Wonder why Pakatan never talks about the lop-sided “crony” IPP agreements anymore

By
 |Nov 24, 2016
Former Premier Mahathir Mohamad demanded former TNB chairman the late Ani Arope to resign within a week for refusing so sign the unfair IPP deal.
Former Premier Mahathir Mohamad demanded former TNB chairman the late Ani Arope to resign within a week for refusing so sign the unfair IPP deal.

The late Ani Arope said he was fired from his job as Tenaga Nasional Bhd (TNB) chairman then because he refused to “play ball” with Mahathir Mohamad in cutting lop-sided deals with the independent power producers (IPPs).

In an interview conducted just months before his death in 2014, Ani said:

At the time TNB were producing electricity at 8 sen per kilowatt hour (kWh).

Ani said taking into account transmission and distribution costs – which were about 6 sen and 3 sen respectively at the time — the power distributor can deliver electricity to consumers at just 17 sen per kWh.

For IPPs to come in, the acceptable benchmark price for electricity production would have been 12 sen per kWh, said Ani, which TNB and the IPPs can negotiate around.

“But the EPU decided on 16 sen per kWh,” he told an online portal, adding that with a take-or-pay clause, the costs jumped to 23 sen … “I said this is ridiculous.”

Another detrimental clause in the PPA was the fixed price for fuel regardless of fluctuations on the open market.

In essence, the PPAs stipulate that IPPs would be paid a fixed capacity payment regularly in exchange for making an agreed electricity capacity available.

Should TNB buy the electricity generated, it would then pay energy charges which would also have been fixed in the agreement.

TNB would also be obligated to cover the difference if the price of fuel – used to generate electricity – rises beyond the agreed price in the PPA.

This effectively insulated the IPPs from market forces and guarantees a fixed margin of profit at TNB’s expense, the latter bearing disproportionate risk.

Calling the eventual PPA arrangement ridiculous, Ani refused to sign and subsequently resigned.

“There were many clauses detrimental to TNB (that I couldn’t agree to),” said Ani. “If I (had) signed, people would have said that I also ‘sapu’ (get a cut),”

It was then Prime Minister Mahathir that put him out to pasture, said Ani, for his refusal to play ball. “He (Mahathir) indicated that I should resign within a week of not signing.”

Prime Minister Najib Razak saved billions for TNB after ending the the era of sweetheart deals for IPPs in 2012.
Prime Minister Najib Razak saved billions for TNB after ending the the era of sweetheart deals for IPPs in 2012.

Najib saved billions

The Pakatan used to make this as such a big issue over many years saying it loses the country tens of billions in ringgit every year and alleging that the owners of these power plants so happen to be Mahathir’s close friends or “cronies”.

But now Pakatan, previously Pakatan Rakyat now Pakatan Harapan, has gone completely quiet on this issue. Why?

The short answer is that Najib had solved this problem, in 2012, actually.

Previously, the now-dead Pakatan Rakyat said it would achieve annual savings of RM3.47 billion on TNB payments to IPPs if the coalition took over Putrajaya in GE13 by reducing the internal rate of return (IRR) guaranteed returns to IPP form 19% to 10%.

This problem of lop-sided IPP deals to past cronies had been a big issue to Malaysians for years where hundreds of billions of ringgit of people (via TNB) and Petronas money were diverted to the cronies.

But in the year 2012, the government had its first ever open tender for IPP and together with 1MDB, which bid the lowest price for each renewal or new IPP and forced the other bidders to lower down their bids dramatically, the government did even better than what Pakatan promised!

Maybank proclaimed that the era of sweetheart deals for IPPs was no more and that the IRR for the IPPs were now at between 5%-6% – much lower than the previous 19% and even lower than Pakatan’s promised 10%.

Therefore, the savings per year to TNB is even greater than what Pakatan promised.

A tariff difference by even a single sen makes a huge difference over a 20-year concession period, for one IPP plant a single sen difference can reduce tariff costs by RM2.9 billion.

That is why you can see from the chart, TNB profits have now improved substantially – swinging from a loss to record profits and government no longer need to compensate TNB periodically, which government did with RM2.2 billion in 2012.

Since Khazanah, PNB, KWSP, Tabung Haji etc and most of the mutual funds have shares in TNB, the improved profits directly translates to money in the pocket for the people – instead of to the crony IPP owners.

Petronas lost billions for years due to sweetheart subsidy deals initiated by Mahathir for IPPs.
Petronas lost billions for years due to sweetheart subsidy deals initiated by Mahathir for IPPs.

Petronas

But Pakatan also missed part of the story.

It forgot that the tens of billions ringgit of gas subsidies that Petronas had to give the IPPs to keep rates to TNB lower.

The subsidised gas price (RM/mmBTU)_for electricity generation from Petronas went up from RM6.40 in 2008 to RM18.20 in 2016, a three-fold increase.

The market price was mostly above RM40 then.

These savings from better IPP deals have gone to reduced gas subsidies and increased gas revenues (in the billions per year) for Petronas without a similarly high increase in electricity prices in 2011 and 2014 – despite TNB making much bigger profits and Petronas saving billions per year.

How much Petronas had lost due to subsidising the IPPs in the lop-sided deals of the past?

The answer is actually in page 63 of Petronas 2015 annual report.

By the end of 2015, Petronas said it had lost RM155 billion in revenue to the power-generation sector due to the gas subsidies forced upon them in May 1997.

RM155 billion that could have gone to Petronas and the government for development programmes instead of having Mahathir making Petronas subsidise the lop-sided IPPs.

With the increase in gas prices charged to the IPPs, you can clearly see a decline in the lost revenues of Petronas.

The 1MDB venture

There is little doubt that 1MDB had helped shake up the IPP industry with its aggressive bidding in the first ever open tender for power purchase agreement (PPA) in 2012 and also subsequent IPP bids where 1MDB was always the lowest qualified bidder for every IPP project it went into.

These savings from paying the previously very lucrative IPPs were then channeled into higher revenues for Petronas, TNB and eventually to the government and the people instead of to the profits of the IPP private owners.

This is the same for the IPPs that were previously owned by crony (with lopsided deals and high gas subsidies) and now sold to China (without lopsided deals and lower gas subsidies).

The life-line tariff (LLT) for consumers who use up to 200 kWh/month affecting 70% of households have not changed since 1997.

It is also GST-free.

1MDB shook up the IPP industry with its aggressive bidding in the first ever open tender for PPA in 2012.
1MDB shook up the IPP industry with its aggressive bidding in the first ever open tender for PPA in 2012.

Any change in your electricity bill is probably because you use much more electricity compared to before.

From the year 2010 onward, households with electricity bills below RM20 no longer pay a single cent.

This benefit is still on-going.

So don’t say that 1MDB or government has not done anything good as tens of billions that would have gone to the IPP cronies every year now goes to the government and to the people – this could easily amount to hundreds of billions of ringgit over 10 to 20 years.

This is one of the more important legacy issues that had been corrected by Najib’s government.

The other would be the 2011 take-over by the government and EPF of 100% of Plus highways, which means that any revenue collected from toll either goes to the government (51%) or to EPF account holders (49%) and no longer to private “cronies”.

This is also why the North-South Expressway tolls have not increased for 11 years since 2005.

If Najib’s government had not done the 100% take-over in 2011 and renegotiated the toll concession agreement, based on the original ‘Mahathir’s concession agreement’, your toll charges for the Jalan Duta to Ipoh stretch would have jumped from RM26.50 today to RM83.17 by the year 2038 … Read More.

Source: LSS

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LSS is a prominent blogger who believes in writing truthful and constructive articles.