Prior to 2004, licences were awarded to the Independent Power Producers (IPP) by the Economic Planning Unit (EPU) on a directly-negotiated basis. It is a well-known fact that only the well-connected were awarded the licences which paved the way to raking in millions if not billions, due to “sweetheart” deals of the first generation IPP’s Power Purchasing Agreement (PPA).
That the first generation IPPs enjoyed mid-teen project’s IRR (Internal Rate of Return – a yardstick used to measure financial viability of a project) is an open secret. That this rent-seeking behaviour had ultimately contributed to higher cost of electricity is synonymous with the hey-day of privatisation ala-Mahathirnomics.
Needless to say, power plants are surely “gold–mines” where concessionaires lock in their cash-flows for at least the next 20 years.
The industry players in the power sector were relieved when the Najib administration embarked on a spate of reforms which were to see, among other core reforms, a competitive tender to be undertaken for the award of future IPPs.
Moving in that direction, MyPower Corp which was established in 2010, a unit under the Energy, Green Technology and Water Ministry, was to spearhead the reforms so as to ensure the cheapest cost of energy delivered to the consumer.
Since 2011, the EC has conducted four competitive biddings. Tenaga Prai power plant (capacity 1.071 MW) was awarded by the EC to Tenaga (TNB) after a stiff bidding process. It was reported that 18 participants submitted their bids. Tenaga outbid the rest, with a levelised tariff of 34.7 sen/kWh and a project IRR of between 6 and 7%. This price now seems to be an industrial benchmark.
The latest competitive bid was the project 3B that was to build a 2,000 MW coal-fired power plant. The EC controversially awarded it to 1MDB despite it not being the lowest but based on technical grounds.
Much to the chagrin of the industrial players in the power sector, the reform is now perceived as being placed on the backburner and the EC is ostensibly making a U-turn, a regression of sorts.
Project 4A is a combined gas-fired turbine plant with a 1,100 MW to 1,400MW capacity. Sources said that the decision on the direct negotiation would help finalise the contract quickly and speed up the delivery of the power plant to address capacity shortage, following recent “outages” in several states.
These reasons, however, were not well received by the power players as it also defied logical thinking. The EC can’t suddenly argue that the country is in dire need of electricity after the recent outages. Planning is an ongoing process. The EC must be transparent as to the real causes of the outages.
The installed capacity is currently at 21,000MW while peak demand comes to the range of 17,000MW. This provides a clear margin of 4,000MW. So taking account of anticipated outages and unplanned ones, there is a clearly a safe margin. There is no foreseeable surge in demands for electricity in the immediate future.
Different opinions prevailed between the EC and the industry players as to the “actual operating reserve margin”. Even after taking into account all scheduled (maintenance and repair) and unscheduled outages (due to lightning and mishaps like floods), industry players insist on achieving a 10% to 21% operating reserve margin.
They argued that gradual power planting would be pertinent and would also arguably avoid excess reserve margins which would only burden consumers.
TNB moreover has made it clear that another 7,000MW of electricity has been planned for commissioning for the next four years and will be coming on-stream by 2018. There is sufficient reserve capacity so as not to allow the repeat of 1992.
Hence, why the rush for an open-tender?
Despite the opposition, going by the latest turn of events, the EC has already offered “a conditional award” for the development of Project 4A to a “consortium that is made up of three prominent bidders” of the project, namely YTL, SIPP and TNB.
Now that the three supposedly top bidders have been asked to form a consortium, one wonders why you even called for an open tender in the first place!
The rakyat would surely want the EC to be transparent as to “what are the conditional offers”. What are the formulae and rates for the power produced by this plant that will be undertaken sold to TNB? One can’t help thinking that the involvement of TNB is an eye-washer of sorts. Considering this is a direct-negotiated deal, it is expected that bigger transparency would be demanded from the Malaysian public.
Be that as it may, such political interference doesn’t augur well for Malaysia and, in fact, damages our credibility in the eyes of the international business community. We shall perhaps be their last destination for further high tech industry since investors are afraid of flip-flopping and uncertainties in policies.
To make it worse, the recent comment by Tan Sri Francis Yeoh urging an end of “capital capitalism” seems both weird and unbecoming as well as hollow. Many perceive that he has outwardly contradicted his own rise in the power sector and, more importantly, his current attempt at securing the project deal 4A deal through connections with the royalty.
YTL International Power Berhad owns the majority share in the holding company of SIPP Power Sdn Bhd while SIPP Energy Sdn Bhd owns 30% share of the SIPP Power Sdn Bhd. For transparency and best practice, Francis should come clean to explain all these rather than simply pronouncing lofty ideals of battling “crony capitalism” in Corporate Malaysia.
Searches in Suruhanjaya Syarikat Malaysia (SSM) have shown that HRH Sultan Ibrahim Ibni Almarhum Sultan Iskandar, Sultan Johor, is the majority (51%) shareholder of SIPP Energy while the majority (3 out of 5) of SIPP Power directors are siblings of YTL International Power Bhd managing director Tan Sri Francis Yeoh and executives within the YTL Group.
In the final analysis, it is important to register that this U-turn and flip-flop in policy is certainly not doing good to Malaysia as an investment destination. The chairman of the EC must be reminded that he is placed in the EC to undertake this reform.
Should he insist on the “direct negotiation”, will he allow for a “Swiss Challenge” from the other equally competent bidders?
It serves the new EC well to do a “Tan-Sri Ani Arope”, ie to exit graciously as a protest to the Najib’s flip-flop policy. That will go down well in history as a commitment for change and reform.