On 31-Mar-1993, Tenaga Nasional Berhad (TNB), Malaysia’s main energy provider and a government-linked company signed a 21-year Electricity Power Purchase Agreement (PPA) with IPP (Independent Power Producers) Yeoh Tiong Lay Corporation Bhd. (YTL). This was the first PPA ever signed by TNB with an IPP license for the Paka and Pasir Gudang Power Stations. Very few people know that their nightmare was about to begin, with lopsided agreement deliberately drafted to benefit the IPP.

The electricity PPA signed had opened the flood-gate for other players, all of them are either cronies or somehow related to the royals, to jump onto the gravy-train. In 1995, TNB’s monopoly in electricity generation sector ended with the establishment of five IPPs which supplied 30.99 per cent of electricity supply to the National Grid. The five were YTL Power Generation Sdn. Bhd. (the first player that signed the PPA with TNB), Segari Energy Ventures Sdn. Bhd., Port Dickson Power Bhd., Powertek Bhd. and Genting Sanyen Power Sdn. Bhd.

It all started when a massive blackout occured in 1992 that shut down much of the country for up to 48 hours, triggering public anger and outcry. As a result, the then prime minister Mahathir Mohamad dismantled TNB’s monopoly in electricity generation and replaced that role with the IPP program. Practically all the well-connected political groups rushed to bid for the IPP licenses. It was cash-cow so naturally everyone wanted to have a piece of the cake. At one point as many as 150 applications flooded in to the Economic Planning Unit.

Experience in the power sector was not a necessary qualification but the strength of political connections to the government was the vital criteria. Tycoons such as Yeoh Tiong Lay (YTL), Ananda Krishnan (Maxis), Lim Goh Tong (Genting) and Syed Mokhtar Al-Bukhary were some who rushed for the lucrative contracts and benefited from their very close connection with Mahathir back then. IPPs signed long-term power supply contracts with TNB and the fact that the PPAs were signed with heavy “presence” of the government, IPPs’ profit were almost guaranteed. Of course in return these IPPs would need to scratch the politician’s (mainly UMNO) back as far as war-chest is concerned.

Early birds get the worm, and so the first 5 (five) consortiums in the first wave or batch that bid for the IPP contracts were guaranteed returns of 20% spanning a period of 21-year contract although the actual profits were much higher. The second batch of players who bid for the IPP contracts which began in 2001 got lower contract rates than the first wave. In addition, the IPP projects were only for companies that have 30% bumiputra ownership and foreign investors were prohibited from taking more than 30% stake, not to mention it was not awarded through open tender.

The IPP contracts were so lucrative that by early 1997, months before the Asian financial crisis, the country had almost 50% surplus capacity from a shortage just couple of years ago. Mahathir administration gave out too many licenses in such a short period of time that the sudden over-capacity prompted Mahathir to urge consumers to use more electricity. Since the PPA agreement was lopsided and TNB was obliged to purchase from IPP even though it does not need the electricity, TNB itself had to turn off its own facilities in order to use them.

Obviously every analyst would say the first five IPP had been laughing all the way to the bank because they had been enjoying favourable terms not found anywhere else in the world. Average-Joes were wondering why IPP were so powerful and untouchable so much so that even during the 1997 Asian financial crisis and TNB suffered its worst losses, nobody could get IPP to renegotiate the lopsided terms. In reality, the government didn’t want to rock the cash-cow IPP because the simple solution was to raise electricity rate and let the consumers absorb TNB’s high operating costs.

But is TNB the only player suffering from losses till this day due to lopsided PPA agreement drafted by Mahathir’s administration? Could Malaysians actually enjoy lower cost of electricity if TNB had managed itself professionally in the first place so that IPP wouldn’t have exist in the first place? But I suppose it’s water under the bridge now as we can’t possibly turn back the clock, can we? What about Petronas, the country’s national petroleum corporation that has been milked since its establishment in 1974?

Poor Petronas’s enormous wealth has been evaporating till today, thanks to mismanagement, leakages, bailout, cronies enrichment program and whatnot from the government of the day. Since 1997 until FY2010, Petronas’s cumulative gas subsidy was at a staggering amount of RM116.4 billion – IPP enjoyed the lion share of RM49.3 billion (42.3%) follow by TNB (RM37.3 billion or 32%) and others such as small industrial, commercial, residential users and NGV who enjoyed RM29.8 billion or 25.6%. The fact that IPP and TNB alone enjoyed a combine RM86.6 billion or 74.4% of the total gas subsidy since 1997 is simply jaw-dropping.

To date, Petronas paid a whopping RM529 billion to both Federal and State Governments, making it the biggest contributor to the nation’s coffer, without which the government would have collapse ages ago. It paid a total of RM74 billion in 2009 for the dividends, taxes, petroleum proceeds, export duties and to the state governments. In spite of Petronas’s healthy revenue, the subsidy to IPP and TNB has taken its toll on the net profit. Every year, Petronas pays billions of dollars in gas subsidy mainly to IPP and TNB. In 2008 alone, its gas subsidy reached the peak of RM19.7 billion with IPP and TNB taken the lion share of RM8.1 billion and RM5.7 billion respectively.

What about TNB itself? There’re quite a number of problems with the national power provider. It’s main problem was the huge borrowings, which has been declining so let’s hope the management continues the job of bringing this double-digit of billions to a more managable level. Now that the local currency has strengthern against the foreign currencies, it should be a bonus to the top management in servicing the debts so the CEO Of The Year, Che Khalib Mohamad Noh, should stop giving childish excuse about high debts eating into the profit.

TNB consistently registers billions of Ringgit in net profit so there was no reason for an electricity rate hike, at least that was the argument from the man on the street. On the other hand, TNB is a public listed company hence it has to answer to its shareholders and naturally profit and loss was the main agenda. However there’s no other power provider except TNB and consumers who were at the lowest chain cycle were made to pay, no matter how unfair it was. TNB made about RM3.2 billion in net profit for the financial year 2010.

Within the core of its business however, TNB is a very inefficient entity especially its operating cost. In 2005, the company’s 40.5% operating costs were spent in purchasing electricity from IPP. For the financial year 2010, TNB’s energy cost grew by 2.4% to RM17,379.0 million from RM16,974.4 million recorded in 2009 – mainly due to higher payment to Independent Power Producers (IPP), totaling RM12,528.0 million, an increase of 5.9% compared to the previous (RM11,827.0 million) financial year. Fortunately, lower fuel costs incurred during the year somewhat offsets the increase in IPP purchases, at least temporary. You don’t have to be rocket scientist to see how IPPs are sucking both Petronas gas subsidy and TNB energy cost dry.

TNB also should do something about its forever escalating staff cost which is eating up nearly RM3 billion for the financial year 2010 alone. Within 7-year since 2004, the staff cost jumped almost 70% from RM1,726 million to RM2,932 million, and that’s a lot of money. Maybe CEO Che Khalib Mohamad Noh should start looking seriously at the forever bloating workforce. With the electricity generation job outsourced to IPP, TNB should have an easier job managing its core business but to see it almost double the workforce’s expenses within 10-year period is obviously inefficient.

Another interesting area that you may not know is that TNB receives Government Development Grants every year, whatever that means. And the amount is not small to the tune of more than RM500 million each year. Whether the grants were another nicely packaged subsidy is everyone’s guess. Nobody knows what has TNB develop with the half of billion of Ringgit grants. What everyone knows is the company will cry to daddy government asking for electricity hike every year without fail. After all, this is the tax-payer money that the government is awarding to TNB.

Now, can you blame the people who cry-fouls after the government agreed to the proposal by TNB in increasing the electricity tariff by 7.12% starting June 1 this year? The main culprit is the government so stop insulting people’s intelligence with marketing hype such as reducing “misallocation of resources” or economic distortion or calling the people opium addicts for not willing to let go of subsidy. The government dare not answer the simple question of why the people must bear the cost of reducing subsidy when the IPP and TNB continue to enjoy the gas subsidy from Petronas.

Sure, the government claimed that since the PPA agreements were signed, it can’t do anything about it, no matter how lopsided it is. Fair enough, since the corrupt and inefficient government dare not raise its voice to get IPP to renegotiate the agreement, why not slap them with Extraordinary Tax, which is perfectly legal, not that the government has not done it previously? Then use the gains to offset whatever tariff hike it planned to implement? Maybe the present government is really a big bully who only bullies the average-Joes while letting the untouchable IPP, who are still laughing all the way to the bank, continue sucking free subsidy.

Other Articles That May Interest You …

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• Windfall Tax – why Discriminate and Petronas not in?

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June 2nd, 2011 by financetwitter

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