Frankly Speaking: Feb 21-27, 2011

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More than about the environment?It does not come as a surprise that the 300mw coal-fired power plant in Lahad Datu, Sabah, did not get the nod from the Department of Environment (DoE).

The project has had more than its fair of problems because it broke new ground in the highly politicised Malaysian power industry.

It was the first power plant to be done on an open tender — something that Tenaga Nasional Bhd’s president and CEO Datuk Seri Che Khalib Mohamad Noh had wanted to do after he took the helm of the dominant utility company, as part of the GLC transformation programme.

Companies were invited to tender for the project — the first that Tenaga itself participated in through its wholly-owned subsidiary TNB Repair and Maintenance Sdn Bhd (Remaco).

Both these developments did not go down well with some quarters in the corporate sector. Before Che Khalib came into the picture, licences for independent power producers (IPPs) were awarded by the Economic Planning Unit (EPU) based on proposals from private or listed companies.

This was done under a cloud of obscurity. These licences were then used as a basis for the company to enter into negotiations with Tenaga for a power purchase agreement (PPA). A licence, together with a PPA, was a lucrative piece of document worth millions.

In the case of Lahad Datu, in June 2007, the EPU awarded the job to a consortium comprising Remaco, Eden-Nova and Maser. The consortium was to have an 80% stake in the project and Yayasan Sabah the remaining 20%.

This came as a surprise as Yayasan Sabah was supposed to have a 40% stake. In February 2008, the consortium awarded the engineering, procurement and construction contract to China National Electric Equipment Corp.

Everything was going smoothly, but approvals from the state were not forthcoming despite many assurances that the coal-fired power plant would not affect the environment.

With the second rejection by DOE, it is more or less certain that the plant will not take off. But what about the work already put in by the consortium? Since Sabah needs power, will the consortium be told to look at other options? Or will its contract be terminated with a cash compensation and a new party given the mandate to build a power plant? Will approvals be speedier if a new party takes over?

Zelan’s costly overseas lessons With more than 90% of the job completed, Zelan Bhd is staring at huge losses in a project to build a power plant in Central Java, Indonesia. That is the costly lesson the company is learning after failing to complete the 700mw coal-fired power plant on time.

The company disclosed that due to delays, the owner of the project — PT Perusahaan Listrik Negara (PLN), which is the equivalent of Tenaga Nasional — has given notice to take over the outstanding work. Meanwhile, Zelan may be slapped with liquidated ascertained damages (LAD) or late delivery changes to the tune of RM125 million.

The company is also likely to face delays in the collection of about RM181 million pending from the project as this will need to be ascertained by independent consultants.

Did Zelan make anything from its Indonesian venture?

It’s hard to say but from the numbers available, it most probably made losses. The company had bagged the job in 2007, then valued at RM2.12 billion, via a joint venture in which it held 70%. Assuming the margin was 30%, the returns would be about RM445 million. But now, Zelan is staring at losses of more than RM300 million.

Zelan is also faring badly in a project in Saudi Arabia. How did these losses come about? Was it because of bad management or lack of good managers?

Share property job gainsAs details of the proposed Klang Valley mass rapid transit (MRT) project come to light, property investors are getting excited.

This is only to be expected as everybody wants the MRT to run near their housing estate but not their backyard.

As the excitement grows, the financing model for the RM36 billion project is slowly taking shape. The financing model should take precedence because it is crucial that the MRT, upon completion, receives as little subsidy as possible from the government for its operations, let alone to repay borrowings.

Some of the financing details were revealed last week. Government-owned Syarikat Prasarana Negara Bhd said property income would be a key component of its financing model for the MRT project.

This is similar to how the Hong Kong MRT system was funded and is maintained.

But for this to happen, the government must ensure that Prasarana gets a share in all new property development projects along the MRT lines. The developers would be getting a windfall, so why not share the cake with Prasarana in a transparent manner so that nobody gets the short end of the stick?

This is especially crucial in new property developments where the future MRT stations will be located.

The parcels of land yet to be developed include the Rubber Research Institute land in Sungai Buloh, the Kuala Lumpur International Financial District, the Cochrane Road development in Cheras. Most of these are government-owned, so there really should be no problem in setting aside a portion of the development for Prasarana.
This article appeared in Corporate page, The Edge Malaysia, Issue 846, Feb 21-27, 2011