Wednesday, December 12, 2007

Reduction in Gas Subsidies

I made this press statement way back in September with regards to the Government hinting at removing gas subsidies, but for one reason or another, I never managed to get round to posting it on my own blog. ;-) Well, here you go, for those who haven't had a chance to read it. ;-)

Gas Subsidies Distort Market, So Does Extortionary Contracts Between Tenaga Nasional Berhad and Independent Power Producers

The Minister of Energy, Water and Communications, Datuk Seri Lim Keng Yaik is absolutely right to say that if artificially low gas prices sustained by Petronas subsidies are not removed, “the Malaysian economy will remain distorted”, as reported in the headline story of the Star today.

However, it is of greatest irony that while the Minister lamented on the impact of the subsidy on straining the finances of Petronas, he conveniently ignored a more urgent and distortionary Government policy of guaranteeing extraordinary profits to Malaysian independent power producers (IPPs) which sells electricity to Tenaga Nasional Berhad (TNB).

The IPPs, which owns more than 35% of the electricity generating capacity, are totally shielded from financial risks. They earn an average of 18-25% rate of return on capital, and some as high as 40% per annum. In addition, TNB is also forced to pay for as much as 40% excess, often wasted, capacity for electricity generation.

The Minister also failed to mention that of the RM14 billion subsidy on gas purchases last year, 47.9% went to IPPs, while another 35.7% went to TNB.

Hence, the high electricity prices paid by the consumers ultimately goes into the pockets of the uncompetitive IPPs, who are in turn guaranteed extraordinary profits and supplied with heavily subsidised gas.

In the interest of the Malaysian public, it is critical that these contracts with the IPPs which lasts for up to 20 years each, be renegotiated by TNB and the Government. Just as gas subsidies to the profit-making IPPs must also be terminated, guaranteed profits to IPPs which results in significantly higher electricity prices must also be abolished to prevent “distortions” to the economy.

In the event that a amicable new contract fails to be renegotiated, the DAP will like to call on the Government to forcibly acquire the assets of the IPPs to protect Malaysian consumers from monopolistic pricing. The management of these IPPs will then be outsourced via an open, transparent and competitive tenders.

While the Datuk Seri Lim Keng Yaik mentioned that “there will not be another increase [in electricity tariffs] any time soon”, he appears to be clearly setting the stage for an increase sometime into the future. However, without first resolving the unequal contracts between IPPs, TNB and the Malaysian Government, there will be absolutely no justification for electricity tarriffs to be raised, burdening the Malaysian consumers and industries for any reason.
Post a Comment