Several months ago, 1MDB had won the bid to acquire Tanjong Energy from Ananda Krishnan for a consideration in excess of RM 8 billion. One weekend in August, rumours swirled regarding a new major acquisition by 1MDB in the power sector.
The “rumours” became reality when an announcement by Bursa said that 1MDB had agreed to acquire a unit of Genting Energy for RM 2.3 billion. That unit of Genting Energy was Genting Sanyen, one of the first generation IPPs with a capacity of 720MW and which came into operation in 1995. The power purchase agreement (PPA) with TNB will expire in 2016. Separately, Genting made a parallel announcement regarding the divestment, adding that it will book a extraordinary gain of RM 1.9 billion from the sale.
Any person with some commercial sense will realise that the book value of the Genting asset in question is only RM 400 million. The PPA has 4 more years to run, after which the asset will be worth nothing more than scrap metal. Even if TNB decides to extend the term of the PPA, it will be on TNB’s terms, and not on Genting’s terms because the alternative to Genting is scrap value of the plant. So why would 1MDB pay RM 2.3 billion for the asset ? Can it recover the RM 2.3 billion in the 4 years remaining of the PPA?
Now let’s make some rough calculations. The plant has an installed capacity of 720MW. It was built in 1995, so let’s assume now that the plant’s capacity is around 700MW given the lapse of time. Let’s also assume that TNB has dispatched the plant 85 pct of the time, so the annual output of the plant should be around [700,000 kW X 24 hrs X 365 days X 85 pct] or 5.2 million kWh (units of electricity). The tariff in the PPA is around 13 sen per kWh, which means annual revenues from TNB will be around RM 677 million. Roughly half of this goes to payment to Petronas for gas, and for operational costs, which means that net revenues before tax will be around RM 300 – 350 million per annum.
Hence there is no chance that 1MDB can even remotely recover its investment of RM 2.3 billion over the remaining 4 years of the PPA with TNB. Either there is gross incompetence at 1MDB or there is a hidden agenda somewhere that no one is telling. 1MDB is an MoF vehicle, whose funding is guaranteed by the Federal Government. We are entitled to an explanation of how funds are spent at 1MDB, and we require accountability.
1MDB acquired Tanjong Energy for over RM 8 billion. Tanjong Energy’s assets are in Egypt, Bangladesh, Pakistan, Oman, Sri Lanka and Malaysia. For this deal, 1MDB had to raise a US Dollar bond at an inflated yield with the guarantee of the sovereign government of Abu Dhabi. Questions were asked as to why 1MDB, the so-called wealth fund created from the oil revenues of Trengganu, made such an investment and the rationale for the huge price paid. There were no answers. The latest deal with Genting raises similar issues, and this time we must demand answers with full accountability. Those trustees of public funds cannot have a “spend, spend, spend” mentality given the state of the global economy.