Why the generous subsidies for IPPs?
Oil price hike protest in Ipoh (Source: Unknown; forwarded via email)
So Petronas and the Malaysian government says subsidies distort the market. Of course, the withdrawal of subsidies will encourage conservation of a scarce resource - which is a good thing. It might even reduce pollution and congestion. Roads were noticeablly less congested in parts of Penang and KL today. Traffic on the Penang Bridge heading to the island at 5.20pm - peak time - was smooth; the usual bottleneck after the toll plazas, as the mutiple lanes narrow down to two lanes, was gone.
But has the government given much thought to the impact of the removal of oil subsidies on the poor - and even large segments of the middle-class, who are rapidly moving down to the ranks of the poor in terms of real purchasing power?
One key question has not been answered: why a sudden complete removal and not a gradual phasing out? Come on, tell us how much profit Petronas made for the year ended 31 March 2008. The figures should be available by now, even if the annual report isn’t ready.
This is what the Petronas CEO was quoted today by AFP as saying as he called for an end to energy subsidies:
“While this is being pursued, nations must also work towards a gradual removal of generous energy subsidies, which cause unmitigated consumption and market distortions that are unmanageable in the long run,” he said.
Perhaps the Petronas CEO and the government will care to explain why Petronas has to sell natural gas to the IPPs at vastly subsidised prices? Some RM30 billion over the years…
The government must also tell us why Tenaga has to pay the IPPs for capacity charges for electricity it really does not need.
Also, why are we spending billions to lay the longest undersea cables in the world to transmit electricity from the Bakun Dam to the peninsula, when there is a 40 per cent reserve capacity in the peninsula?
Questions, questions… but no satisfactory answers. This is an article I wrote some time ago about the colossal subsidies given to the IPPs:
Subsidising Gas to Private Power - State Utility Pays
PENANG, Oct 12 (IPS) - A staggering 27.6 billion ringgit (8.2 billion US dollars); that’s the amount the Malaysian public has incurred through gas subsidies given out over the years to private power producers by national petroleum corporation Petronas.
With oil and gas prices now soaring, the government – and Petronas – is feeling the pinch of higher fuel and gas subsidies. Petronas has proposed a removal of gas subsidies for electricity production, but much of the attention has focused on the impact it would have on state power firm Tenaga Nasional Berhad.
Tenaga faces a double whammy: from higher gas prices and from higher fuel costs being passed on to it by the privately owned, and from hugely profitable, independent power producers (IPPs). The IPPs sell power to Tenaga under lucrative power purchase agreements (PPAs). Tenaga also generates its own electricity through its network of power plants. Read more
In the meantime, small businesses are likely to suffer as people tighten their belts. Restaurants, hawker centres, and sundry shops are likely to see a drop in business.
Perhaps it’s time to look at alternative economic models that return to the basics - a more sustainable model of development that emphasises food self-sufficiency, public transport, the promotion of small eco-friendly business activity, and the recycling and recovery of waste.
To keep the economy healthy in the face of all that belt-tightening, the government should invest in activities that enhance human dignity. It should focus on expanding the public health care system, enhancing the quality of education, building more affordable houses, encouraging organic farming and improving public transport. All these will create jobs - and more importantly, they are sustainable activities, built on domestic demand, that will improve the quality of life. We cannot rely on fickle foreign investors alone to drive and control our economy.
In the meantime, do you detect any slowing of business activity in your area? What do you think are the likely implications of the price hikes? How are you coping personally? Have you “changed your life-style” in any way - what sort of belt-tightening measures have you undertaken? How do you think this will affect you - and the economy?
- Why are we subsidising the profitable IPPs?
- Petronas barrels in record RM96b profit as oil prices soar
- Undersea cable cost for jinxed Bakun doubles to RM15b
- Petronas’ RM600 billion profit: Where has it all gone?
- Corporate doublespeak: subsidies vs “incentives”
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Anil
Please tell me that you are suppoting Tuntutan Subsidi Makanan.
http://sebolku.blogspot.com/2008/06/tuntutan-subsidi-makanan-rakyat.html
in trying to camouflage the excessive profits given to the IPPs which are controlled by Maahtir’s cronies, the GOvt announced a tax on super profits enjoyed by IPPs. Under the formula, a 30% tax will be imposed on returns in excess of 9% of assets. Lets clap our hands, right?
But, you better wait coz cronies are cronies and they need their usual feeding. Now, the cronies are crying and said its an unfair tax. In compensation, the cronies want an extension of the IPP contract!
Goodness, do you know how much these IPPs have been making. Billions of dollars per IPP per year. Who is bearing the profits? Its Petronas ( and therefore the rakyats money) thru gas subsidies and Tenaga which have to buy the electricity regardless of need!
Oh, you think the above is outrageous. Wait till you hear this. It is now found out by investment bankers that the tax is no tax actually. Coz, most IPPs earn around 9% return on assets which means no super profit tax! Thats why the analyst is not going to rerate the IPP shares downwards after the study. And the IPPs have the temerity to ask for an extension to the tenure of the contract as compensation.
Read this, BN. If you will to sell out the rakyat again by granting any extension to these greedy cronies, THE PEOPLE WILL NEVER FORGIVE YOU AND WILL KICK YOU GUYS OUT IN THE NEXT ELECTION.
Anil, your articles are so good lah. Can you set up a facility to email your articles from your site itself?
Ganesh, thanks for the encouraging words. You can subscribe to this blog, by entering your email address in the box mid-way in the column on the far right.
‘When the first generation of IPPs came online, Tenaga’s profits plunged by 30 percent in 1995. “When the generous terms were given to the IPPs, all my other peers around the world asked what was happening,” former TNB executive chairman Ani Arope told the media last year. “They said (the contracts to IPPs) were ‘too darn generous’. (The terms) were grossly one sided.” When asked how the Malaysian model of IPPs was created, Ani who helmed Tenaga in the early 1990s, replied, “Ask our previous Prime Minister (Mahathir)!”
WHO OWNS THE IPPs and how much (if any) “commision” goes to UMNO AND BN?
“In an earlier analysis, the business weekly identified the IPP beneficiaries as Genting Sanyen Power, YTL Power, Malakoff Bhd and Tanjong Plc/Powertek Bhd - companies “controlled by the families of Tan Sri Lim Goh Tong, Tan Sri Yeoh Tiong Lay, Tan Sri Syed Mokhtar Al-Bukhary and Ananda Krishnan, four of the richest families and individuals in the country”.
BLOODY BLOOD SUCKERS. BOYCOTT ALL THESE BUSINESS.
Bro
I’d be amazed if IPP’s only make 9% on returns. It is common knowledge that bankers insist on 18% Internal Rate of Return (IRR) for funding these IPPs.
Most venture capitalists and personal bankers will guarantee you 8% return on investment. So, shareholders of IPPs should be screaming bloody murder if all their CEO’s with their million $ remuneration packages can provide is a pathetic 9%. In the early years of the IPPs it was reported that collectively they made more profits than Tenaga with giveaway ‘Take or Pay’ contracts and 20-year laugh-all-d-way-to-d-bank Concessions.
The trouble with the subject of these IPPs and Toll Highway Agreements is that we are somewhat, though not totally, shooting in the dark! It is Unconstitutional & Unfair that Public contracts are protected under the OSA.
What expertise or proven track record did Genting, YTL, Usaha Tegas (AK) & MMC have prior to being awarded their lucrative contracts. We have on record the disclosure by ex-Tenaga MD Tan Sri Ani Arope that he had stood firm against EPU pressure, only to have it rammed through with indecent haste soon after his departure. Why were there no open tenders which would have given Tenaga and Petronas much leverage in negotiating favourable terms for the People!
refer to my satire blog ‘Grand Saga - The Sanctity ofGridlocks & Power Grids’ at http://donplaypuks.blogspot.com
So, when you have Ministers who blatantly only side Big Biz, and politicians with vested interests, it is the general Public which is held hostage and subjected to ransom by contracts where the beneficiaries enjoy very sweet non-commercial terms & conditions.
The 1st step is for Petronas to come clean with the publication of its full, detailed Accounts. The ability to ‘read’ and analyse accounts is not the sole prserve of the Mericans, Govt, foreign merchant bankers & financiers or card carrying members of ‘Parliament Library.’
We need to know what other and how much subsidies Petronas is shy about revealing to us and how much they have written off - Proton, Augusta MV, Prasarna, F1, Petronas Uni, MPO, PMB. Possibly Cyberjaya, Putrajaya? How are they really performing overseas? How long will our reserves really last at the current rate of consumption and how much of that have they forward-sold, at what average price and who made these decisions? One man or the Board?
Simultaneously the IPP & Toll Highway contracts should be fully declassified. If the Concessionaires protest, let them sue. With the current back-log of cazes, they will be lucky to get a hearing by 2020!
That is when we can talk about Open Govt
Transparency, wherefore art thou?
What about the sale of gas to the Japanese when gas was first discovered. MM was so afraid that nobody will buy it because they did not offer to anyone else and only offered to the sogososhas for a song only to be sung to MM. Rumors recently that to fulfill that contract even petronas has to buy back at a high cost to fulfill the extremely low price and unable to supply to local industries. So subsidies should not be given to homeland but alright to continue fulfilling low price agreements. BN past and present is walking one step forward and 3 steps backward.
One of the IPPs, Genting is a beneficiary of the cheap gas and after making all their money from power and gambling, they have shifted a portion of it elsewhere to be safe
Bro,
I understand that Petronas has to susidies IPP’s. Then only IPP’s price to TNB be lower so that electricity charges is reduce to consumers.
But what I don’t understand and demand goverment to review PPA with IPP’s is why should TNB has to buy power from IPP’s eventhough there are 40% access capacity?????.
Should PPA be scrutinised and TNB only pay to IPP’s as and when its use the power???.
donplaypuks
there are many ways to skin a cat. first, inflate the construction cost to extract the real cream upfront. second, set up a maintenance unit to divert yearly profits to camouflage the indecent profits generated by the power plant.
there you go. return on inflated assets is just a paltry 9% in the words of the cronies. re-emphasise its return on assets (and not equity. as comparison, banks would laugh all the way if it can 1.5% on assets). and if you add in the diverted profits, no wonder the cronies can afford to own shopping complexes, huge commercial buildings etc. best, now they are cringing that the govt is gonna imposed a windfall tax which amounts to no more than RM8 million a year for a major IPP and is now demaning extension of tenure as compensation for the not-so-windfall tax. No wonder, they can go to church to pray on Sunay and testify how great and fair God has been to them.
Like Jeff Ooi said, I amost puke after hearing…
if we could expose these guys and their connected businesses, we could call for a boycott.
but we’re too pampered for that. it’s always let someone else like mr anil do the fighting, as we sip kopi-o and rant about it in kopitiams. offering austere policies that the country should adopt as if we are the finance minister.
the truly financially smart ones would have anticipated the government’s move and prepared for the rainy season. fuel prices will continue to rise as it becomes scarce and the middle eastern conflict will continue to deteriorate as weaponry becomes more sophisticated.
unlike our neighbours, malaysians will not take to the streets, preferring to take it in peacefully and sulk among private circles than to confront the government. perhaps this is a good thing, at least we can still enjoy our kopi-o without any worries.
Easy somebody has got a share in the pie.In malaysia you scatch my back n i will do your’s.
The IPPs are having it so good I have decided to go out and buy some of their shares. Sure make money one.
Don’t be surprised if the price of Kopi-O in the kopitiam also goes up!
anil,
you are still barking and some of us still happy hearing you barking at wrong tree.
Why?
1.IPP- cronies
2.TNB - glc
teksi driver had to wait for ngv gas at least one hour to fill their tank-so the goverment have no interest to protect people in the street- because we are only their coolies before become boss in election.
raj raman-anyway keep barking anil-sure someone will hear your cries on behalf of Malaysian.
SO THE TRAFIC IN PENANG ALSO MISSING?I THOUGHT KUALA LUMPUR ONLY.
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