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Wednesday, 23 November 2016

Ever Wondered why Pakatan never talks about the lop-sided "crony" IPP agreements anymore?

The late Tan Sri Ani Arope said he was fired from his job as TNB Chairman then because he refused to "play ball" with Tun Mahathir in cutting lop-sided deals with the Independent Power Plant operators.

In an interview conducted just months before his death in 2014, Tan Sri Ani Arope said:
"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.” 
Another detrimental clause in the PPA was the fixed price for fuel regardless of fluctuations on the open market. 
In essence, the PPAs state that the IPPs would be paid a fixed capacity payment regularly regardless of whether TNB needs to buy the power or not.
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. 
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),” 
It 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 Pakatan used to make this as such a big big issue over many years saying it loses our country tens or billions in Ringgit every year and alleging that the owners of these power plants so happen to be Mahathir's close friends or "cronies".

Here is one of many, many examples : Ketua Menteri Pulau Pinang Lim Guan Eng desak Perdana Menteri jawab skandal subsidi gas yang didedahkan oleh bekas CEO TNB Tan Sri Ani Arope.

 But now Pakatan have gone completely quiet on this issue. Why?

The short answer is that Najib had solved this problem. In 2012, actually.

Previously, the now-dead Pakatan Rakyat said it will achieve annual savings of RM3.47 billion on Tenaga Nasional Bhd (TNB) payments to independent power producers (IPPs) if the coalition takes over Putrajaya in GE13 by reducing the Internal Rate of Return guaranteed returns to IPP form 19% to 10%. (see video)

This problem of lop-sided IPP deals to past cronys had been a big issue to Malaysians for years where hundreds of billions of ringgit of Rakyat (via TNB) and Petronas money was diverted to the cronies.

But in the year 2012, the govt had it's first ever open tender for IPP and together with 1MDB which bid the lowest price for each renewal or new IPP and forced the other bidders to lower down their bids dramatically, the govt did even better than what Pakatan promised!

(Click on images above to read the first 3 pages of their full report)

Maybank proclaimed that the era of sweetheart deals for IPPs are no more and that the IRR for the IPPs are now at between 5%-6% - much lower than the previous 19% and even lower than Pakatan's promised 10%. Therefore, the savings per year to TNB is even greater than what Pakatan promised.

A tariff difference by even a single sen makes a huge difference over a 20-year concession period, for one IPP plant a single sen difference can reduce tariff costs by RM2.9 billion.

That is why you can see from the chart, TNB profits have now improved substantially - swinging from a loss to record profits and govt no longer need to compensate TNB periodically, which govt did with RM2.2 billion in 2012.

Since Khazanah, PNB, KWSP, Tabung Haji etc and most of the mutual funds have shares in TNB, the improved profits directly translates to money in the pocket for the Rakyat - instead of to the crony IPP owners.

But Pakatan also missed part of the story. They forgot that the tens of billions ringgit of gas subsidies that Petronas had to give the IPPs to keep rates to TNB lower.

The subsidized gas price (RM/mmBTU)_for electricity generation from Petronas went up from RM6.40 in 2008 to RM18.20 to 2016, a 3 fold increase. The market price was mostly above RM40 then.

These savings from better IPP deals have gone to reduced gas subsidies and increased gas revenues (in the billions per year) for Petronas without a similarly high increase in electricity prices in 2011 and 2014 - despite TNB making much bigger profits and Petronas saving billions per year.

How much Petronas had lost due to subsidizing the IPPs in the lop-sided deals of the past?

The answer is actually in page 63 of Petronas 2015 annual report.

By the end of 2015, Petronas said it had lost RM155 billion in revenue to the power-generation sector due to the gas subsidies forced upon them in May 1997.

RM155 billion that could have gone to Petronas and the govt for development programs instead of having Mahathir making Petronas subsidize the lop-sided IPPs.

With the increase in gas prices charged to the IPPs, you can clearly see a decline in the lost revenues of Petronas.

There is little doubt that 1MDB had helped shake up the IPP industry with it's aggressive bidding in the first ever open tender for PPA in 2012 and also subsequent IPP bids where 1MDB was always the lowest qualified bidder for every IPP project it went into.

These savings from paying the previously very lucrative IPPs were then channeled into higher revenues for Petronas, TNB and eventually to the government and the Rakyat instead of to the profits of the IPP private owners.

And this is the same for the IPPs that were previously owned by crony (with lopsided deals and high gas subsidies) and now sold to China (without lopsided deals and lower gas subsidies).

The Life-Line Tariff for consumers who use up to 200 kWh/month affecting 70% of households have not changed since 1997. It is also GST-free.

Any change in your electricity bill is probably because you use much more electricity compared to before.

From the year 2010 onward, households with electricity bills below RM20 no longer pay a single cent. This benefit is still on-going.

So don't say that 1MDB or govt has not done anything good as tens of billions that would have gone to the IPP cronys EVERY year now goes to the govt and to the rakyat - this could easily amount to hundreds of billions of ringgit over 10 to 20 years.

This is one of the more important legacy issues that has been corrected by Najib's government. The other would be the 2011 take-over by the Government and EPF of 100% of PLUS Highways, which means that any revenue collected from toll either goes to the government (51%) or to EPF account holders (49%) and no longer to private "cronies". 

This is also why the North South Highway tolls have not increased for 11 years since 2005. If Najib's govt had not done the 100% take-over in 2011 and renegotiated the toll concession agreement, based on the original Mahathir concession agreement, your toll charges for the Jalan Duta to Ipoh stretch would have jumped from RM26.50 today to RM83.17 by the year 2038.


  1. what u on about? the price of electricity has gone up, despite the low coal price environment. Any savings made are back to the glc's, ppl are still burdened. Prices of cooking gas has also increased.. again burdening ppl.. so now petronas and tnb has made more revenue.. Pointless argument, so what... so what..

    1. The average electricity price increase in 2014 was 15% but does not affect the free tariff band and also the 200kwh and below users. BUT the cost of gas (which is half of all the power plants) had increased 3 folds (200%). If not for the reduction of the IPP costs, rates would have increased a lot more.

      And subsequent to 2014 increase, there was also a rate reduction in March 2015.

      And by the way, please update yourself. There is a boom in coal prices right now.

      Also, if the IPP sweetheart deals were not resolved, Maybank Investment would not have put out a report saying "No more sweetheart deals", right?

    2. What u see increase is the reduction of subsidy. Our country have been on subsidy-addiction for such a long time that, when comes time to break that addiction, mindless pipu rage when suffering withdrawal symptoms.

    3. read the title correctly...go and ask your pakaTUN!!!1

  2. 1. lembaga letrik negara privatised to become tenaga nasional berhad, why do we need ipp? cuma tukar towkay?
    2. water is life, why privatised? shd be managed by the state.
    3. plus shd be run by the state as well.
    4. pnb (asn/asb etc) shd declare 20% dividen this year & how come the value of 1 unit is still the same since 1990?.

    isn't better to eliminate the legacy than correcting it? these are the pains to the rakyat. get rid of the root causes to the problems.

    1. I wonder who privatise LLN? Who start privatise water? Heck, who started this penswastaan malaysia?
      Wait la, Azmin working hard to make your wish come true. Lets see what happen when selangor build DASH, SUKE, EKVE, PJD Link. If successful then khazanah and kwsp can sell plus saham to selangor state lor. Lets say RM200 billion for 100% share. Then fed govt can get good profit, and channel that money to pay your pnb dividend 20%. Kaw tim

  3. Dear LSS, do u think with 1MDB in quagmire now, the efforts to take back control of them IPPs is endangered and that these cronies can now relax?

    In all likelyhood, if 1MDB shutters down and retreats, the IPPs can go back scheming again to arbitrarily raise prices for their margins.