A crowded field in power sector

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1Malaysia Development Bhd’s (1MDB) power generation asset acquisition spree is another example of the extent to which the government is willing to allow companies that are publicly owned to compete against the private sector.

The latest power asset the government-owned investment arm is eyeing is the 1,400mw coal-fired Jimah power plant in Negri Sembilan, which it is said to be acquiring for RM1.7 billion.

When contacted by The Edge, 1MDB officials did not deny or confirm the proposed acquisition.

Those in the industry, however, will not be surprised if the Jimah power plant got new owners. The plant is unique in the sense that it was built with the highest leverage.

Shareholders only had to come up with minimum equity in constructing and commissioning the RM6 billion power plant in a financing arrangement completed at the end of 2004.

The power generation business carries such a low risk that bankers are prepared to provide almost full financing.

And this is where 1MDB has the advantage.

With the government as its sole shareholder, the investment arm that is supposed to help transform the local economy is deemed as a company that will not be allowed to fail.

That gives it the edge over other players in the power generation industry where cheap financing plays a big role in enhancing profitability.

1MDB’s first tranche of capital, some RM5 billion, was fully backed by the government, which would have convinced any banker to lend to the entity.

Subsequently, the investment arm took on more liabilities, which would have been largely used for the expansion of its energy division.

Since March last year, 1MDB has acquired two major power plants — the first was the RM8.5 billion purchase of Tanjong Energy from Usaha Tegas group and the second was the RM2.3 billion acquisition of Genting Bhd’s domestic power plant.

If the Jimah deal goes through, it will be the third power plant acquisition within a year.

Is expansion at this kind of pace possible for privately owned entities? Certainly not because private sector companies do not carry the "too big to fail" tag — unless they are banks. This does not give them much leeway in terms of financing.

Bankers tend to squirm in their seats as their exposure in private sector companies builds up, even though the power generation industry is one that sees steady cash flow and carries a low risk of default.

Unlike highways that depend on traffic, Tenaga Nasional Bhd is the sole offtaker for the power and has proved to be a reliable paying customer even in the worst of times.

Power plants carry operational risk, but with good management and operational teams in place, this can be minimised. At the most, there is some downtime, like the one experienced by Malakoff Bhd’s Prai power plant a few years ago.

Then, Malakoff had to pay a penalty running into the millions for not being able to meet its commitment to supply power to Tenaga.

But it had an avenue to reclaim some of the penalty from its suppliers. And after the problem was rectified, the power plant was back churning cash flow.

Coming back to 1MDB’s foray into power generation, the question is, is its expansion into the industry based on a level playing field?

In the power industry, favourable financing terms are crucial. So, is the fact that the government owns 1MDB giving it an advantage over other players?

When Tenaga entered the fray to build power plants, it was with a reason. The national utility company wanted to prove that power plants could be built at cheaper prices and that electricity could be supplied at lower tariffs.

This did not go down well with the industry because Tenaga had several advantages. It was the offtaker, which meant that it could get the power purchase agreement (PPA) done with minimum hassle. Tenaga was also seen as being able to enjoy cheaper financing compared with its industry peers as it was a government-backed entity.

The other advantage was that international equipment suppliers tended to team up with Tenaga as it was seen as a favourite in any competitive bid to build power plants.

The competitors got lesser known names.

In its defence, Tenaga — which is owned by Khazanah Nasional Bhd — contended that it was in the fray to show existing players that power could be supplied at lower rates.

There is another sound reason for Tenaga’s foray — it was paying huge sums in capacity payments to independent power producers (IPPs).

Tenaga had always contended that the power purchase agreements, especially with first-generation IPPs, were too generous to the private sector.

Now, along comes 1MDB, another government-backed entity picking up power assets. Apart from 1MDB, Petronas is also in the picture because it claims power and energy are related to its bread-and-butter business of producing oil and gas.

Where does this leave the private sector that is supposed to be the long-term driver of the economy?

In other countries, there are laws to ensure government-backed business entities do not enjoy a competitive advantage over the private sector simply because of public ownership. It is called complying with competitive neutrality.

There is a commission that overlooks this aspect of business where the private sector can lodge complaints against unfair advantages that public sector companies may have. This does not apply to publicly owned companies that are non-profitable organisations.

Clearly, it is time Malaysia implemented measures to ensure competitive neutrality in the power sector.

At the rate government-owned companies are flocking to the sector, it may not be long before private participation in the industry is stifled.

[M Shanmugam is managing editor of The Edge.]

This story first appeared in The Edge weekly edition of Feb 25-Mar03, 2013.