Kuek Ser Kuang Keng | May 24, 11
Malaysiakini

Calls to reveal ‘secret contracts’ with independent power producers (IPPs) have regained momentum with the announcement by Idris Jala that the government is reviewing gas subsidies provided to this sector.

Idris, a Minister in the Prime Minister’s Department, told Malaysiakini last week that some of the contracts are expiring and that the subsidies offered will come up for review.

“It’s being renegotiated. The negotiations are going on and we’ve concluded some of them. In due course, we’ll be making an announcement,” Idris had said.

However, one reason for lopsided contracts signed in the early 1990s with first-generation IPPs was the lack of transparency and scrutiny.

It now appears that the mistake may be repeated, as information has not been disclosed on the review of existing contracts or the negotiation of new contracts.

“All contracts relating to subsidies and the public interest, especially in the areas of public utilities, must be made public,” said Klang MP Charles Santiago of the DAP.

He suggested that Parliament should be given a say in the negotiation process with IPPs.

“The government should come up with a proposed agreement that has to be scrutinised by a parliamentary select committee. Only after it is endorsed by the Parliament should it be officially signed by both the government and private companies,” he said when contacted.

“This provides two levels of scrutiny – the government and Parliament – to ensure that such contracts are in the best interests of the people.”

An observer pointed out that disclosing the details of IPP contracts would put the issue under the spotlight and lead to early reduction of subsidies as well as the electricity tariff.

In January 2009, 16 highway concession agreements had been declassified and made public after persistent demands from the opposition and civil society groups.

This was followed by discounts on certain toll highways or certain stretches of highways, a freeze on toll hikes and early closure of a few toll plazas.

However, PKR’s Batu MP Tian Chua is of the view that the government will not compromise on IPP contracts.

“The government is not sincere about increasing transparency. When (the Selangor government) wanted to publish the Bukit Antarabangsa landslide report, the BN federal government blocked us,” he said when contacted.

Best of both worlds

IPPs have been enjoying privileges on both sides of their operations. They purchase gas from national oil producer Petronas at a subsidised price and sell electricity to Tenaga Nasional Bhd (TNB) at a high price.

Former Energy, Water and Communications Minister Shaziman Mansor disclosed in 2008 that Petronas was selling gas to IPPs at RM6.40/mm BTU when the production cost was RM15/mm BTU to RM16/mm BTU. It was reviewed to RM10.70/mm BTU in 2009, but this is still lower than the market price.

The agreements between TNB and IPPs, also known as power purchase agreements (PPAs), compel TNB to purchase all electricity produced by IPPs regardless of demand, causing Malaysia to hold some 40 percent of excess electricity.

On top of that, the PPAs, described by former TNB executive chairperson Ani Arope as “grossly unfair”, allow IPPs to sell electricity to TNB at price higher than TNB’s own generation cost.

Re-negotiations with several IPPs began in 2006, to correct certain weaknesses in the PPAs.

However, the talks halted in March 2007 when the principles for negotiation could not be established and there were concerns that the review would have a significant impact on the local stock exchange, since one-fifth of the bonds in the country were issued by the IPPs.

The negotiations resumed in 2008, but by last year, no progress had been reported – until the recent announcement by Idris.

Deputy Finance Minister Awang Adek Hussin once said that it was not the government’s policy to withdraw business contracts that had been signed.

“Do you want Malaysia to be known throughout the world as a country that can take back contracts that have been signed?” he was quoted as saying in a media report.

Unable to review the PPAs, the government in June 2008 imposed a 30 percent windfall tax on IPPs – but this only lasted three months.

The tax was scrapped after protests by the IPPs, which again warned that the local stock market would be heavily affected. The government then replaced the windfall tax with a one-off payment that was equivalent to the tax for one year.

According to figures released by government in July 2008, total profits before tax of 13 IPPs in 2007 amounted to RM3.37 billion. This figure was later denied by the IPPs, which claimed the figure was overstated by RM499.316 million.

The lucrative profits are obtained at the expense of TNB, which is then forced to transfer its financial burden to end-users whenever there is a hike in fuel prices.

It is reported that TNB forked out RM19 billion to the IPPs from 2001-2010. In its 2008 financial year, the payment to IPPs amounted to over RM9 billion, forming 45 percent of TNB’s costs.

The IPPs, however, enjoyed nearly RM8 billion in subsidies from Petronas in the financial year ending March 2010.

Santiago pointed out that an independent international study had shown that the IPPs’ rate of returns had reached 22 percent, an exceptional figure for the public utilities industry.

“It is too high… 22 percent is just madness. The rate of return for any power producer and provider of utilities must be capped. The best strategy is to set up a commission to bring down the profit to reasonable level.”

Santiago also questioned if the IPPs’ contracts, signed during Dr Mahathir Mohamad’s tenure as premier, included any kickback for political parties and politicians.

“There is no reason not to make the contracts public, unless they want to hide something,” he added.

Chua also expressed reservations over Idris’s announcement that the IPPs’ subsidies would be cut.

“I believe that after enjoying years of subsidies, they would demand compensation should their subsidies be cut, such as increasing the price of electricity sold to TNB,” he said.

The earliest PPAs, signed in the early 1990s, will expire in stages from the end of 2014, 2015 and 2017.