By Khairie Hisyam
Any day now, the winning bid for 1MDB’s power assets is expected to be announced. By the bid figures, it would seem foreigners are the frontrunners ahead of Tenaga Nasional. But that may lead us down a slippery slope.
On Nov 15, 2015, Edra Global Energy suggested that the gradual liberalisation of the local power sector is the logical next step for the government, citing homegrown independent power producers (IPPs) which had expanded overseas such as Tenaga Nasional, Malakoff Corp and YTL Power.
But Edra Global, ailing 1Malaysia Development Bhd’s (1MDB) wholly-owned power arm, has vested interest in saying so. 1MDB is in the midst of selling off its entire power assets held under Edra Global and is currently considering two bids – one from Tenaga Nasional at RM8 billion and another from a consortium of foreign entities at RM10 billion, KINIBIZ reported earlier this month.
Liberalisation of the power sector will only help Edra Global’s sale go forward as the existing 49% shareholding cap on foreigners preclude the foreigners from winning the bid unless it is waived.
To set the record straight, the power of this waiver does not rest with the Energy Commission but with the Economic Planning Unit (EPU), which took over the function from the now-defunct Foreign Investment Committee (FIC).
In turn, the self-interested nature of Edra Global’s remark on power sector liberalisation echoes what may transpire should the government allow the foreign consortium, which comprises Qatari outfit Nebras Power and China General Nuclear Power Group, to take full ownership of 1MDB’s power assets locally.
At the heart of it, the government is in a conflicted position vis-a-vis the transaction.
A foreign buyer cannot win the bidding unless the government allows the 49% shareholding cap to be waived for this instance. Yet the government doing so raises questions on what sort of precedent is set going forward.
Some history adds vital perspective. Up to 2009, the mergers and acquisitions involving equity stakes, mergers and takeovers were governed by FIC regulations, which limit foreign shareholding and require 30% equity to be held by bumiputera entities in any acquisition of a local company.
When the prime minister repealed the regulations in 2009, he specifically noted that national interest in terms of several strategic sectors will remain safeguarded through respective sector regulators. One such sector specifically referred to was the power sector.
It is for this reason – national interest – that the 49% shareholding cap on foreign ownership of local power plants remains intact despite the deregulation elsewhere. Six years after this pronouncement, will there be a U-turn in that the government deems such a shareholding cap no longer relevant vis-a-vis safeguarding national interest in the power sector?
In such a scenario, what essentially happens is that the government bends its own rules for its own transaction involving a government-owned distressed company. 1MDB, grappling with RM42 billion in borrowings which it is finding difficult to service, is fully owned by the Ministry of Finance, and the prime minister, whose ministry the EPU is parked under, chairs 1MDB’s advisory board. The prime minister is also the Finance Minister.
This would set a dangerous precedent, especially if it is a one-off waiver. Power is not the only strategic sector of national importance noted by the prime minister in 2009 – others include water and communication.
What if another distressed local company in these sectors seeks a waiver of the 49% shareholding cap on foreign ownership because it wants to divest a majority stake? If, in their troubled state, they are courted by foreign investors, will the government bend the rules for them too?
On one hand, such requests are not a light matter considering the strategic importance of these sectors. Allowing non-Malaysians to have controlling stake in local companies involved in these sectors raises concerns of potential compromise down the road.
Yet, on the other hand, such companies can point to the precedent set with the Edra Global sale. Similar arguments of checks and balances being present and how existing regulations are sufficient to alleviate concerns will arise again.
And then the government may find itself in a sticky spot: not allowing other local companies in strategic sectors to open up to foreigners in cases of distress would smack of double standards.
Essentially, would critics then accuse the government and government-owned companies of playing by a different rulebook than private companies? Can the playing ground be even if, when running into trouble, government-owned companies are accorded different options than their private sector counterparts despite competing against each other in the same sectors?
Such inconsistency in the application of rules and regulations cannot be good for investor confidence, which had taken hits from domestic uncertainty among others. If there is such selective application in one sector it is then a matter of time before this spreads to other sectors – it is a slippery slope for the government.
Good luck wooing investors if, at the end of the day, all we can say is “tough luck” when the private sector asks for a level playing field against government-owned companies.
GRRRRR!!!
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