Screenshots: The crooked vision of the IPPs... ( 2 )

This big devil called the IPPs.

There is a recently published research on The IPP Investment Experience in Malaysia by Jeff Rector, which was released on August 17, 2005. It is a working paper presented under The Program on Energy and Sustainable Development at Stanford University, an interdisciplinary research program that started in 2001 -- i.e. after the Asian Financial Crisis -- and it focused on the economic and environmental consequences of global energy consumption.

The research paper is illuminating as it examines the development of global natural gas markets, reform of
electric power markets, international climate policy, and how the availability of modern energy services,
such as electricity, can affect the process of economic growth in the world’s poorest regions.

I recognised that fact that the research carries substantial academic clout as the program is based at the Center for Environmental Science and Policy, at the Stanford Institute for International Studies.

There are few key points that highlighted the perils Malaysia, and TNB in particular, faced off at the mercy of the IPPs.

Firstly, the IPPs charge TNB on a "Take-or-Pay" tariff regime -- ranging from 14 to 16 sen depending on the PPA -- that far exceeds the cost if TNB were to generate its own electricity.

Rector quoted sources as saying the IPPs derived between eighteen and twenty-five percent internal rate of return (IRR), while Little Birds told Screenshots the IRR could be as high as 40%.

Secondly, TNB is currently having about 40% excess capacity. This is far worse that the non-revenue water situation where water can be stored in reservoirs when leakages are plugged. Excess electricity pumped into TNB's national grid from the IPPs becomes perishable -- meaning totally wasted -- as there is no battery on earth to store unutilised electricity.

Under the PPAs, the IPPs charge TNB based on the capacity, no matter if the electricity is actually generated. Apart from that, the IPPs bill TNB on another category stated as 'energy charge' for actual electricity supplied.

In totality, the IPPs bill TNB around the clock, but 40% of billable electricity becomes wasted excess, everyday. And this situation has no sign of being reversed anytime soon.

The excess level will increase once Tanjung Bin and Jimah plants come on stream soon, despite a marginal growth in domestic consumption projected by TNB.

Thirdly, all IPPs are shielded from financial risks, right from the time when Malaysia was sucked into the Asian Financial Crisis. The Government has indirect stakes in all of them, according to Rector's paper.

So, you have to find the Syed Mokhtars, the YTLs and the LimGohTongs, and the Anandas, to fit the jigsaw puzzles that we talked about. They are all live specimens till this day (Click here).

SOURCE: The IPP Investment Experience in Malaysia by Jeff Rector, Stanford University, Page 27

In order not to be blamed for distorting facts, I will give you the full PDF of Rector's paper (335K) to enable you digest the information and make your own conclusions. I must say I am in no position to claim what is right and what is wrong with the IPP system. You decide for yourself.

Before that, I would like to excerpt two portions from Rector's research paper to demonstrate why we had asked for trouble, and why we are not out of the bush.

Notably, TNB recognised and admitted that the new tariff won’t solve its cash-flow deficit any time soon.

The reasons are out there with the Devils.

G. From Shortage to Glut (Page 14)

Malaysia moved forward with its IPP program with impressive speed. While the existing capacity was roughly 6,000 Megawatts, Malaysia commissioned five projects totaling 4,157 MWof new capacity in the span of eight months from April to December 1993. The IPPs were given incentives to finish their projects quickly, to which they responded. The IPPs came online quickly and Malaysia was soon out of its power shortage.
Unfortunately, the new capacity grossly overshot demand growth. By January of 1997, several months before the Asian financial crisis struck Malaysia, peninsular Malaysia had almost fifty percent surplus capacity. Much of the electricity had no real market, which prompted Prime Minister Mahathir to urge consumersto use more electricity. At this time IPPs accounted for roughly thirty-five percent of all installed generation assets, but supplied more than this percentage because Tenaga-owned facilities were turned off in order to utilize IPP power given that Tenaga was obliged to purchase. [...]

Once it became clear that the IPP contracts were causing serious strain on Tenaga’s profitability, Tenaga began attempts to renegotiate the long-term supply contracts with the IPPs. Political pressure on the IPPs to lower the contracted rates to Tenaga began as early as 1996. “We do not want to kill Tenaga by giving lots of profits to the IPPs,” said Prime Minister Mahathir. “It must be balanced.”

Efforts to reduce Tenaga payments to the IPPs were not limited to obligations of the PPAs. The minister for energy, telecommunications and posts, indicated that Malaysia's five independent power producers might be asked to “take up the slack in rural electrification programs.”

At the time, Tenaga bore half the cost of providing unprofitable services to rural areas; the rest was borne by the federal government. The IPPs eventually agreed to contribute one percent of their revenues to the rural electrification program. This is where things stood between Tenaga and the IPPs until the summer of 1997, when the Asian financial crisis swept the region.

V. THE ASIAN FINANCIAL CRISIS

The Asian Financial Crisis hit Malaysia in July of 1997. Triggered by the collapse of the Thai baht, pressure on the fixed-exchange-rate ringgit became insurmountable. On July 14, the government decided to float the currency, resulting in a huge devaluation, which then triggered a major correction on the stock exchange. After the crisis hit, electricity demand growth slowed, and reserve generation capacity expanded from fifty percent to fifty-five percent.

VI. ANALYSIS OF THE MALAYSIAN IPP EXPERIENCE (Page 21)

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.97 We don’t know exactly how much money the sponsors made,98 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.105 Publicly listed IPPs have provided a better return than both the Kuala Lumpur Stock Exchange index and Tenaga during the relevant period. (See Appendix A)

Separately, it seems that bondholders and lenders to the project companies were paid according to originally contracted schedules without difficulty. Malaysia’s IPP experience, in consideration of the policy and developmental goals of the government of Malaysia, should be considered as a qualified success. The government’s highest priority, installation and management of adequate generation capacity to facilitate high economic growth, was achieved. Moreover, the privatization of Tenaga and the local financing of the IPPs contributed to the development of local financial markets. This success is blemished by the fact that the contracts were probably too rich for the IPP sponsors.

Consequently, a higher than necessary cost of power resulted in financial losses to the government controlled utility, higher prices to consumers, and arguably an inefficient allocation of society’s resources. But this defect should not be overemphasized: timely expensive power is a far superior outcome than blackouts that discourage FDI and domestic investment, and stunt economic growth. Additionally, if someone is going to reap exorbitant profits, it is probably better from a political standpoint that they be domestic investors, as they were in Malaysia, rather than foreigners.

Finally, Tenaga made a number of commercial improvements to the PPA used in the second round of investment: tariffs were lowered and there was a more balanced allocation of risks.

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.

Further research should investigate whether trading value data for project bonds are available. See supra note 94. In researching for this working paper we have encountered reports that assert the PPAs were renegotiated. But we have looked for and discovered no direct cause to believe that any PPAs were renegotiated either in 1998 or
2001, while we have encountered sufficient basis to conclude that they were not. In private interviews with the author, both a Tenaga official and an attorney involved in the deals confirmed that the PPAs were never altered. In 2001 and 2002 reports to investors, Tenaga highlights progress that they made in reducing foreign debt exposure, but there is no mention of changed PPAs. In a 2004 report to investors, Tenaga reported that the average cost of purchased IPP power was about 15 sen per KWh, which is the level they were set in 1993/1994. YTL Power annual reports and Malakoff Bhd. annual reports in 2001 and 2002 make no mention of changed PPAs, yet Malakoff highlights the completion of a new PPA for a new project that happened to be signed on the very day others reported that “re-negotiations” were completed.

In light of the breaches of contract and forcible renegotiations seen in the IPP sectors of India, 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?

You have to read on for Rector's hypothesis.

Meawhile, tell me who are the major beneficiaries of the Top 5 IPPs. Follow the money, Deep Throat says!

Comments

This is the IPPs contribution “towards the national development and to work towards achieving the objectives of our Prime Minister's vision”. The IPPs are course reluctant to renegotiate the pricing in their one-sided contracts (just like the NS highways concessionaires) and the Government can only bait them with again the win-win formula by extending their period of operation.

These are the so-called ‘captains’ of industry who gained their fortunes by political pull, by having government grant them favors and franchises at the expense of their fellow-men.

The Tun’s vision is indeed a "blurred Vision 2020" causing so much problems and hardship. No wonder he asked history to “forget me” in his exclusive interview with Malaysiakini. Check the gist at:
http://powerpresent.blogspot.com/2006/05/dr-m-exclusive-interview-3rd.html

Posted by: multidimid | May 26, 2006 10:20 AM

If ever you wondered what talking in tongues really is, listen and read very carefully what and how the government explains away this glut in capacity that we are wasting on a daily basis. When there is 40% surplus capacity what it really means is that for every RM140 you pay TNB, RM40 is as good as throwing money in the drain..gone ..wooosh.... just like how it sounds when you flush the toilet. Your real consumption is only RM100. The extra RM40 is towards what the IPPs charge which you or I or the industries in the country don't consume.

Fair enough, TNB would say that we need to have a higher capacity than the actual daily consumption...But what is the universally agreed or international standard for what that excess capacity should be? TNB officers would tell you that they used to do very well with just 13% excess once upon a time.

What is worse is the IPPs charge TNB for their full generating capacity whether they actually generate it or not. Therefore if there is already 40% capacity surplus, in any one month their operationaly capacity only need to be 60% - 70% and the cost attributed to that operational capacity is what is incurred.

But then TNB is not the only GLC that operates in this manner is it? I recall that the MAS catering contract provides for the catering contractor to supply on the basis of a full plane load even if the plane is flying half empty. And this includes all the liquor, the food, the drinks and everything. And after the flight..the laundry and the cleaning is also for the full plane load even though a lot of the stuff is not used.

But then we are Malaysia....I suppose boleh la!

Posted by: Observer | May 26, 2006 11:17 AM

Very interesting information.But I thought this sort of onesided contracts where the other side is perpetually in benefit are common things in our country! Example all toll operators,the crooked bridge, IPPs and many others.The increase in power tariff cause inflation across the board,regardless of what our YB Mentri and politicians tell the public.
Everyone, except those whose bills are paid from public funds.The amount of RM1.5b TNB expect to collect additionally, which is not going to get TNB out of trouble,a lot of people and thousands of small businesses will definately be affected. The businesses will charge the extra as legitimate expense in running their businesses and their profits will come down.Will not this reduction in profits reduce the income tax the businesses pay.So TNB's gain is revenue loss to the Govt. May be some tax man out there can clarify how the arithematic works.
I remember reading an article in The Hedge that the Govt. buy ,takeover,all such enterprises like IPPs,highway operators which will be beneficial to the country and people in the long term. Did anybody in authority,the Ministry of Finance, Minister and top guns, read the article even if they could not think of such a solution?
Please reduce the public financial burden created by our Govt of 22 years.Have some sympathy for the ra'ayat!.

Posted by: ksn | May 26, 2006 11:52 AM

I was told by some friends in TNB that before there were IPPs, TNB submitted several proposals to increase their capacity but were turned down by the Finance Ministry and when the massive blackout occured, TNB was blamed and the IPPs came into the picture.

Posted by: Hussin | May 26, 2006 03:08 PM

people,

why all of you blaming IPPs? They just a tool/proxy for those in power to get easy money.

just blame yourself for voting them.

Posted by: rosman | May 26, 2006 05:06 PM

Most signboards - "Satu Lagi Project Kerajaan Barisan Nasional" ..

another fine mess you got us into ... Tun

Posted by: pengembara | May 26, 2006 06:46 PM

And Dr M answered, "I think they should forget me..." when asked how he would like Malaysian history to remember him.

With so many painful and burdensome reminders of his 22 years of excess and lopsided contracts, it would be nice to be able to forget, but the nightmare returns and returns and returns.

What's worse, the possibility of the pain and burden getting worse looks decidely likely, not only for us, but also for our children.

Posted by: Leithaisor | May 26, 2006 07:25 PM

We can see it clearly, the previous and present government already failed to performed the government function on fairly allocating the country resources. (Or someone purposely do this, to ensure money flow into their friend pocket)
Malaysia always prouded to be on sucessfully implemented the privatised the government function.
Please we have PLUS, IPP, Telekom and........,
Please it's high time for Malaysia to run the country professionally, if still based on race based politician, not based on their ability, to run the country. We will have more similar IPP case in the future.

Posted by: Ken | May 26, 2006 09:09 PM

//why all of you blaming IPPs? They just a tool/proxy for those in power to get easy money//
Mr Rosman,
Who r 'ALL OF U" that you r refering to? Y didn't u pointed them out?
Blame IPPs for what? As IPPs r capitalists too n they r not doing charities.Capitalists aim to maximise profit,as simple as that.
Problem is,who was the culprit given birth to IPPs at the 1st place?
N who subsequently sealed contracts wif IPPs for their supplies at guaranteed profits?
Pls dun b so judgmental by telling those who voted BN to blame themselves n now they have to bear the brunt as the result.
It's certainly not up to u to pin point those who chosed the wrong Gov that you thought.
Each individual has their own right to cast which box on the ballotting paper at his own discretion.As simple as that.

Posted by: teh-o | May 26, 2006 11:33 PM

I agree with mr.rosman. You vote for what you wish for...so just take it and learn to take it.

BN get landslide votes at the last election...so now you get high rise prices...and no one can stop them...isn't it fair enough?

So really many thanks to those who vote and wish for these...

But...we are kind...we no matter how disatiffy and suffer now...will soon forgive all the evils behind these...

Posted by: kwei | May 27, 2006 02:36 PM

http://business-times.asia1.com.sg/sub/storyprintfriendly/0,4582,196530,00.html?

Business Times - 26 May 2006

Tenaga's woes not over despite tariff hikes

Firm has to tackle lopsided deals with independent power producers

By S JAYASANKARAN
IN KUALA LUMPUR

AFTER nine years, Malaysian power company Tenaga Nasional has finally got the green light from the government to raise electricity tariffs by 12 per cent.

This will not be a magic wand that will make the company's woes disappear. But at least, it's a start.

Tenaga's shares jumped 5.8 per cent to RM9.15 yesterday when they resumed trading after being suspended on Wednesday ahead of news of the tariff increase.

Tenaga said that the increase would boost revenue by at least RM1.5 billion (S$654.6 million) a year. But notwithstanding this, the company still faces huge problems. Although Tenaga ostensibly reports profits, it is a negative net cash flow company.

According to chief executive Che Khatib Mohammad Noh, the company's 2007 cash deficit, even after the tariff increase, will be RM759 million, which will swell to RM3.2 billion in 2010.

The reason: payments to independent power producers (IPPs) and, to a lesser extent, annual capital expenditure to upgrade services. While Tenaga has lost its monopoly in generation, it is still the sole company licensed to transmit and distribute power in Malaysia. And payments to IPPs alone, at 37 per cent of expenses, are its single largest cost. Tenaga wants to remedy this by renegotiating its contracts with the IPPs - an instruction from the government recently.

Some of the so-called first generation IPPs - those that got their licences in the early 1990s - enjoy handsome internal rates of return of around 20-22 per cent through lopsided deals with Tenaga.

But fixing this state of affairs is easier said than done. Talk about renegotiating contracts began over two years ago when Prime Minister Abdullah Badawi first took over from Mahathir Mohamad - but nothing has come of it. Moreover, most deals Tenaga has with IPPs are iron-clad, so it will take a lot of goodwill on both sides to achieve the 'win-win outcome' Mr Khatib has said he would like.

There is also the question of subsidised gas sales by national oil corporation Petronas for energy generation. Petronas sells gas to all generating plants at RM6.40 a unit, when world gas prices are easily three times that. This highlights Malaysia's inefficient energy generation, and not surprisingly, Petronas wants a fairer deal. It spends more than RM11 billion a year subsidising electricity generation.

It is not clear how the issue will be resolved but according to some news reports, the government has commissioned a study and recommendations could be made in two months.

Despite all these problems, the tariff hike will come as a relief to Tenaga, which originally asked the government for a 20 per cent increase. Mindful of public anger over recent fuel price hikes that have pushed up consumer prices across the board, Kuala Lumpur baulked. But sooner or later, it may have to bite the bullet.

'The Tenaga's tariff hike was long overdue,' says Tan Teng Boo, managing director of fund management company icapital.biz. 'We should be pushing businesses and industry towards greater efficiency and competitiveness, but what we are doing instead is to pamper the consumer.'

Posted by: ktak | May 27, 2006 10:37 PM

The leaders of Bolivia and Venezuela knew how to deal with corporate big wigs.if Hugo Chavez ruled Malaysia, we will be assured of the following :-
a) Nationalisation of IPP, highways concessions, naval contractors and other lop sided contracts.
b) better deal with singapore on water otherwise the supply will be cut.

this is what we get after CPM surrendered and there is no more creditable challenge to the government.
vive la revolution!

Posted by: sydput | May 28, 2006 08:55 PM

Posted by: sydput | May 28, 2006 08:57 PM

I don't think there is a need to build more IPPs now.. not at least for the next couple of years. What everyone here seems to forget is that what we need is more direct investment by the IPP stakes in maitnenance of the transmission grid. The 2 major national blackouts that we had over the past decade or so had nothing to do with not enough capacity, the problem was in the transmission network. Same goes for the blackout to Kedah, Langkawi, Penang that we experienced a couple of years ago. For the moment, TNB has to foot the bill for power transmission and all maintenance work. Its time the IPPs are made to pay for that as well.

I agree to some extent that overcapacity is good. But we've enough breathing space now to last us a long time.

As for Sydput.. I find your statement entirely reprehensible. The CPM [ DELETED - this blog entry is about electricity tariff increase and has not relevance to Communist Party of Malaya. ]

Posted by: alfabob | May 29, 2006 07:36 PM

Again, responding to his comments, my point being if just because of an electricity tariff hike we'd want to have a revolution, well... thats disgraceful to those who fought the CPM...

Posted by: alfabob | May 30, 2006 12:49 AM

sorry if I had offended some on the CPM statment. CPM was used to explain the fact that this country is ruled by a government with no credible challengers. It has monopoly on power, politics and in everything that matters. If there is a compromise, it is seen as a friendly gesture to those affected i.e. to make it look good. But they can steamroll any policy at their whims and fancies and nobody can do anything about it. a monopoly in business is illegal in europe and america due to its stranglehold on the market and therefore bad for consumers. a monopolistic government is even worse bcause it not only affects consumers, but all citizens and everything that comes with it. We are already feeling the affect of bad policies. Just to give an example, the prevous CEO of tnb who opposes the IPP deal and was coming up with a solution to the problem was removed in a shameful way (Tajuddin ali), and replaced by a young and budding Umno politician (Jamaludin jarjis).
Even worse, the dominant party, umno has disallowed any challengers to the post of president and vice prsident. Now that is dictatorship. And what can we do about it. at the moment absolutely nothing, because power, like opium is addictive and once you are hooked, there is no way those it will be given up easily. In a similar manner, NEP is also addictive to the malays.

Posted by: sydput | May 30, 2006 06:49 PM

dear teh-o,

you the coward one who vote for current monkeys must realize what you had done to others. you put them up there and dont dare to accept your sin.....shame on you

Posted by: rosman | June 13, 2006 03:55 PM

INTERNET does not operate in a legal vacuum.
Read this before you post a comment in this blog!

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The crooked vision of the IPPs... ( 2 )

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