Behind and Beyond the IPPs
“There is nothing much TNB can do as long as there is no revision to the Power Purchase Agreements (PPA).
The IPPs were given favourable terms that cushioned them from many risks, which propelled them from obscurity to great fame and fortune. Business savvy and innovation do not account for their financial success. It is due to the one-sided and lucrative PPAs.”
By Masterwordsmith
As we all know, power rates have increased by an average of 7.12% or 2.23 sen per kilowatt hour (kWh). Natural gas will rise to RM13.70 per British thermal unit (mmBtu) from RM10.70 and go up by RM3 every month until December 2015, after which market rates will apply (Source: FMT).It is a hefty increase to a retiree like me. Filled with much indignation, I started to read up on IPPs to unravel the true story behind the energy puzzle.
According to Jeff Rector in his paper The IPP Investment Experience in Malaysia:
A massive blackout in 1992 shut down much of the country for up to 48 hours, prompting a fierce public outcry and threats of lawsuits against Tenaga. An inquiry cleared Tenaga of negligence but the incident severely damaged its reputation.
In response to the blackout, Kuala Lumpur dismantled Tenaga’s monopoly on generation and aggressively pushed forward the IPP program to restore an adequate safety margin of capacity and to ensure that the country could meet its anticipated future power needs. It seems that doubts over the managerial capacity of Tenaga were more important than a perceived lack of internal financing capabilities in the
decision to aggressively move forward with the IPP program.
The IPP licenses were highly sought after: when the IPP policy was first announced, more than 150 applications flooded in to the Economic Planning Unit.
Politically wellconnected groups were formed to bid for IPP licenses and investors in the first five winning IPPs included some of the biggest corporate names in Malaysia: gaming company Genting, media and telecoms group Malaysian Resources, giant multinational Sime Darby and construction firm YTL Corp, the state-owned investment company, Permodalan Nasional, and “tycoon” Ananda Krishnan.
It seems that experience in the power sector was not a necessary qualification for securing a concession, while the strength of connections to the government was of central importance. This may have made it difficult to get lending from some international financial institutions. “What has raised concern among banks is the companies getting the licences,” reported a Singapore-based international banker. “They are run by well-connected individuals who are after lucrative contracts.”
“The good news is the government is getting the IPP program going,” said one analyst. “The bad news is that politics and connections are playing too big a role in the way the whole process is being carried out.”
Tenaga became a twenty percent or ten percent minority shareholder in all but one of the first IPPs and a was a shareholder from the project inception for later IPP projects in order to hedge its bets and get into what was believed to be a very profitable sector in the business.
After being awarded concessions, these IPPs signed long-term power supply contracts with Tenaga. While the contracts were ostensibly ordinary private contracts, they were completed with the mediation, guidance and imprimatur of the government. According to separate interviews with a Tenaga official and an IPP owner, the PPA negotiations and some of the financing conversations were three way negotiations including the IPP, Tenaga, and the government.
