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Message: <blockquote data-quote="Iqlima" data-source="post: 186050" data-attributes="member: 174">Yes, the "premium rate"  IRR (Internal rate of return) between 18% to 25%.We learn abit but my kids will surfer obviously without control of this IPP's G. From Shortage to Glut (Page 14) Malaysia moved forward with its IPP program with impressive speed. While the existing capacity was roughly 6,000 Megawatts, Malaysia commissioned five projects totaling 4,157 MWof new capacity in the span of eight months from April to December 1993. The IPPs were given incentives to finish their projects quickly, to which they responded. The IPPs came online quickly and Malaysia was soon out of its power shortage. Unfortunately, the new capacity grossly overshot demand growth. By January of 1997, several months before the Asian financial crisis struck Malaysia, peninsular Malaysia had almost fifty percent surplus capacity. Much of the electricity had no real market, which prompted Prime Minister Mahathir to urge consumersto use more electricity. At this time IPPs accounted for roughly thirty-five percent of all installed generation assets, but supplied more than this percentage because Tenaga-owned facilities were turned off in order to utilize IPP power given that Tenaga was obliged to purchase. [...]   Once it became clear that the IPP contracts were causing serious strain on Tenaga’s profitability, Tenaga began attempts to renegotiate the long-term supply contracts with the IPPs. Political pressure on the IPPs to lower the contracted rates to Tenaga began as early as 1996. “We do not want to kill Tenaga by giving lots of profits to the IPPs,” said Prime Minister Mahathir. “It must be balanced.”   Efforts to reduce Tenaga payments to the IPPs were not limited to obligations of the PPAs. The minister for energy, telecommunications and posts, indicated that Malaysia's five independent power producers might be asked to “take up the slack in rural electrification programs.”   At the time, Tenaga bore half the cost of providing unprofitable services to rural areas; the rest was borne by the federal government. The IPPs eventually agreed to contribute one percent of their revenues to the rural electrification program. This is where things stood between Tenaga and the IPPs until the summer of 1997, when the Asian financial crisis swept the region.   V. THE ASIAN FINANCIAL CRISISThe Asian Financial Crisis hit Malaysia in July of 1997. Triggered by the collapse of the Thai baht, pressure on the fixed-exchange-rate ringgit became insurmountable. On July 14, the government decided to float the currency, resulting in a huge devaluation, which then triggered a major correction on the stock exchange. After the crisis hit, electricity demand growth slowed, and reserve generation capacity expanded from fifty percent to fifty-five percent.VI. ANALYSIS OF THE MALAYSIAN IPP EXPERIENCE (Page 21)  A. Was the IPP Program a Success or a Failure?  Given what we know about the Malaysian IPP experience, we must assess that the experience from the investors’ perspective was very positive.97 We don’t know exactly how much money the sponsors made,98 but all accounts indicate that the first wave of investment was very profitable.   One analyst said, “The first batch of IPPs, namely YTL Power, Malakoff, Genting Sanyen, Powertek and PD Power Bhd derived between eighteen and twenty-five percent internal rate of return (IRR).” Other observers said that the first five IPPs had been “‘laughing all the way to the bank’ as they had been enjoying favourable terms ‘not found anywhere else in the world.’” Additionally, all of the original players are still in the business and willingly entering new contracts at rates lower than agreed in the first round of investment.   As to the second wave of investment, an analyst said that “the market expectation is that any new PPAs signed with [Tenaga] will give an IRR of only about twelve per cent.” That Tenaga was willing to threaten unilateral revision of the contracts and withhold payment for two months may have hung a cloud over the sector, but during the crisis period, IPPs were perceived by at least one analyst to be one of the best sectors in which to invest.105 Publicly listed IPPs have provided a better return than both the Kuala Lumpur Stock Exchange index and Tenaga during the relevant period. (See Appendix A)   Separately, it seems that bondholders and lenders to the project companies were paid according to originally contracted schedules without difficulty. Malaysia’s IPP experience, in consideration of the policy and developmental goals of the government of Malaysia, should be considered as a qualified success. The government’s highest priority, installation and management of adequate generation capacity to facilitate high economic growth, was achieved. Moreover, the privatization of Tenaga and the local financing of the IPPs contributed to the development of local financial markets. This success is blemished by the fact that the contracts were probably too rich for the IPP sponsors.   Consequently, a higher than necessary cost of power resulted in financial losses to the government controlled utility, higher prices to consumers, and arguably an inefficient allocation of society’s resources. But this defect should not be overemphasized: timely expensive power is a far superior outcome than blackouts that discourage FDI and domestic investment, and stunt economic growth. Additionally, if someone is going to reap exorbitant profits, it is probably better from a political standpoint that they be domestic investors, as they were in Malaysia, rather than foreigners.   Finally, Tenaga made a number of commercial improvements to the PPA used in the second round of investment: tariffs were lowered and there was a more balanced allocation of risks.   B. Why did the Contracts Hold?   It is notable that the PPAs were not altered during the economic crisis—a period when there must have been tremendous pressure on Tenaga to unilaterally change the terms of its expensive obligations to the IPPs. The national off-taker was forced to manage a debt crisis while it was hemorrhaging due to the expensive IPP contracts coupled with low power demand. Nor were they altered in 2001 as some reports have indicated. This conclusion would be hardly a surprise to those close to the deals but others have somehow been given a different impression.   In 1998, IPPs constituted about thirty-five percent of Tenaga’s capacity (and even more of production) and were more expensive than Tenaga’s own generating capacity. Power demand was low and Tenaga was contractually bound to purchase power that it could not sell. The drop in electricity demand brought on by the Asian financial crisis exacerbated these problems, but the fact that fuel for the IPPs was produced domestically and the projects were financed exclusively in local currency significantly mitigated the stress of the crisis.   Further research should investigate whether trading value data for project bonds are available. See supra note 94. In researching for this working paper we have encountered reports that assert the PPAs were renegotiated. But we have looked for and discovered no direct cause to believe that any PPAs were renegotiated either in 1998 or 2001, while we have encountered sufficient basis to conclude that they were not. In private interviews with the author, both a Tenaga official and an attorney involved in the deals confirmed that the PPAs were never altered. In 2001 and 2002 reports to investors, Tenaga highlights progress that they made in reducing foreign debt exposure, but there is no mention of changed PPAs. In a 2004 report to investors, Tenaga reported that the average cost of purchased IPP power was about 15 sen per KWh, which is the level they were set in 1993/1994. YTL Power annual reports and Malakoff Bhd. annual reports in 2001 and 2002 make no mention of changed PPAs, yet Malakoff highlights the completion of a new PPA for a new project that happened to be signed on the very day others reported that “re-negotiations” were completed.   In light of the breaches of contract and forcible renegotiations seen in the IPP sectors of India, Pakistan, and Indonesia, we might not have been surprised if in a country like Malaysia, with a weak rule of law, the state-controlled power company under serious duress decided to change the rules on investors after the investment was in place and the balance of leverage shifted. But this did not happen. How was it that the IPPs could withstand Tenaga’s pressure to renegotiate in a time of national crisis? Was it because of the strength of their legal protections, or was it something else? </blockquote>

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