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.


Anonymous said...

They are trying to renegotiate the IPP deals. They can't redo the deal without exposing what really happened which was a part of it went to corrupted officials including Dr. M.

You really believe that TNB and even EPU wanted to pay YTL and Genting more than they have to? Hell they would want them to lose money if they could.

Do you think that YTL and Genting did not forsee that the terms could be renegotiated when they did the deal? You are naive and underestimate them.

Golf Afflicted said...

Simple questions:

1. Why sign them in the first place if TNB and EPU thinks the agreements were overpriced?

2. What happened to the first renegotiation done in the early 2000s? That's right, absolutely nothing.

3. The IPPs are laughing all the way to the bank (at our expense) - you think they'll really bother with renegotiations of a "legally-binding" contract?

4. Why not renegotiate the extortionary toll deals as well?

The whole thing just smells so fishy, it's just unbelievable.


Anonymous said...

You need govt guarantee for big private investment in such huge projects ...

Golf Afflicted said...

Fine, then why guarantee such astronomical profits and such unfair conditions?

This is getting silly.

Anonymous said...

good question ... but when and how will it be answered ?

Anonymous said...

All government contracts are covered by the OSA.
Where else, but in a thoroughly corrupted government, will you experience such policies!
Tony, the BN got to go, else we are all finished!

Anonymous said...

Di sini kita harus fikir secara mendalam, ia itu "siapa punya kawan" yang membekal tenaga kepada TNB?

Kedua nya pun saya hairan kenapa TNB dan PETRONAS menjalankan perniagaan universiti yang menelan banyak belanja dan bukan dalam aktiviti bisness TNB dan Petronas? Apakah motiv sebenar di sebalik membuat universiti tersebut?

din merican said...


It is not what privatization is supposed to be. The idea of it is that it should benefit consumers in terms of efficiency and customer satisfaction. In that sense, Malaysian privatization is a failure. Public monopolies have become private ones. So we need to review the whole concept, or abandon it completely.

With regard to sweetheart privatization deals of the 1980s, it is now difficult to renegotiate the concessionary terms. There is no way we can get YTL to agree to any change. The option is probably for Tenaga to buy over the interest in their Malaysian IPP. But this is not going to be cheap.

The lesson to learn from all this is that short term solutions create long term problems for our country and our people.

Anonymous said...

its money laundering laaa....a way to transfer the money or part of it to some other parties

Anonymous said...

A big shock and a proof against the Election Commission.
Check out this link!

myop101 said...

dear tony,

when you said that malaysian taxpayers pay an excess to TNB (and ultimately to IPPs) for maintaining unused excess capacity is a waste is not entirely true. you must understand that there is a need for a certain excess margin to ensure that in the event there is a sudden surge in demand or sudden power loss in some other power station, the unutilised capacity will kick it to keep things going. the problem m'sia had in the 90s was that we operate at very low excess margin capacity which ultimately led to nationwide lost of electricity. aren't you glad it no longer happens today?

i am not saying it is ok for these IPPs to make lots of money but it is not as simple as passing the costs back to the IPPs and be done with it. many of these IPPs raise debts to finance their construction and building and in order to ensure some financiers do not lose heart and run away midway, there are two tier rates that are now applied to the 2nd generation IPP agreements where the first tier is meant to pay off the debts while the second tier (the lower one at that) is meant to reward the shareholders for taking on the risk to build the plant, manage it within a reliability gap and yet not earn astronomical profits.

the likes of YTL and Genting is the first generation IPP contracts which came to existence simply because TNB had problems raising the excess power margin at that time.

perhaps it is time to revise those rates but in revising it, one must consider what the impact to the reliability of the electricity delivery that we so often enjoy but seldom give thanks for.

i am all for reducing the subsidy and using the freed up funds to buy out these IPPs.

Anonymous said...

"The lesson to learn from all this is that short term solutions create long term problems for our country and our people." - Din Merican

To begin with privatisation in this country is not meant to be a solution to anything.
Privatisation is an all out effort to benefit cronies at the expense of the tax-payers!
If it is a monopoly business, so much the better; the privatised entity will have a captive market!
Deals under privatisation have never been revealed to the public until now. If everything is above board, what is there to hide!
This government has tons of skeletons in its cupboards!

Anonymous said...

As the natural resources become scarce, there is a need for human to find alternative resources; solar energy, bio-diesel, bio-ethanol, bio-gas and the like, will be the next substitute energy resources in the next five to ten years.

However, as some “non-corporate citizens” companies are now solely depends on natural resources to enhance their profit and lost account, these companies are seeing the substitute alternative energy as one of the main threat to them, they will find ways to attack the substitute energy.

In order for the alternative energy to be used commonly like Brazil, EU (and now Australia), there is a need for the authority to promote and encourage normal citizens like us to use the alternative energy. Subsidies should be given, not only for corporate tax deduction of up to 60%; but rather to all of us, the ordinary Malaysian, to use bio-diesel, bio-ethanol and bio-gas.

Just like the half-tank water for all toilets, all new housing development projects in the future must have the solar energy water heater capability. Subsidies on income tax deduction also should be provided to ordinary tax payer for upgrading / changing existing electric water heater to solar energy water heater.

Anonymous said...

1. The history of what happened with the signing of those deals are clear - there was a lot of interference from politicians who coopted key players to push the deals through.

2. Once a deal is done, legally to change it cannot be done unilaterally even with UMNO hegemonist. In fact often the IPPs and toll operator will take advantage of any change wanted with even worst terms. For example, UEM have taken advantage of government to improve weakness in NS highway with demand for longer concession. They balloned the price because they do the construction themselves thereby giving them a longer toll period.

4. Of course its fishy! But its not easily solvable AND accountable. What is even worst is the game has moved to a different one now. Have you not noticed that the likes of YTL and Gamuda is doing different type of deals. Why do you think Patrick Lim is doing real estate and Petronas deals? Great robbers innovate and have real discipline even if they are crooks.

Anonymous said...

One former PM even said the privatisation deals are stupid - that is, lop-sided in favour of the company taking over the utility because they (the ministers) were not well versed in legal matters (or words to that effect)!
Is it that simple to fob off such an explanation on the public for projects which makes them pay through the nose for decades?
Isn't there anybody in the government who cares about the interests of the citizens who voted them into power?
Don't the government have any legal department to handle such matters? This is not buying vegetables in the supermarket; it involves billions of ringgit and the future of the country.
Would the ministers sign such deals if they have to pay for it out of their own pockets (the acid test!)?
This clearly shows how responsible the BN government has been in safe-guarding the interests of its citizens!!
Would anyone still want to cast a vote for the BN?