. Mandatory Taxation

• Income tax.
• Sales and value-added tax.

c. "Voluntary Taxation"

• Lotteries.
• Public charities and donations.

Let us not forget that the ordinary citizens and taxpayers will still be required to pay to use any of the public goods. This is a source of revenue. It won't be for free, of course.

-

"Voluntary taxation" via lotteries as a form of public finance has been abandoned since the 1980s. As mentioned earlier, Sports Toto was a statutory body until it was privatised in 1985. It was intended to be a vehicle to raise funds for the development of sports in Malaysia. Sadly, with privatisation the original objectives have disappeared.

-

Before the repeal of its legislation, the social welfare lottery was a key public finance vehicle for the welfare and services ministry. In its earlier guise, it was a lottery managed by the Malaysian Chinese Association.

-

What is so fundamentally wrong if this form of voluntary taxation is now deployed as a government policy to fund projects such as:-

• Roads, highways and bridges (yes, even the 2nd Penang Bridge!).
• Subsidise public transportation.
• Education scholarships.
• Sports development.
• Tourism-related projects.
• Micro-financing.
• Welfare schemes.

The beauty of a voluntary tax is that the "taxpayer" who buys the lottery, sweepstake or 4-Digit number is HAPPY to part with his money. We cannot say the same for the taxpayer who pays his tax assessment.

-

If we combine the reported annual sales turnover of all the entities involved in lotteries, gaming and wagering in Malaysia, we have about RM12 billion. Assuming RM7 billion is used to pay prize monies and RM2 billion is used for operating expenses (and whatever else), there is still RM3 billion available for public finance. Think about it!

-

Just let charitable public foundations have the annual licences issued by the Ministry of Finance. Trustees of these public foundations are allowed a tenure of 2 terms of 2 years each. Their accounts, charitable donations and disbursements must be audited quarterly by reputable firms of public accountants. As public foundations, they must be subjected to parliamentary scrutiny.

-

Lottery operations can be outsourced on 5-year contracts. Tenders and proposals must be public. Tender committees must be outsourced to combined committees of public accounting firms and law firms.

-

The lurking suspicion one has is that whether it is BN or Pakatan Rakyat that runs the federal government, this form of voluntary taxation will NOT take place. It's a political "hot potato" on irrelevant considerations such as social morality or religious sensitivity. Oh! Let's not forget the powerful lobbying from the businessmen who have a vested interest in these lottery, gaming and wagering ventures. Can Makkal Sakhti happen in the area of public goods management and financing?