Saturday July 11, 2009

Old issues, new minister

By ANITA GABRIEL

Energy, Green Technology and Water Minister Datuk Peter Chin inherits a number of outstanding issues when he took charge.

IT can be disconcerting somewhat for an industry dealing with major headaches to midway have to deal with a new decision maker. What more when it involves two key sectors with far-reaching impact on the country and its people.

So, when Datuk Peter Chin Fah Kui was appointed Energy, Green Technology and Water Minister in the new cabinet lineup unveiled in early April (succeeding Datuk Shaziman Abu Mansor), for a short while, it appeared as if the niggling points in both the power and water sectors came to an abrupt standstill. Truth is, it didn’t and Chin had very little time to warm his seat.

“It’s a big mess,” says an analyst, referring to the woes in the power and water sectors. “The minister needs to address these issues once and for all,” he says.

In an interview with StarBizWeek, Chin reveals that he knows this only too well.

The problem in the water sector, in a nutshell, has much to do with its restructuring plans, which appears to have taken off smoothly in most states but remains a slippery point in Selangor with the state and Federal Government having clashed on the takeover of privatised water concessions.

Several deadlines and months of heated lobbying and negotiations, which at one point turned into a public spat, later, the offers (original and revised) on the table do not appear good enough for the private concessionaires to part with their assets. The cost can be monumental and at stake is billions of ringgit for the concessionaires and hard-to-stomach higher water tariffs for consumers.

Under Chin’s watch, the second deadline – June 30 – set by the Federal Government for the Selangor government to complete the consolidation of the state’s water sector has come and gone, with no takers but one. The options for renegotiation has thinned considerably since and a solution remains ever more elusive unless of course, the Minister decrees that “no thanks” is not good enough an answer from the concessionaires.

Power problems

In stark contrast to Chin’s candour in talking about the power and green technology sectors, he declines to comment on the water sector, which indicates that water is currently a major sticky point. His refrain may also be explained by his hesitation to fan the flame in the water saga. But analysts say with the private concessionaires having snubbed the state’s offer, the ball is now very much in the minister’s court. (more in separate story)

On the other hand, while the monumental challenges facing the power sector may be nothing new, they still need to be addressed urgently. Competing for attention are short- as well as long-term structural matters involving tariffs, cost pass through formula, pricing transparency, fuel mix and alternative fuel sources, Tenaga Nasional Bhd’s (TNB) high payouts to independent power producers and regulatory redundancies.

Any delay in settling these issues would be an assault on the future stability of the energy sector.

“Two words”, says an analyst, “Energy Policy – that’s the solution”. But as it stands now, there is none. Some comfort, however, comes from the fact that Chin has said the policy is in the “advanced stages” of completion.

Swooping in on the dearth of suggestions to pull the sector out of its current funk is state investment arm Khazanah Nasional Bhd, which is understood to have a month ago submitted a working paper to the minister to fix the structural deficiencies in the industry.

Khazanah initiative

The study was carried out by Khazanah, with consultants McKinsey, on its own accord. Essentially, the state agency has made 10 recommendations to move the industry forward, touching on four broad categories – governance (how decisions and plans are made), market structure, electricity tariff and the fuel issue. But don’t be mistaken, there are multiple issues that feed into these broad categories. Recommendation No. 10 – to implement all the recommendations, much of it involving a fair share of give and take among the various industry players, without leaving anything out. Otherwise, the efforts will be futile.

It is understood that the ministry is now preparing to table the paper to the cabinet. “The report needs to get the buy in from the highest level. That way, all parties will be committed to get it done,” says the source.

Khazanah is also the major shareholder of TNB, but according to sources, it had to take a “country first approach” and do away with its narrow interests in drawing up the working paper. As such “some of the things required to be done may appear worst off for TNB in the short term but it actually means the industry will be better off. But all players need to play their role or it won’t be equitable,” says a source.

Nagging issues

The suggestions put forth by Khazanah, however, is hardly gape worthy.

The fragmented governance structure in the power industry has long been a beef among industry players and observers given the numerous overlap and gaps involving several agencies, ministries and their respective units. For example – historically, while the planning of power plants would fall under the Energy Ministry, the actual execution and implementation is done by the Economic Planning Unit under the Prime Minister’s Department. “How can one do the planning while the other, handle the execution? It doesn’t make sense,” says an analyst.

Then, of course, is the tariff formula or lack thereof, which has been a growing frustration among businesses (no clarity in energy cost) as well as TNB. TNB is financially debilitated by rising fuel costs, which takes up a chunk of its cost, as it is unable to pass the higher cost to end users. A pass through tariff formula would once and for all rid itself of the issue. Let’s not forget – with such a transparent formula in place, it will also show up TNB’s efficiency, or inefficiency.

But analysts contend that it’s really no rocket science. “In essence, there is already a formula which has led to the revisions in tariffs since 2006, but it’s implicit. What we need is for the formula to be made explicit. It is not so much an issue of rates going up as it is the uncertainty. The formula will make things more predictable for businesses,” says an analyst.

“We are the only jurisdiction in the region that actually has a fixed tariff. The reality is, by and large, the overall cost to generate electricity is more than the revenue from the sales of electricity which throws up other challenges such as the sustainability of our industry as well as our national utility,” says an industry watcher.

Fortunately, all signs show that by this year, there may be a pass through tariff formula in place.

Then there is the issue of adding new capacity to meet future needs; it has been 17 years since the country’s privatisation of the power generation sector but sadly, there is yet no template or formula for a more equitable and fair power purchase agreements. But still, it is clear that the era of sweetheart deals is long over.

Fuel is another major headache. Currently, gas (fixed and subsidised price) and coal (international market prices) fire up most of the country’s power generation plants. Gas supply is fast running out while coal leaves the national utility vulnerable to the vagaries of the market. Apart from that is the crushing impact of rising fuel cost, which makes up over a third of TNB’s cost component. It is dire – the country needs to look for alternative and affordable fuel sources.

“In reality, what we have (now) is not sustainable. The industry is not investible as it has no high comfort levels,” he says. Clearly, however, there is growing optimism that a resolution is in sight, which perhaps is best reflected by analysts’ waning scepticism towards TNB and their confidence on the sector outlook.

“The regulatory changes and regulatory risk for TNB is falling. TNB used to be a regulatory nightmare for investors. But there are now more bulls among us and eventually, these risks would be eliminated,” says a power analyst.

Many market observers are comforted by the slew of measures taken by Prime Minister Datuk Seri Najib Tun Razak to ease the rules to woo investments and raise the bar on Malaysia’s competitiveness.

They say it’s a reflection that the political will to tackle these issues is stronger than ever, which is ultimately, key in resolving any issues.

An analyst, typically sceptical, seems hopeful: “Maybe, now, there is more impetus to get things done.” Perhaps, we should be too?

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