Malaysia’s other first-generation IPPs

By Khairie Hisyam

YTL Power’s sweetheart deal as the first independent power producer (IPP) paved the way for more IPPs to come into the power generation sector. Dubbed the first generation, the four that bagged IPP licences soon after YTL Power did share one common characteristic with YTL Power: connections.

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After Malaysia’s first IPP was born, four others followed hard on YTL Power’s heels within eight months. At the heart of these IPPs were well-connected businessmen and individuals who were reputedly close to then-prime minister Dr Mahathir Mohamad.

Together, these five IPPs had a combined capacity of 4,157 megawatt (MW) compared to the existing capacity of roughly 6,000 MW at the time.

Francis Yeoh of YTL Power, the first IPP, has notably been said to be Mahathir’s favourite ethnic-Chinese businessman, to the point that many saw him as ‘Mahathir’s man’, according to a 1999 book by academic Edmund Terence Gomez titled “Chinese Business in Malaysia: Accumulation, Ascendance, Accommodation”.

Yeoh however has continuously insisted throughout the years that he did not benefit from any patronage nor did he have a special relationship with Mahathir. In turn the latter reportedly justified government contracts given to Yeoh by saying “he got things done”, according to a November 1994 edition of Asiamoney.

Interestingly when Yeoh was caught in a controversy over his crony capitalism remarks recently, Mahathir took to his blog to criticise an unnamed “public figure”, though many connected Mahathir’s comments to Yeoh given the timeframe.

“Recently a public figure claimed that the situation in Malaysia is terrible because of cronyism and favouritism in the form of discrimination towards one party. So he does not wish to do business here,” wrote Mahathir. “Was he born so rich that he could do business in the countries free from cronyism or did he amass his copious capital here before moving abroad to enjoy governance without cronyism?”

The political connections

The second Malaysian IPP was Genting Sanyen Power Sdn Bhd, who was awarded a 762 megawatt (MW) licence on July 1, 1993. Genting Sanyen (now known as Kuala Langat Power Station) was controlled by the late Lim Goh Tong of Genting fame, who was reputedly a close associate of Mahathir.

According to a list of Bumiputera beneficiaries of privatised projects released by then-prime minister Mahathir, other interested parties in the IPP at the time included TNB and Worldwide Holdings Bhd — the latter being a listed entity controlled by Kumpulan Perangsang Selangor, which in turn is Selangor state government’s investment holding entity. At the time Selangor state was controlled by ruling coalition Barisan Nasional led by Mahathir.

Five years after Lim’s passing in 2007, Genting Group sold its stake in the power plant to controversial state-investment fund 1Malaysia Development Board (1MDB) in October 2012 for RM2.3 billion in cash. 1MDB, the brainchild of current Prime Minister Najib Abdul Razak, now control 75% of the power plant, which had been renamed Kuala Langat Power Plant.

The third Malaysian IPP was Segari Energy Ventures Sdn Bhd, which got its 1,303 MW licence two weeks after Genting Sanyen Power.

At the time Segari Energy was controlled by Malaysian Resources Corporation Bhd (MRCB), which in turn was controlled by Realmild Sdn Bhd, linked to the United Malays National Organisation (Umno) party and in particular to Anwar Ibrahim, then deputy prime minister and currently opposition leader.

Interestingly Mahathir’s list named Abdul Kadir Jasin, Ahmad Nazri Abdullah, Khalid Ahmad and Mohd Nor Mutalib as Bumiputera beneficiaries for the Segari Energy IPP.

Another two smaller IPPs joined the first generation group later the same year.

One of them was consortium that included Umno-linked MRCB, government-linked company (GLC) Sime Darby and Malakoff Bhd was awarded an IPP licence for 440 MW on Dec 1, 1993 through Port Dickson Power Bhd.

Interestingly the same quartet of Bumiputera beneficiaries for Segari Energy was also named as beneficiaries for this IPP.

Diversified tycoon Ananda Krishnan also joined the ranks of Malaysia’s early IPPs through Powertek Bhd, which received a 440 MW IPP licence on Dec 1, 1993. Other than Ananda Krishnan’s Cergas Unggul Sdn Bhd, shareholders of Powertek at the time included banker Azman Hashim’s Arab-Malaysian Development Bhd (now Amcorp Properties Bhd) and the Malacca state government through Yayasan Melaka.

Segari Energy have since come under the ownership of Malakoff Bhd, a unit of MMC Corp which is controlled by well-connected businessman Syed Mokhtar Albukhary, reputedly a close associate of Mahathir. Malakoff also bought out Sime Darby’s 75% interest in the Port Dickson power station earlier this year in a deal worth RM300 million to obtain full ownership of the power plant.

As for Powertek Bhd, it was eventually sold to 1MDB as part of Ananda Krishnan’s sale of his Tanjong Energy Holdings Sdn Bhd in 2012. The sale price was RM8.5 billion.

Lucrative deals

Like YTL Power’s IPP licence, all four of these IPP licences were granted through direct negotiations.

Despite long-held beliefs within the industry that the five were given sweetheart deals, it is difficult to ascertain just how lucrative the deals were given that the exact terms of the power purchase agreements (PPAs) are classified under the Official Secrets Act 1972.

However, according to the Association of Water and Energy Research Malaysia (AWER), information provided by TNB shows that the first generation of IPPs averaged 17.8% in internal rate of return (IRR) from their PPAs.

In essence IRR is a rate of return used to measure the profitability of investments, in terms of the return on investments. However the type of measurement does not take into account external factors such as interest rates, hence the word ‘internal’.

In YTL Power’s case, a Malaysian Business magazine article in February 1994 reported the cost of its power projects to be at RM3.4 billion. At the same time YTL Power raised RM2.66 billion in funding to finance it — the largest private Ringgit-denominated funding at the time.

These two figures mean that YTL Power’s power generation stations were 78% funded by borrowings with the remaining 22% covered through equity.

Assuming interest rates of 8% — in the early 1990s interest rates hovered around 7% to 8% — and taking the average IRR of 17.8%, YTL Power’s return on equity (ROE), a measure of net income derived as a percentage of equity, comes to a staggering 52.5%.

This means YTL Power would have recouped its total capital invested within two years, a fantastic rate of return by any measure.

It must be noted, however, that KiniBiz’s calculations above assumed a 17.8% IRR, which is the average, as well as an interest rate figure of 8%.

Given that YTL Power is often said to have received the most lucrative deal of all, it is possible that the IRR figure for YTL Power is even higher, which would translate into an even higher ROE — especially if the applicable interest rate was less than 8%.

However last year special purpose power sector reform unit MyPower Corporation stated in a media briefing that the first-generation IPPs had to secure the best possible terms in the PPA to ensure the projects’ financial requirements were met.

“Being the first batch of IPPs, the risks were relatively unknown for the country,” said MyPower. “There were no comparable projects in the country that could be the basis for the valuation and pricing of the IPPs, which may seem onerous in hindsight.”

What crisis?

In addition to the lucrative terms of the PPAs awarded to the first generation IPPs, what raised more eyebrows were the fact that the PPA terms were not renegotiated when the 1997 Asian Financial Crisis (AFC) struck.

This means the IPPs, with fixed purchase prices and a minimum take-up capacity of around 80%, were effectively insulated from the headwinds that blew during the crisis at a time when much uncertainty gripped the region. On the other hand TNB had to bear the brunt of the crisis’ effects on its own.

Indeed in 1998 Bloomberg reported during the financial crisis period that gambling and IPP stocks were viewed as promising sectors to invest in.

The pressing question here was why national utility TNB was unable to renegotiate the PPA terms in light of forced renegotiations for IPP contracts seen in Indonesia and India.

A 2005 academic paper titled ‘The IPP Investment Experience in Malaysia’ by Stanford University researcher Jeff Rector, which examined the IPP sector in Malaysia from its inception, noted that TNB was forced to manage a debt crisis while “hemorrhaging due to the expensive IPP contracts coupled with low power demand”.

“How was it that the IPPs could withstand Tenaga’s pressure to renegotiate in a time of national crisis?” wrote Rector in his analysis. “Was it because of the strength of their legal protections, or was it something else?

In considering the question, it is interesting to note the government’s position as both the majority shareholder in TNB and, through its control of TNB, an indirect shareholder in all but one of the first five IPPs — TNB initially had a 10%-20% stake in all of them barring Powertek. This means the government had much authority in TNB’s corporate decisions.

Also notable is the fact that the IPPs, which between them raised over RM9 billion in funding, did so entirely from local banks.

“Most of the banks lending to the projects were state banks (and) the state pension fund was by far the largest bondholder lending funds to the IPPs — (i)n some cases it was the only bondholder,” wrote Rector in his 2005 paper. “Needless to say, the government had influence and control over the decisions of state controlled banks and the state pension fund.”

Another major consideration, according to Rector, was the reported links between the major players of the IPPs and then-prime minister Mahathir.

“The network of relationships that connected equity holders and sponsors to debt holders and other lenders to government policy makers (and to Tenaga itself) likely opened avenues of communication and accommodation that were not available elsewhere in the IPP universe,” wrote Rector in his 2005 analysis.

“IPP arrangements in Malaysia thus faced less pressure than in other countries that faced macroeconomic troubles, and were manageable through a range of relationships that also were not common in other countries,” added the researcher in his paper.

Yesterday: How Malaysia’s first IPP was born

Tomorrow: The problem with IPPs