By Khairie Hisyam
Apart from properly valuing 1MDB’s power assets held under Edra Global Energy for its proposed sale, concerns grow on the looming spectre of majority foreign ownership of local power plants. KINIBIZ examines the matter.
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As Malaysians await the aftermath of the Edra Global Energy power assets sale, there are growing concerns that the sale may see foreign ownership of local power plants exceed 49% for the first time in history. The question, however, is whether these fears are really justified.
On the surface, changes in ownership of power plants – whether into foreign hands or otherwise – do not impact consumers directly.
Sources familiar with the industry told KINIBIZ that once awarded, power purchase agreements (PPAs) are iron-clad in the sense that the tariff rate and other conditions cannot be changed even if there is a change in equity ownership vis-a-vis the concessionaire.
Technically, sources say the PPAs do make allowance for potential changes in equity ownership. However, such terms do not entail a renegotiation of the terms contained in the original award – this means whichever bidder ends up buying over Edra Global Energy’s power assets would have to abide by existing terms of the PPAs attached to them.
To allow a renegotiation of tariffs already set out in a PPA would set a dangerous precedent for future demands from other PPA concessionaires, which would in turn will put the Energy Commission (EC) on the back foot in regulating the sector.
Concerns, however, loom large on the implications that follow the unprecedented scenario whereby foreigners have majority, even full, equity control over Malaysian power plants.
Arguments against foreign ownership
Foremost among the arguments against allowing foreigners to take majority ownership of local power plants is one of national security: do we want foreign entities to gain a foothold in a sector that is essentially the backbone of the economy?
Some industry observers KINIBIZ spoke to took the stance that allowing foreigners to own majority stakes in power plants, as opposed to the current 49% cap on foreign shareholding, may carry serious implications for a small economy such as Malaysia.
One potential issue is whether such an entry, which would set a precedent for further entry of foreign power sector players, would result in foreigners holding some bargaining power against the implementation of future national policies.
It is an especially alarming question considering power plants are traditionally viewed as national-interest assets, meaning having them becoming bargaining chips may result in a scenario whereby the government is essentially blackmailed in future.
Zooming into the sector level, there is also concern that allowing so-called bigger boys from overseas into the local power sector may in turn harm the existing local outfits which may find it difficult to compete in terms of funding costs, for example.
This is particularly so because the local power sector in general offers a more lucrative internal rate of return than those found in most other markets, potentially allowing foreigners to undercut local players and in turn drive locals out of the sector eventually.
“Is the market ready for national interest assets to be sold to foreigners?” asked one industry observer to KINIBIZ, requesting anonymity as it is a sensitive matter.
There is also the worry of what sort of precedent would be set by allowing foreigners to bypass the 49% shareholding cap in the power sector. Will existing or future local PPA holders then try to manipulate the precedent by selling off majority stakes in their power plants to foreign entities to make a quick buck?
This in turn raises concern on whether this will increase patronage at a time when Malaysia ought to be removing grey areas in which corruption and cronyism has thrived over the years.
Is foreign ownership really that bad?
On the other hand, it may also be that allowing foreigners to assume majority stakes in power plants would not necessarily lead to a doom-and-gloom scenario. One only has to look across the Causeway to see a working example: Singapore counts plenty of foreigners in its energy supply sector and it seems to be working out well.
Electricity supply is a straightforward business – PPA holders operate a power plant to supply energy at an established tariff rate and must abide by the terms of the concession until its expiry.
While exact terms of any PPA is shielded from the public by the Official Secrets Act 1972, by all accounts they are iron-clad in nature. This cuts both ways: while the profit margin is guaranteed for the PPA holder, logically there would also be terms that were put in place to safeguard public interest vis-a-vis supply stability and security.
As for questions on foreigners holding undue bargaining power after taking ownership of local power plants, one observer KINIBIZ spoke to put it bluntly: these foreigners can’t exactly uproot the power plants and take them out of the country.
This means that insofar as national interest and security is concerned, allowing foreigners to assume majority control over local power plants is a viable prospect so long as necessary precautions are included in PPAs.
In the end, increasing competition in the power sector can only benefit the consumer so long as the government returns to competitive bidding as a means to dish out future power plant projects.
While the government promised in 2005 to use competitive bidding as the only means to award new power plant projects, it seemingly abandoned the commitment by awarding the Track 4A power plant project directly to a YTL Power-led consortium in May 2014.
To put the matter into context, going with competitive bidding as opposed to direct awards had reportedly saved some RM4 billion, savings which directly benefitted end-consumers in terms of the electricity tariff.
Can EC handle it?
Amidst these apparent pros and cons, however, there is also the question of whether the EC, as the regulating body for the power sector, has got enough chops and gumption to deal with foreign players.
Concerned industry observers KINIBIZ spoke to indicated that there is concern over the EC’s past performance against the prospect of potentially more sophisticated power players coming into the sector.
In essence, it is crucial for the EC to be on the ball on all aspects of its regulatory functions over the sector, ranging from ensuring all power plants meet the required technical specifications to meeting power plant construction deadlines and other aspects of operations.
This became a question when the EC controversially awarded Track 4A to the YTL Power-led consortium in May 2014 through direct negotiation. According to a press statement by the EC, it did so “based on their (the consortium) ability to offer competitive rates in the recently concluded tender exercises”.
The latter refers to the previous power plant award for Track 3B, which went to a 70:30 joint venture between 1Malaysia Development Bhd (1MDB) and Mitsui of Japan. However, financial troubles have led to 1MDB selling its 70% stake to Tenaga Nasional Bhd (TNB) for roughly RM47 million in July this year.
Returning to the issue, the EC’s reasoning raised some flak given what it previously said about why 1MDB-Mitsui won Track 3B, edging out YTL Power which was said to be also close to winning the project. According to a March 2014 statement from the EC, 1MDB-Mitsui edged out the YTL Power-led consortium because, among others, the latter did not fully meet technical specifications outlined for the project.
This raised questions on why it was awarded Track 4A on the basis of a flawed bid for Track 3B. YTL Power eventually dropped out of the project following an unrelated controversy over YTL Group managing director Francis Yeoh’s remarks on crony capitalism in Malaysia.
In any case, this incident raises questions on how capable the EC may prove to be in regulating potentially more sophisticated entities from abroad to ensure full compliance with existing regulations. One potential risk is an unscrupulous foreign player cutting corners without EC noticing, said one industry observer, which may lead to trouble down the line.
Another highlighted example was the controversy over a potential delay in completion for Malakoff Corp’s 1,000-megawatt (MW) Tanjung Bin power plant and how the EC dealt with the matter.
While industry observers noted the potential issue had become apparent as early as end-2012, the EC had not been seen as dealing with the matter swiftly. It was only in June 2014 that Malakoff applied for an extension to its scheduled March 2016 deadline, to which the EC granted an eight-and-a-half month extension.
In the end, public pressure through the media was seen to have led to Malakoff forking out extra funds to speed up construction and catch up with the original deadline anyhow, raising concerns as to why such pressure did not come from the EC as industry regulator.
The political factor
On top of these concerns regarding the EC specifically, another worry is the potential for political expediency to interfere with the EC.
Coming back to the Track 4A award, information available to the public paint an indication that there may have been interference vis-a-vis the award process and this raises concerns whether the EC may similarly be undermined in the future.
Abdul Razak Abdul Majid
To recap, on May 16, 2014, EC chairman Abdul Razak Abdul Majid was quoted by Business Times as saying there will not be direct awards for Track 4A and 4B in response to an earlier report by The Edge Financial Daily that Track 4A was to be awarded directly.
This was only little more than a week before the EC did end up awarding Track 4A directly. That EC member Mohd Nasir Ahmad resigned reportedly in response to the award only fuelled questions on what may have transpired behind the scenes to lead to such an abrupt U-turn.
The concern basically boils down to this: will the EC be allowed to go about its regulatory function in a completely professional manner in future? Or will political considerations and expediency at some point or another undermine its authority especially in respect of potentially growing foreign presence in the power sector?
Shareholding cap decision unclear
Any discussion on the potential implications of allowing foreigners to own majority stakes in local power plants would be based on the presumption that these entities are allowed to bypass the existing 49% shareholding cap for foreigners.
It is not an implausible scenario. The Electricity Supply Act 1990 makes no mention of such a limitation, meaning it would strictly be a matter of government policy which is more easily amended or exempted than a legal requirement would be.
However, it is currently unclear who exactly would be deciding as and when such an exemption would be granted.
To recap, the decision to allow a change in equity ownership of an existing power plant would technically go through the EC. Approval is also required by the Committee for Planning and Implementation of Electricity Supply and Tariff (or its Malay acronym JPPPET).
JPPPET, which looks at the planning aspect of national energy supply, is chaired by the incumbent Energy, Green Technology and Water Ministry and includes representatives from sole electricity distributor TNB, the EC, the ministry itself as well as the Economic Planning Unit (EPU), among others.
On the EC side, the primary concern on equity ownership changes would likely be on matters of continuity in operations insofar as ensuring supply of electricity is not disrupted. For upcoming power plants, focus would shift on ensuring the new party taking over would have the capability to ensure the project remains viable in terms of both expertise and funding without disrupting the national grid’s integrity.
However, it is likely the approval for any foreign party to be exempted from the 49% maximum shareholding cap would have to be obtained separately.
Until 2009, acquisitions, mergers and takeovers involving foreign and Malaysian interests were regulated by the Foreign Investment Committee (FIC), a unit under the EPU of the Prime Minister’s Department.
Set up in 1974, the FIC had previously outlined a requirement that any acquisition of a local company must retain at least 30% equity in bumiputera ownership, among other things.
However, the FIC has since been disbanded and it is unclear which entity has taken over oversight of the foreign shareholding cap and its implementation.
While there is the possibility that the call now rests with the International Trade and Industry Ministry, the fragmented system of governance in Malaysia means there is also a chance that the matter is under the purview of the EPU or even another regulatory body.
What is clear is that the decision to grant a one-time waiver of the 49% cap in the case of Edra’s power assets sale would rest with the government and possibly at the cabinet level, given the national significance of the sale in the context of the 1MDB controversy.
That said, this question would only come into being should one of the foreign bidders vying for Edra’s power assets somehow edge out TNB, which as a local player would be seen as the favourite from a national interest perspective – such a scenario would then require a clear disclosure of why the winning foreign bid was picked and how it is clearly superior to TNB’s bid.
And given 1MDB’s past history of dodgy dealing, it is also imperative to ensure that the sale process is done in a straightforward manner without room for potentially questionable side-deals. KINIBIZ looks at this issue in the next article.
Yesterday: Putting a price tag on Edra
Tomorrow: 1MDB may be killing its only cash cow
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