Windfall Tax – Punishment or Desperation for Money?



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Jul 13 2008
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It’s funny that the brother of deputy Prime Minister expressed his pessimism of the country’s economy so much so that he urged the government to review the windfall tax imposed on independent power producers (IPPs). Huh? The CEO of CIMB group is protecting the IPPs who are making tons of money because of lopsided agreement which saw the electricity generated being pushed into Tenaga Nasional Berhad’s (KLSE: TENAGA, stock-code 5347) throat, regardless whether TENAGA needs it or not?

Wait a second. Didn’t Nazir’s brother, deputy PM Najib screamed there was no problem with the country economy and everything was in freaking good condition despite investors closing their trading book “temporary” and wait for a better time to pour their money? The trading volume on the Kuala Lumpur Stock Exchange has already shrunk to new low. Attack where it hurts the most and in this case the pocket of CIMB’s CEO. Of course this guy was worried about the stagflation – stagnant economy with escalation inflation. Going by the rate the economy is being run, you should not be surprise if such virus (stagflation) could arrive at the nation’s doorstep soon.

IPP Windfall Tax BarChartNazir has all the reasons to worry because his bank (second largest lender) and investment bank would be badly affected should there be no new capable leader who knows how to manage the country’s economy emerges soon. The country’s economy built over the decades is not only affecting the CIMB’s CEO but almost all the CEOs of the public listed companies. It’s mind-boggling that the government’s coffers are drying up so fast that it has to take such desperate measure to slap IPP with a 30% windfall levy in excess of 9% ROA (return on asset). Depending on which angle you look at IPP you either love them (their stocks) or hate them (their greed). On the other hand who can blame them when it was the former premier Mahathir who encourage such a bias PPA (Power Purchase Agreement) in the first place? And to think that TENAGA always took the easy way out tackling its revenue problem by increasing the electricity tariff could easily sent your blood boiling.

IPP Windfall Tax PieChartInvestors were speculating that the cash-strapped government’s windfall tax was actually a way to punish the stubborn and arrogant IPPs who always uses the PPA to resists compromise for a fairer deal. It’s hard to say if Tenaga would put people above the monetary interest even if tycoons who own the IPPs such as Syed Mokhtar Albukhary (MMC Corp), Lim Kok Thay (Genting Group), Francis Yeoh (YTL Group) and Ananda Krishnan (Tanjong Inc.) were not involved in the power generation business. No doubt these tycoons have been making easy and guaranteed money, some were issued licenses since 1993 such as YTL Power, Malakoff, Tanjong and Genting Sanyen, and it’s about time to contribute back windfall tax to the government’s coffers. But why now and not 10 or 5 years ago when the tycoons were laughing all their way to the bank? Interestingly, most of these billionaires were closely linked to former premier Mahathir.

Critics said the government was short-sighted and too anxious to get hold of the estimated RM540 million from the windfall tax on IPPs without looking at the bigger picture. Since the date the tax effective (1st July 2008) MMC Corp Berhad’s stock which controls Malakoff Berhad has lose over RM1 billion in market capitalization while Francis Yeoh’s YTL Power International Berhad was poorer by RM330 million. It wasn’t a surprise plunge since Malakoff and YTL Power made up the lion share of IPP market segment with 40 and 17 percent respectively. One of the losers is EPF (Employess Provident Fund) who besides holding a gigantic huge chunk of the debt papers issued by IPPs, also owns 30 percent shares in MMC Corp which in turns own Malakoff Berhad who is expected to pay more than RM200 million annually for the windfall tax. Malakoff is screaming that the company will close shop within 3 years due to groups’ huge borrowing – a staggering RM1.2 billion annual interest for its RM16 billion debts. Investors who weren’t happy with MMC’s RM16 billion privatization of Malakoff exercise two years ago have all the reason to cheers and smiles now, out of vengeance.

Government Malaysia force Windfall TaxWith the estimated power excess of about 40 percent (and the extra 2,400 megawatts from Bakun dam?) being absorbed by Tenaga, maybe this windfall tax is a good strategy to wipe out some of the IPPs and subsequently reduce Tenaga’s “electricity inventory”. At least now the IPPs are more willing to open their gate of negotiation and make the whole messy IPPs business model more efficient. Of course if you’re shareholders of such IPPs or benefiting from its business one way or another then you’re feeling the great pinch of the shares sell-off, the same way most of the brokers, analysts and CIMB CEO are feeling now. But then the flip-flop government might make a U-turn out of pressure from corporate figures. It appears peoples are grumbling that after taking money from the poors-on-the-street the government is now refocus their attention to the corporate world – for money.

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