By G. Sharmila
The energy minister confirmed that national utility provider TNB is in talks with 1MDB to purchase the latter’s stake in Track 3B. But whatever happened to due process of open tender that Putrajaya promised? Why allow 1MDB to probably make a profit by flipping its stake to Tenaga?
It is now an open secret that self-styled strategic development fund 1Malaysia Development Bhd (1MDB) is in financial trouble, what with recent news of suspiciously rushed land deals with pilgrimage fund Lembaga Tabung Haji and Retirement Fund Inc (KWAP).
Yesterday, the Business Times Singapore reported, citing sources, that jittery lenders of a US$975 million (RM3.6 billion) syndicated loan led by Deutsche Bank plan to ask the troubled state-owned firm to pay up before the loan falls due in less than four months.
While that report remains unconfirmed (though not denied) by 1MDB at writing time, what really smacks of a bailout to Tiger is the confirmation yesterday by Energy Minister Maximus Ongkili that utility giant Tenaga Nasional Bhd (TNB) is in talks with 1MDB to acquire the “biggest stake” in the Track 3B power plant project. 1MDB owns a 70% stake in Track 3B, while the rest is owned by Mitsui Co Ltd.
Track 3B is a power plant project to be located in Jimah, Negeri Sembilan, with an estimated value of RM11 billion. It will be commissioned in stages from Oct 1, 2018. When 1MDB beat YTL Power International Bhd in the bid for Track 3B in March last year, most industry observers had said that it was a feather in the cap for the now-beleaguered strategic investment fund.
This was because 1MDB had planned an initial public offering (IPO) for its energy arm Edra Global Energy Bhd.
To date, nothing has come of this listing plan; however, there now appear to be parties interested in buying 1MDB’s energy arm, the latest name cropping up being IJM Corp Bhd. According to previous media reports, 1MDB paid a total of RM12 billion for the power assets it currently has, including a premium of RM3.3 billion above the fair value. Bankers have said in the past that a sale of Edra Global’s assets would be tough because a single company would not want to pay a premium for these assets
Apparently the Ministry of Finance thought so too, what with its U-turn from having an IPO and then appointing CIMB Group to handle asset sales and then going back to the IPO – all within a week.
Anyway, TNB’s role as a white knight is clearly to facilitate a bailout for 1MDB, who is reportedly facing funding difficulties for Track 3B.
Of course, TNB is expected to benefit from buying into Track 3B, according to a report from CIMB Research on May 11. The research house believes that TNB would be given revised terms for the construction of the 2,000 megawatt (MW) coal-fired power plant. CIMB said that if TNB took on the project, it would benefit in the long run, as it could revise the terms of agreement to ensure a fair return for the capital costs and risks that it would undertake.
While this may sound like a win-win situation for both parties, Tiger thinks that Track 3B should actually be re-tendered, given that 1MDB no longer wants (or one might say, is no longer able) to take it on.
Why should TNB and TNB alone be given priority to buy a stake in the power plant? Tiger thinks that other power players should also be given a fair chance to take on the power plant project. Tiger has written before about the ministry awarding power plant projects via direct negotiation versus the tender process and TNB having talks with 1MDB over the project only goes to show that the ministry is not interested at all in awarding projects via the more transparent competitive bidding process.
Recall that while Track 3B was awarded via a tender process in March last year, the government awarded 1MDB a multi-billion ringgit 2,000 MW power plant in Malacca via direct negotiation last October. The plant is reportedly scheduled for commissioning in 2021.
The ministry had first come under fire for awarding a power plant project dubbed Project 4A via direct negotiation to a consortium that comprised TNB, the Johor Sultan vehicle SIPP Energy Sdn Bhd and YTL Power. YTL Power, however, bowed out of the consortium amid the controversy surrounding the award of the project. In the end, TNB and SIPP Energy decided to proceed with the project without YTL Power on board.
Track 3B raises the question of whether TNB is being arm-twisted into becoming 1MDB’s white knight. Although analysts might say that TNB will profit in the long term, Tiger thinks that it is 1MDB who needs a cash injection and therefore stands to profit from a stake sale to TNB. That profit margin will come at a cost to TNB if it ends up paying a premium for the stake, unless it passes the costs down to consumers in the form of higher tariffs.
If and when that happens, it will mean that the public is bailing out 1MDB. Really, the only party who benefits from this “deal” is 1MDB.
In a nutshell, TNB should not be buying the stake directly from 1MDB. The concession should be reclaimed by the ministry and the whole thing re-tendered since the majority stake owner could not fulfil the terms of the concession.
It is not too late yet for the ministry to step in and announce that Track 3B will be re-tendered in the interest of fairness and transparency surrounding the award of power plant projects. It would certainly regain some of the respect it has lost in the industry due to its direct negotiation tendencies.
Any other method will likely introduce bailout element to 1MDB which is likely to be large.
GRRRRR!!!
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