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Issues  |  JULY 7, 2014 1:00PM

How Malaysia’s first IPP was born

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IPP Instory banner EDITEDBehind the recent controversy surrounding power generation project Track 4A — and the Energy Commission’s U-turn in awarding it directly after promising an open tender process — is a lingering bitter taste over how the first Malaysian independent power producer was born two decades ago. KiniBiz talks to former Tenaga Nasional Bhd executive chairman Ani Arope, during whose tenure IPPs came into being in Malaysia.

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Four and a half years of fighting cancer had taken a great toll on former Tenaga Nasional Bhd (TNB) executive chairman Ani Arope. When met by KiniBiz at his home recently, he appeared frail and in pain.

But his eyes burn bright still, especially when it comes to how independent power producers (IPPs) came to be in Malaysia. And it started with the very first IPP — YTL Power Generation Sdn Bhd — which was born after a nationwide blackout incident in 1992.

“The rest came in using YTL’s power purchase agreement (as a template),” said Ani, who headed TNB from 1990 to 1996, to KiniBiz in an interview.

A mysterious blackout

On Sept 29, 1992, a total power blackout engulfed the nation for several days. This landmark incident sparked a privatisation of the power generation sector that broke the dawn for IPPs in Malaysia.

In the process, however, TNB’s monopoly of the power generation sector was dismantled by then-prime minister Dr Mahathir Mohamad as YTL Power was awarded the nation’s first IPP licence in 1993. But what caused the blackout?

Ani-Arope

Ani Arope

“All these instances can be arranged,” said Ani, adding that even among TNB’s staff members at the time there were some unhappy quarters that were against him. “I’m not accusing them, but there were some disgruntled people.”

When Ani became head of the national utility in 1990, there was opposition to his appointment. In a previous media interview Ani reminisced how his effigies were beaten and burnt, among other things that included poison pen letters being distributed to TNB customers. The police even detailed personnel to protect him round the clock.

Amid great public outcry and even threats of legal action against the national utility following the 1992 blackout incident, an inquiry subsequently cleared TNB of any negligence, according to a 1996 report by Asiaweek.

But despite this 1996 inquiry finding, the damage to its reputation had been done. More importantly, the ball — kicked off by the 1992 blackout incident — was by then rolling with momentum for the award of the first power purchase agreement (PPA) to the first IPP.

On Aug 3, 1996, another widespread blackout occurred in most of Peninsular Malaysia, with states including Kuala Lumpur, Selangor, Putrajaya, Johor, Malacca and Negeri Sembilan losing power for several hours.

According to a news report by the Wall Street Journal on Aug 6, 1996, then-prime minister Mahathir called the incident an “embarrassment”.

Lim Kit Siang

Lim Kit Siang

Across the political divide, opposition leader Lim Kit Siang also slammed TNB, quoted as saying it is “time that the government should stop mollycoddling Tenaga Nasional, which must be made to accept liability and to pay compensation” for losses suffered by its customers.

By this point the nation had five IPPs including YTL Power and this group would later be dubbed the first generation.

YTL Power declined to be interviewed for this article, though its previous statements have indicated that it thought the PPA terms were fair given its pioneering of the IPP role in Malaysia.

The Association of Independent Power Producers or Penjana Bebas also declined to be interviewed after being sent a tentative list of questions by KiniBiz.

Harassed and humiliated

While IPPs were ostensibly brought into the picture to ensure Malaysia can meet its rising power demand as well as restore a comfortable safety margin of capacity, the very first PPA was “grossly unfair”, said Ani, who opposed the deal.

“I was not negotiating with YTL,” said Ani to KiniBiz on the first PPA. “I was (in reality) negotiating with the government (via the Economic Planning Unit or EPU).”

And every time the national utility sat down with the EPU to hash out the PPA terms, its officials were harassed and insulted, said Ani.

“I forget the details but we were insulted (by saying) we don’t have planning, etc (which led to the 1992 blackout),” said Ani. “(But) we had 260 engineers (at the time), they can’t be stupid.”

Calling the eventual PPA arrangement ridiculous, Ani refused to sign and subsequently resigned.

“There were many clauses detrimental to TNB (that I couldn’t agree to),” said Ani to KiniBiz. “If I (had) signed, people would have said that I also ‘sapu’ (get a cut),”

Former Prime Minister Dr Mahathir MohamadIt was then-prime minister Mahathir that put him out to pasture, said Ani, for his refusal to play ball. “He (Mahathir) indicated that I should resign within a week of not signing.”

The exact terms are under wraps behind the Official Secrets Act 1972. But according to Ani, there was no real negotiation taking place between TNB, the sole distributor of electricity, with YTL Power, who would be an IPP.

According to Ani, the generous terms of the early PPAs surprised his peers around the world when they were signed.

A lucrative deal

By all accounts YTL Power got a sweetheart deal through the first PPA. According to Ani, the price was fixed by the EPU and not through negotiations between TNB and YTL Power.

At the time TNB were producing electricity at eight sen per kilowatt hour (kWh), said Ani. Taking into account transmission and distribution costs — which were about six sen and three sen respectively at the time — the power distributor can deliver electricity to consumers at just 17 sen per kWh.

For IPPs to come in, the acceptable benchmark price for electricity production would have been 12 sen per kWh, said Ani to KiniBiz, which TNB and the IPPs can negotiate around.

“But the EPU decided on 16 sen per kWh,” he said to KiniBiz adding that with a take-or-pay clause, the costs jumped to 23 sen. “I said this is ridiculous.”

The take-or-pay clause, which stipulates that TNB would take a minimum of 80% of power produced by YTL at a fixed price, was detrimental to TNB.

“Even if we didn’t use it, we would have had to take or we had to pay,” said Ani to KiniBiz. “We had excess electricity at that time so we cannot make use of all that electricity.”

In a 2006 interview, Ani said one IPP agreed to negotiate around the 12 sen per kWh mark but claimed that the EPU stepped in, saying that the IPP would not get the contract unless the price is raised. The IPP got the contract at 14 sen per kWh, Ani was quoted as saying.

A guaranteed profit margin

Another detrimental clause in the PPA was the fixed price for fuel regardless of fluctuations on the open market.

In essence, the PPAs stipulate that IPPs would be paid a fixed capacity payment regularly in exchange for making an agreed electricity capacity available. Should TNB buy the electricity generated, it would then pay energy charges which would also have been fixed in the agreement.

TNB would also be obligated to cover the difference if the price of fuel — used to generate electricity — rises beyond the agreed price in the PPA.

This effectively insulated the IPPs from market forces and guarantees a fixed margin of profit at TNB’s expense, the latter bearing disproportionate risk.

According to a 2005 paper titled ‘The IPP Investment Experience in Malaysia’ by Stanford University researcher Jeff Rector, this arrangement of TNB completely bearing the fuel cost risk singles out YTL Power’s PPA as being significantly different from the other four first-generation IPPs.

YTL-Logo-thumb“The first IPP (YTL Power) had a significantly different PPA than the next four IPPs that participated in the first wave of investment,” wrote Rector. “In later IPPs fuel cost risk was partially shifted to the IPPs.”

Ani had said in his book that without a corresponding rise in electricity tariff, this would have hurt TNB’s financial standing.

In addition, when the first PPA was awarded to YTL, TNB was actually prepared to plant up in Pasir Gudang, Johor and Paka, Terengganu but was not allowed to do so, said Ani to KiniBiz.

“We were going to build those power plants,” said Ani in the interview with KiniBiz, “but the prime minister said he has his own plans.”

Notably in his paper Rector said that TNB “may have been able to finance additional capacity given the deep bond market and their blue chip reputation”.

In the end, the plant sites were transferred to YTL, who started constructing the gas-powered power plants in November 1993. The first generating units at both locations were commissioned and synchronised with the national grid in September 1994 and YTL finished the construction just 22 months after works started.

With a total capacity of 1,212 MW, YTL contributed approximately 15% of Malaysia’s power then. A Malaysian Business report from 1996 said that YTL had an option to expand to 1,500 MW, making YTL one of the biggest IPP in the world at the time.

In any event, with the project completed ahead of schedule, one year after that YTL clocked in a massive increase in earnings. In June 1996, the group saw turnover of RM1.6 billion translating into RM356 million in pre-tax profits, a 54% jump from the previous year.

Who were YTL Power’s Bumiputera partners?

Given the history of how YTL Power became Malaysia’s first IPP, the emerging question is why the power sector liberalisation had to go forward through such murky circumstances and on such questionable terms.

In a 2006 interview, Ani simply said the question of how the Malaysian model of IPPs was created should be posed to then-prime minister Mahathir. To-date, Mahathir had not addressed this subject publicly.

However, the key to discovering the answer may lie in a licensing requirement for IPPs, based on KiniBiz’s interview with Ani Arope. “To get an IPP licence, 30% of it must be owned by a Bumiputera company,” he said.

YTL power shareholding prior to listing 070714However it is unclear who exactly the Bumiputera parties were in YTL Power’s case and how that information fits into the overall picture.

According to The Star in 1994, when awarded the first IPP licence YTL Power was 50% owned by YTL Corporation while TNB held a 20% stake. The Employees Provident Fund (EPF) held a 10% stake.

The remaining 20% equity was split between British-based construction outfit John Laing Plc, Mayban Ventures Sdn Bhd and Bumiputera-owned company Bara Aktif Sdn Bhd.

TNB’s stake is not unusual as the national utility had stakes in all but one of the first generation IPPs, holding either a 20% or 10% equity. In turn Mayban Ventures is a private equity management company owned by Malayan Banking Bhd and Aseambankers Malaysia Bhd on a 70:30 basis.

According to its website, Mayban Ventures “pool(s) capital from institutional and high networth investors to fund and manage portfolios of privately held investments”.

On the other hand, Bara Aktif, incorporated in April 1993, only has two shareholders — Raja Wahid Raja Kamaral Zaman and Mohamed Zainal Abidin Abdul Kadir — and is an investment holding company.

Both men are also directors in Bumiputera construction company Seri Yakin Sdn Bhd. Mohd Zainal Abidin is also a 56% shareholder in investment holding company MZK Realty Sdn Bhd, with the remaining 44% are apparently held by his children. Notably MZK Realty’s registered address is the same as Quarry Ventures Holdings Sdn Bhd — formerly known as Achieve Goals Sdn Bhd — a YTL company.

Interestingly Mohd Zainal Abidin is also among Quarry Ventures Holdings’ directors.

According to YTL Land & Development Bhd’s 2013 annual report, both Mohd Zainal Abidin and Raja Wahid are substantial shareholders through both direct and indirect shareholdings. Mohd Zainal Abidin holds 13.71% through direct shareholding and those of Bara Aktif and MZK Realty while Raja Wahid holds 7.84% equity through direct ownership and that of Bara Aktif.

When posed the question by KiniBiz, Ani declined to comment on the identity of YTL’s 30% Bumiputera partners.

Undue influence?

However, tracking back through time some other names emerge that complicates the question.

umno-flag-2.0On June 20, 1998, then-prime minister Mahathir released a list of Bumiputera recipients who benefited from privatised projects. The revelation, made during an United Malays National Organisation (Umno) general assembly, was made following criticism that Bumiputeras had not benefited from Mahathir’s policies.

Interestingly YTL Power’s IPP award was also featured in the list, which named Aripin Mokhtar, Haron Mohd Taib and Dr Yahya Ismail as among the beneficiaries.

Among others, Aripin was previously on the boards of PJI Holdings Bhd (now known as YFG Bhd), Ho Hup Construction Bhd and YTL Corporation Bhd. Aripin was also once an executive deputy chairman position at L&M Corporation Bhd before a reverse take-over (RTO) saw the company renamed Prinsiptek Corporation Bhd in 2003.

Aripin was also a non-executive member of Gula Perak Bhd’s board, which was led by executive chairman Rahim Baba, former senator and Special Assistant to the late former Deputy Prime Minister Ghafar Baba. Aripin resigned his position in May 2011 before Gula Perak was delisted later that same month.

As for Haron Mohd Taib, prior to his death on Aug 17, 2011 he was a director at YTL Corporation and YTL Power International. Notably Haron has had a long career in public service, which included various high-ranking positions at the Ministry of Defence in the 1970s and 1980s.

Also on both YTL Power and YTL Corporation’s boards is Dr Yahya Ismail, whose corporate journey had seen him sit on the boards of Killinghall (Malaysia) Bhd, Shell Refining Co (FOM) Bhd, Metroplex Bhd and United Engineers Malaysia (UEM) Bhd.

While it is difficult to confirm who exactly were YTL’s 30% Bumiputera partners and what political entity the link leads back to, it is interesting to note that not only were the negotiations for the first PPAs involving heavy political interference but the identity of the parties getting the IPP licences raised concern too.

“What has raised concern among banks is the companies getting the licences,” reported Rector’s paper quoting a Singapore-based international banker. “They are run by well-connected individuals who are after lucrative contracts.”

TNB logo new thumbnailAs for Ani, after his departure from TNB, no company would touch him for quite a while, he said to KiniBiz. And anti-corruption officials even came to his house to inspect his belongings, coincidentally when he was having lunch.

“I cannot offer you lunch in case you construe it as bribery,” recalled Ani, adding that he told the officers he would give them “an itemised list of every room”.

But even 20 years on after the episode, Ani is still firm on his stand back then. “I stood by the truth,” said Ani to KiniBiz. “I don’t want people to come and urinate on my grave later.”

Here is an excerpt of the interview with Ani Arope:

Ani: Of course I was accused that “Ani thought this is his father’s property”. But you know, this is a trust, an ‘amanah’. If it is my father’s property, of course it’s so easy to handle: I just dish it out to my relatives.

But for a trust that you were given to look after this big corporate… I mean let us have due diligence, let us sit down and negotiate.

But I was not negotiating with YTL. I was negotiating with the government — the EPU. And I recall in this instance every time we went we were harassed, we were insulted, macam-macam.

KiniBiz: How were you insulted during the meetings?

Ani: I forget the details but we were insulted. That we didn’t have planning, that we don’t have this and that. But we had 260 engineers. They can’t be stupid.

KiniBiz: What was the cause of the 1992 blackout?

Ani: All these instances can be arranged. Of course amongst the 260 engineers there are some disgruntled ones who were against me. You would remember the burning of my effigies when I first came in. I’m not accusing them but there were some disgruntled people.

These disgruntled engineers could also play cahoots, do something, switch off something thinking it would only last an hour. But it went on for three days.

KiniBiz: So you’re saying the blackout could have been arranged.

Ani: Yes, to prove that TNB is inefficient and therefore the IPPs must come in. I told the prime minister then that our cost is about eight sen. I calculate if I had to come in now, it’d be about 12 sen.

So I told them, let’s negotiate on that, maybe 12.5-13 sen, we can proceed. But they have already decided 16 sen.

Mahathir - Copy (2)KiniBiz: The prime minister decided?

Ani: The EPU. At 16 sen, with take-or-pay, it jumped up to about 23 sen. I said this is ridiculous.

KiniBiz: 23 sen?

Ani: With take-or-pay. We had to sign a (take-or-pay) contract whereby we had to take a minimum of 80% (of electricity generated). Even if we didn’t use it, we either have to take or we have to pay.

Yet we had excess of electricity at that time. So we cannot make use of all of that (electricity) but we still had to pay 80% (as per) what is written down on the contract. If you calculate the costs, it comes to about 23 sen.

So I told the prime minister, “You’re talking about zero inflation” — that was his favourite phrase — “but with this you cannot get zero inflation”. Now the real costs of power is 23 sen. There is (also) a transmission cost. There is a distribution cost.

KiniBiz: How much were the transmission and distribution costs?

Ani: About six plus three sen.

KiniBiz: So six sen for transmission and three sen for distribution.

Ani: All these things have to be passed onto the consumers. So I said, sir your EPU is not an Economic Planning Unit. It is an Economic Plundering Unit.

I said sorry, I’m not signing. Within a week I was put out to pasture.

We’re not anti-Chinese, no. It’s nothing to do with race yet they accused me racialising (the issue). I think I’m the last person to (do that).

KiniBiz: So the take or pay was for all the early PPAs?

Ani: Yeah. So everybody now just copies that. They take that as the standard for everybody.

KiniBiz: So that’s what they called the capacity charge isn’t it.

Ani: I think (it is better if we) sit down and negotiate. If there’s a take-or-pay, (discuss) how much we can take. Because we have excess capacity. And then over and above that, we negotiate on the price.

KiniBiz: Or you can maybe if you want to take, you ask the power producers to put in their bids and then take the lowest bid.

Ani: Yes. In Australia that’s what they do. Every day they call and ask. Then they take the lowest bid.

KiniBiz: Maybe it could have been structured such that you have a base load, say you take 50% or 60% from everyone or 70% from everyone, then for anything above that you bid. So that is one way it could have been done.

Ani: There are many ways to skin a cat. (If) you want to make money (it’s) okay, but we have to look around. This is a national (interest). Otherwise, your electricity bill from RM100 goes up to (higher) — for nothing.

KiniBiz: Do you think there could have been some mechanism whereby, say, TNB could have been kept as the sole generator? Would that be desirable or should it have been opened up?

Ani: Well, the PM decided (on) IPP. Now the IPPs control about how many percent? 60%? (Editor’s note: IPPs account for 47% of Peninsular Malaysia’s capacity as of last year.)  Yet all the costs are borne by TNB, who also does the transmission.

KiniBiz: When you said there are many ways to skin a cat, were there any need for IPPs to be brought in at that particular time, objectively?

YTL Corp group managing director Francis Yeoh Sock Ping

Ani: The rest came in using YTL’s PPA (as template). But to get an IPP licence, 30% of it must be owned by a Bumiputera company.

So all these people, who got the 30%? To whom did YTL’s 30% go?

KiniBiz: Did you try to talk to the PM at that time about this?

Ani: No, after that he kicked me out. Gave me the red card.

KiniBiz: He kicked you out of TNB?

Ani: Within a week of not signing, I was given the red card. Out lah.

KiniBiz: At the time it was said you resigned.

Ani: Yes, he asked me to resign. His people indicated (that I should). That’s a small matter. But I stood by the truth.

Look, I was entrusted with the job. If I wanted to make money in Tenaga, every contract runs into the millions. Nothing less than half a billion ringgit, RM500 million. If I just ‘pakat’ (cut a deal that) ‘okay, I’ll give it to you, all you have to do is put in 1% and here is my bank account’. 1% of RM100 million is RM1 million.

If you want to get rich like that, it’s easy. But as I said (in his memoirs) I do not want people to come and urinate on my grave later on.

Even after I resigned, he sent in anti-corruption people to come to my house to look at things.

KiniBiz: After you resigned?

Ani: Yes. It was lunch time. So I told them, I’m not inviting you all to lunch in case you construe this as bribery. I said no need to look at all the fixtures, I give you the itemised one because every room has an itemised (list). So you can keep that, I said.

KiniBiz: Why did Mahathir let YTL have such a generous deal?

Ani: The crux of the whole thing was who got the 30%. The first PPA with YTL, there’s a 30% shares for the Bumiputera. That explains the whole thing.

KiniBiz: There are people who are saying that TNB can do Track 4A on its own.

Ani: Sure. All this while, who had been doing it? During my time, to raise money for TNB was so easy because people know TNB. Within a week, I raised enough money to build both the Paka and Pasir Gudang plants. The Pasir Gudang and Paka sites were our property already. So I told then-prime minister (Mahathir) that we were going to build. But he said ‘No, we have our plans’. So those were taken away from us.

Now Pasir Gudang and Paka are supposed to be handed over. That will be a problem also. So what TNB will be inheriting? A plant or scrap iron?

KiniBiz: Can’t TNB operate the plant (after inheriting it)? The agreement specifies that the plants are handed over in good condition.

Ani: Yes, TNB can operate. But what is a ‘good condition’? Subjective. But before that, (they can) cannibalise the thing. In the end (TNB may) inherit scrap. That’s one problem.

The second problem is there are people there who have been working for 20 years. For political pressure TNB may be asked to absorb them at no less than what they’ve been enjoying before. Now of course under YTL maybe they get a bit higher salary.

But when TNB takes over, there cannot be two scales of salary. So these people will be brought down to TNB’s scale and then you’ll have a disgruntled lot of people working for you.

KiniBiz: So what is the solution then?

Ani: TNB needs to sit down and start thinking now, not wait till 2015. Oh they might say, this is a simple thing. Not so.

Just leave it to TNB. For any new plants coming, just give it to TNB to do.  This is a national interest (matter) and if it (power generation) can be for less than what the commercial players can do…

KiniBiz: So TNB should have a natural monopoly in this case? For public interest?

Ani: Yeah. They keep the price down. Now look at the inflation.

KiniBiz: The allegation that has been made was that TNB is inefficient and therefore we needed the IPPs.

Ani: If they are inefficient, how could they have sold to the consumers at 16 to 17 sen per kWh for a long time? If they were inefficient, then the price would have gone up.

KiniBiz: That was because of earlier plant-ups, isn’t it? That brings TNB’s costs down?

Ani: If you talk about efficiency, it is about costs. Cost per unit measures the efficiency. If we can sell at 17 sen and still make money, and he needs to sell at 23 sen to make money, who is more efficient?

When YTL came in, there was one breakdown. And there was an investigation by an international party. And then the report was not released, kept under the Official Secrets Act (1972). Why?

So far the Tun (Mahathir) had not answered on anything.

KiniBiz: Maybe TNB can do it alone but the fact is that IPPs are here now, maybe for good. So how do we go from here? Can we make this work in a way that doesn’t benefit just the elite?

Ani: TNB should be sitting down to negotiate directly instead of with the EPU. (In the PPAs) there were so many clauses detrimental to TNB (that I couldn’t agree to).

On the excess capacity issue, we can negotiate on that. Like the take-or-pay and all these things, we should negotiate. But there was no chance (for TNB) to negotiate (with IPPs), we had to negotiate with the EPU.

Tomorrow: The other first-generation IPPs



 
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