Business

Monday December 15, 2008

Is IPP the right model?

BY C.S. Tan


THE country had adopted a model of participation from independent power producers (IPPs) from the time Tenaga Nasional Bhd prepared for its initial public offering in the early 1990s.

On hindsight now, that does not appear to be a model of merit. The shocking revelation of TNB CEO Datuk Seri Che Khalib Mohamad Noh last week that the company will have to pay RM1bil a year to the Jimah IPP for electricity it does not need raises the question of the role of IPPs.

TNB will be paying RM1bil a year for nothing because the reserve margin for power generation reaches 47% when Jimah is commissioned next month. That is a large surplus capacity because Tenaga needs a reserve margin of just 25%.

Che Khalib was quick to point out that Jimah was planned a decade ago when it was believed the demand for electricity would be increasing at a clip of 7% or more a year; the current condition of demand increasing by just 2%, with a possibility of negative growth next year, was not anticipated.

Even so, the payment of RM1bil a year to Jimah will cause a reduction of this sizeable amount in TNB’s pre-tax profit and cashflow. After a period of two or three years, TNB could, of course, be drawing power from Jimah. Fortunately, Jimah is the last IPP to come onstream.

In the previous financial year, TNB’s profitability was impacted by the commissioning of Malakoff Bhd’s Tanjung Bin power plant, the second last IPP.

There should not be any more issue of IPP licences for the next several years so that TNB can reduce the country’s excess generation capacity.

In the past, there was no competitive bidding for IPP licences and it’s also not clear if the Government evaluated supply carefully before the last few licences were issued.

When the time comes again to have a new power plant, it may be a better structure to allow TNB to build it rather than an IPP.

In the case of Jimah, TNB has to pay for its cost as well as a profit for its owners. In addition, the borrowings of IPPs are based on the credit standing of their customer, TNB, which should be able to borrow at a lower cost than the IPPs.

Depending on demand, the country may not need another power plant until around 2015 when transmission of electricity from the Bakun hydro-electric project will be onstream.

Left: An artist's impression of the Jimah plant. Right: Barack Obama.

Intangible infrastructure

THE eloquent President-elect Barack Obama recently popularised the economic buzzword “intangible infrastructure.”

Speaking to the American people on the recession, he said he wanted to jump-start economic activity and he also wanted to ensure his programme addressed long-term sustainable development issues.

Besides a massive construction programme to re-build ageing physical infrastructure and stimulate economic activity, he wants a focus on intangible infrastructure.

The intangible part of the economy refers to sectors such as education and healthcare as opposed to the production of tangible goods in industries such as construction, transport and motor vehicles.

An emphasis on intangible infrastructure has been a pet project of Lawrence Summers, economic adviser to Obama, since his days as Treasury Secretary in the Clinton administration. Summers will now advise Obama on this principle of economics.

This principle partly emanates from the Nobel prize winning work of economist Robert Solow who demonstrated the co-relation of technology and human capital with economic growth. Both technology and human capital are facets of the intangible economy.

At present, one of the observations of economists in the United States is that jobs are still being created in the intangible economy – in healthcare and education – while jobs are being lost in every sector of the tangible economy.

Furthermore, jobs in the intangible economy pay as well, or even more than, jobs in the tangible economy.

It is, of course, a well-known phenomenon that human capital can be more important than the other factors of production in the expansion of per capita income. This is clearly observed in economies such as Singapore, Hong Kong and Japan.

As Malaysia is also preparing to embark on a stimulus construction programme, the country will also need to ensure its intangible infrastructure is also improved on. That would generally need a focus on developing human capability where much more needs to be done.

  • C.S. Tan is an associate editor at The Star. He thinks improvement in healthcare and education will do much to improve the quality of life


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