Kuek Ser Kuang Keng | May 24, 11
Malaysiakini
Calls to reveal ‘secret contracts’ with independent power producers (IPPs) have regained momentum with the announcement by Idris Jala that the government is reviewing gas subsidies provided to this sector.
Idris, a Minister in the Prime Minister’s Department, told Malaysiakini last week that some of the contracts are expiring and that the subsidies offered will come up for review.
“It’s being renegotiated. The negotiations are going on and we’ve concluded some of them. In due course, we’ll be making an announcement,” Idris had said.
However, one reason for lopsided contracts signed in the early 1990s with first-generation IPPs was the lack of transparency and scrutiny.
It now appears that the mistake may be repeated, as information has not been disclosed on the review of existing contracts or the negotiation of new contracts.
“All contracts relating to subsidies and the public interest, especially in the areas of public utilities, must be made public,” said Klang MP Charles Santiago of the DAP.
He suggested that Parliament should be given a say in the negotiation process with IPPs.
“The government should come up with a proposed agreement that has to be scrutinised by a parliamentary select committee. Only after it is endorsed by the Parliament should it be officially signed by both the government and private companies,” he said when contacted.
“This provides two levels of scrutiny – the government and Parliament – to ensure that such contracts are in the best interests of the people.”
An observer pointed out that disclosing the details of IPP contracts would put the issue under the spotlight and lead to early reduction of subsidies as well as the electricity tariff.
In January 2009, 16 highway concession agreements had been declassified and made public after persistent demands from the opposition and civil society groups.
This was followed by discounts on certain toll highways or certain stretches of highways, a freeze on toll hikes and early closure of a few toll plazas.
However, PKR’s Batu MP Tian Chua is of the view that the government will not compromise on IPP contracts.
“The government is not sincere about increasing transparency. When (the Selangor government) wanted to publish the Bukit Antarabangsa landslide report, the BN federal government blocked us,” he said when contacted.
Best of both worlds
IPPs have been enjoying privileges on both sides of their operations. They purchase gas from national oil producer Petronas at a subsidised price and sell electricity to Tenaga Nasional Bhd (TNB) at a high price.
Former Energy, Water and Communications Minister Shaziman Mansor disclosed in 2008 that Petronas was selling gas to IPPs at RM6.40/mm BTU when the production cost was RM15/mm BTU to RM16/mm BTU. It was reviewed to RM10.70/mm BTU in 2009, but this is still lower than the market price.
The agreements between TNB and IPPs, also known as power purchase agreements (PPAs), compel TNB to purchase all electricity produced by IPPs regardless of demand, causing Malaysia to hold some 40 percent of excess electricity.
On top of that, the PPAs, described by former TNB executive chairperson Ani Arope as “grossly unfair”, allow IPPs to sell electricity to TNB at price higher than TNB’s own generation cost.
Re-negotiations with several IPPs began in 2006, to correct certain weaknesses in the PPAs.
However, the talks halted in March 2007 when the principles for negotiation could not be established and there were concerns that the review would have a significant impact on the local stock exchange, since one-fifth of the bonds in the country were issued by the IPPs.
The negotiations resumed in 2008, but by last year, no progress had been reported – until the recent announcement by Idris.
Deputy Finance Minister Awang Adek Hussin once said that it was not the government’s policy to withdraw business contracts that had been signed.
“Do you want Malaysia to be known throughout the world as a country that can take back contracts that have been signed?” he was quoted as saying in a media report.
Unable to review the PPAs, the government in June 2008 imposed a 30 percent windfall tax on IPPs – but this only lasted three months.
The tax was scrapped after protests by the IPPs, which again warned that the local stock market would be heavily affected. The government then replaced the windfall tax with a one-off payment that was equivalent to the tax for one year.
According to figures released by government in July 2008, total profits before tax of 13 IPPs in 2007 amounted to RM3.37 billion. This figure was later denied by the IPPs, which claimed the figure was overstated by RM499.316 million.
The lucrative profits are obtained at the expense of TNB, which is then forced to transfer its financial burden to end-users whenever there is a hike in fuel prices.
It is reported that TNB forked out RM19 billion to the IPPs from 2001-2010. In its 2008 financial year, the payment to IPPs amounted to over RM9 billion, forming 45 percent of TNB’s costs.
The IPPs, however, enjoyed nearly RM8 billion in subsidies from Petronas in the financial year ending March 2010.
Santiago pointed out that an independent international study had shown that the IPPs’ rate of returns had reached 22 percent, an exceptional figure for the public utilities industry.
“It is too high… 22 percent is just madness. The rate of return for any power producer and provider of utilities must be capped. The best strategy is to set up a commission to bring down the profit to reasonable level.”
Santiago also questioned if the IPPs’ contracts, signed during Dr Mahathir Mohamad’s tenure as premier, included any kickback for political parties and politicians.
“There is no reason not to make the contracts public, unless they want to hide something,” he added.
Chua also expressed reservations over Idris’s announcement that the IPPs’ subsidies would be cut.
“I believe that after enjoying years of subsidies, they would demand compensation should their subsidies be cut, such as increasing the price of electricity sold to TNB,” he said.
The earliest PPAs, signed in the early 1990s, will expire in stages from the end of 2014, 2015 and 2017.
This is one of the ways the evil mad man Mamakthir Mohamad Kutty gave away billions of the rakyat’s money to his cronies. It is anybody’s guess how much of a kickback he or his agents were able to get from the IPPs.
Just imagine Petronas that produces fuel at a higher price being forced to sell it at a lower price to the IPPs which in turn sells to TNB at a very much higher price. The IPPs make a clean profit from Petronas’ subsidized rate and another profit from the sale to TNB.
No one other than the Mamak and his advisors can come up such a money minting business. TNB on the other hand sells power to the rakyat at inflated rates to cover the higher of power from the IPPs. The RAKYAT ARE THE ULTIMATE LOSERS.
The PPAs signed with the IPPs are similar to the ones agreed upon with the HIGWAY concessionaires. It was plain HIGHWAY ROBBERY. Here again the losers are the RAKYAT. The agreements are so one-sided in favour of the Highway Concessionaires that they are allowed to blackmail the government into agreeing a rate hike every three years failing which the government has to compansate their loss of increased revenue with the RAKYAT’s money.
Whenever the price of fuel goes up in the international market, the government uses this as the reason for the hike in domestic fuel prices. WHAT THE GOVERNMENT DOES NOT REVEAL IS THE INCREASE IN REVENUE IN SELLING MALAYSIAN CRUDE IN THE INTERNATIONAL MARKET.
The government wants to reduce the subsidies in fuel given to the rakyat but it does not reduce the subsidies to the IPPs. Is it because the IPPs give generous kickbacks while the rakyat who are too poor to make a decent living are unable to do the same?
The cost of living has been going up all the time but the Barang Naik government does not exercise fiduciary based on accepted norms to curb inflation and bring about productivity. It has been cheating the rakyat with its ‘people first’ slogan. It has given out handouts in the form of pay rise to the police, army and others who are helping it to be in power. It has completely forgotten the majority of the poor whose votes they begged during elections.
Every hike in prices affects the poor MORE than the middle and upper strata of society. But then who in BN cares. They are more interested in lining their pockets.
On this subject, I think Pakatan has gotten the whole issue wrong. Pakatan is making statements that are clearly ridiculous because they do not know what is exactly going on, and they will be ridiculed for it.
“They purchase gas from national oil producer Petronas at a subsidised price and sell electricity to Tenaga Nasional Bhd (TNB) at a high price.”
This is clearly wrong. The gas price is a pass-through which means that the IPPs buy gas at RM 10.70 per million BTU and pass this through with no profit to TNB. What they make on is efficiency – they agree on an efficiency level with TNB, and whatever they improve on efficiency the IPPs get to keep. In the past, the agreed efficiency levels were low, and this allowed the IPPs to make money when efficiencies were easily achieved. However, in the new generation Power Purchase Agreements, the IPPs are obligated to pass on all improvements in efficiency to TNB.
When Petronas say that they subsidised gas to IPPs, they mean that the price level of RM 10.70 is way below market prices. They get three times as much selling this gas to Singapore and Thailand. If Petronas is allowed to sell gas to the IPPs at market prices, and this is then passed right through to TNB, you and I will not enjoy the low electricity tariffs we have today.
“Santiago pointed out that an independent international study had shown that the IPPs’ rate of returns had reached 22 percent, an exceptional figure for the public utilities industry.”
This is probably true for the five “first generation” IPPs conceived in the early 90s. The rate of return is an internal rate of return, not a straightforward return on equity. Google this to know the difference. The government now negotiates new IPPs at an internal rate of return of around 10 pct.
“Santiago also questioned if the IPPs’ contracts, signed during Dr Mahathir Mohamad’s tenure as premier, included any kickback for political parties and politicians.”
Scrutinising the PPAs will not show anything extraordinary. It’s not like the contracts show that there is a separate payment to some other entity.
I can go on and on about this subject, but Pakatan has to be careful. If you don’t know what is actually going on, don’t simply make statements that will either subject you to lawsuits or to ridicule.
“The government is not sincere about increasing transparency. When (the Selangor government) wanted to publish the Bukit Antarabangsa landslide report, the BN federal government blocked us,” he said when contacted.
Interesting…..maybe the Selangor government can pass a FOI act or even establish a new state inquiry to determine the cause of the Antarabangsa disaster.
For the IPPs, definitely the agreements should be published before any reviews so that we can all know the “good” deeds of the government.