Fearsome prospects for 1MDB’s former energy assets

A QUESTION OF BUSINESS | The signing of the power purchase agreement (PPA) last week between national power utility Tenaga Nasional Bhd and Edra Energy Sdn Bhd, formerly owned by Malaysia’s infamous 1MDB and now owned by China company CGN Group, puts Edra under public scrutiny yet again.

This is a good time to note the enormous, potentially adverse implications that Edra has on our energy industry.

First, ever since independent power producers (IPPs) were introduced in the 90s, this is the first time that Tenaga is signing a deal with a 100 percent foreign-owned entity - all previous PPAs were signed with locally owned companies which have at least 30 percent bumiputera participation.

Second, the deal clearly shows that future development of IPPs were included in the sale price of RM9.83 billion paid by CGN to 1MDB, as pointed out by an article in The Sun newspaper.   

This has major implications and may indicate that not sufficient account was taken of this in the sale price.

According to the article, at the time of the announcement of the sale in 2015, 1MDB held two project awards that were yet to the developed, a 2,000MW combined cycle gas turbine venture and a 10x50MW utility scale solar power plant, which are also in the list of assets sold. At the time, no confirmation was made on whether the rights had been transferred to CGN.

1MDB agreed to sell Edra Global Energy to CGN Group for RM9.83 billion cash in November 2015 with the sale completed March 2016.

1MDB had paid a total of just over RM12 billion for the power assets earlier, all owned by Malaysian entities - RM8.5 billion from Ananda Krishnan’s Tanjong Energy Ventures renamed Powertek Energy Group, RM2.3 billion from the Genting group and RM1.23 billion for Jimah Energy Ventures.

Even so, analysts felt that CGN overpaid for the assets by about RM1 billion. However, with future power development ventures included, it looks like overpayment, if any, may have been a lot smaller.

But consider the implications of this - prime power assets, not just in Malaysia but in other countries as well, were sold off to a foreign company from China, basically switching ownership of these assets out of the country. 1MDB is fond of saying that it is a strategic development company owned by the government - how strategic is that?

Despite the overpayment, 1MDB’s only earning assets within its rather dubious acquisitions were the power assets under Edra.

It is telling that despite loans at one stage of RM42 billion in its books and few assets to show, it had to sell Edra to quash bank debts which were becoming fast due - clear evidence of major problems at 1MDB.

Some of the bond issues were taken to buy the energy assets but were diverted elsewhere.

There is legitimate concern that this rescue of 1MDB by CGN is a quid pro quo for other China deals such as the RM55 billion East Coast Rail Line project and the RM40-80 billion KL-Singapore high-speed rail.

Under the latest PPA, Edra will construct, own, operate and maintain a gas-fired combined cycle electricity generating facility with a total nominal capacity of 2,242 megawatts to be located at Alor Gajah, Malacca.

It will consist of three generating blocks, and an expected commercial operation date of Jan 1, 2021 for the first generating block, March 1, 2021 for the second generating block and May 1, 2021 for the third generating block.

The PPA governs the obligations of the parties to sell and purchase the generating capacity and, to the extent despatched, the electrical energy generated by the facility. The PPA will be for a period of 21 years from the commercial operation date of the first generating block.

However, the purchase price for electricity is not disclosed by Tenaga and it was not possible to obtain any figures from the Energy Commission website as well.

Scarcity of info on IPPs

From the time former prime minister Dr Mahathir Mohamad introduced IPPs in the 90s, there has been a scarcity of good information on IPPs and their deals - however one thing is clear, billions have been made by people who were essentially cronies of the PM and the ruling party then.

Over the years, the deals for IPPs have gotten progressively more in favour of Tenaga but Edra may jettison the progress made - there needs to be transparency to ensure that deals that are too favourable to IPPs are not signed as it was in the past.

For that, two quantities need to be disclosed - the purchase price for the electricity and the internal rate of return (IRR - the financially correct way of measuring returns) for the project.

The second needs to be audited by qualified people and their significance properly explained.

Otherwise we are going to see a second round of masking of benefits, this time to foreigners.

Remember that Edra is no longer Malaysian but foreign owned - all 100 percent of it. And therefore it should no longer be entitled to the benefits that Malaysian companies get.

'Malaysia first' should be our slogan too.

A Bernama article in April last year quotes Edra president and executive director Mark Ling who said the recent RM9.83 billion acquisition of Edra by CGN puts Malaysia in a strong position to develop Asean’s power sector.

He of course got it wrong - it does not put Malaysia in that strong position but China.

He further said that Edra, backed by CGN’s capitalisation of US$60 billion, was now able to link through the Trans-Asean grids from the Philippines to Sabah, down to Sarawak and Sumatra.

“We are now able to immediately further enhance opportunities and commitments, opportunities which have been knocking at our door previously but which we were unable to entertain,” he said.

“And to actually have a Sarawakian lead Edra, it’s a great honour for us Sarawakians. We have to understand that we have got no barriers in convincing the rest of the world that we can do it. And I will be looking seriously into avenues of new energy businesses in Sarawak.”

Rather propaganda-ish! Well, if that’s the case, this means that this China-owned company is all set to get even more projects and that is extremely worrisome when you consider that Malaysian companies have the ability and the knowhow to do the same - we never needed any help from China before.

Think Tenaga for instance. Why are we passing the baton on to a China company after spending so much effort to nurture and develop an indigenous power generation industry with international capability?

Is this yet another mysterious strategic development initiative followed upon by an earlier one by 1MDB? How much will we end up eventually paying for 1MDB’s transgressions in addition to the tens of billions of ringgit already lost and stolen?

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P GUNASEGARAM says desperation and corruption are a potent combination for bad business. E-mail: t.p.guna@gmail.com.-Mkini