A primer on subprime (5 of 5): Who’s to blame?

Culprits as I see it:

1) Greed by everyone in the chain: The people who took out loans they really shouldn’t have, the bank officers helping to falsify loan information to meet their performance targets, the CEOs out to make their big bonuses, shareholders hungry for profit growth, ratings agencies focused on fee income, investors looking for a free lunch ….

Borrowers were encouraged to over-state their income to qualify for bigger loans; or even to qualify for loans in the first place as banks rushed to hand out credit. A senior officer at Washington Mutual, one of the failed US banks said, "At WaMu it wasn't about the quality of the loans; it was about the numbers … They didn't care if we were giving loans to people that didn't qualify. Instead, it was how many loans did you guys fund."

They were facilitated by a false sense of security after years of benign economic conditions. Over-optimistic assumptions were built into financial models. Bankers and ratings agencies conveniently assumed recent low default rates were sustainable in the long-term. Those who argued against were told, “This time it’s different”.

Some senior bankers knew it was a house of cards – remember former Citigroup boss Chuck Prince saying, “As long as the music is playing, you’ve got to get up and dance?” But bank bosses were under pressure to show profit growth. Banks competed fiercely to lend, and often dispensed with the usual covenants meant to secure such credits – ie the “cov-light” loan. Ratings agencies gave unwarranted AAA ratings.

2) The market failure was facilitated by regulatory failure. Alan Greenspan’s Federal Reserve refused to deflate the mortgage bubble. He argued that markets had efficiently found ways to diversify the risks. But regulators failed to look deeply enough into the institutions that had supposedly took on the risks. The risks appeared to have been off-loaded, but really weren’t as the insurers were not well capitalised. It turned out that even large AAA-rated firms like AIG were over-extended and could not pay up when defaults rose.

Quite frankly though, I don't think the soul-searching is worth much. History is useful if only we would learn from it. And yes, for a while, lending standards will be tighter, banks will focus on risks and regulators will be stricter.

But as the good times roll again, politicians and businessmen will push for relaxed standards. Risk managers don’t earn revenue. Loan salesmen do. We'll again hear “This time it's different. We've learnt our lessons.” We shall see.

Look deeper into IOI cancelling its Menara Citibank purchase …

At the last minute, IOI Corporation decided not to complete the RM587m acquisition of the Menara Citibank office tower in Kuala Lumpur. IOI forfeited its RM73m deposit - 12% of the purchase price. Here are 3 potential reasons:

1) It is an IOI problem. IOI cannot afford the deal because crude palm oil prices have collapsed. But a quick check with my analyst friends finds most of them forecasting about RM2bn pa of operating cashflows with CPO around RM2,000/ton. So, it doesn’t look like IOI itself has issues;

2) Which takes us to … IOI thinks the Malaysian economy will get a lot worse. And it thinks property prices will fall by at least another 20%. (Otherwise, why would it forgo the 12% deposit?);

3) Or, IOI thinks Citi is in serious trouble and will be forced to do a fire-sale later.

Any thoughts? Comments welcome.

A primer on subprime (4 of 5): What we can do

It's a given Malaysians will suffer too in this global slowdown. Anyone suggesting Malaysia will be unaffected is living in dreamland. All of us – government, businesses and employees – have to contribute to mitigate the pain:

1. Government in the next few months has to spend to cushion the local economy and protect society's poorest;
2. In the longer-term economic policy has to be reevaluated to attract investment, both local and foreign;
3. Businesses and employees must use the breathing space afforded by the government handouts to improve efficiency and productivity.
   

Like most things, these are easier said than done. Unfortunately, government fiscal options are limited. We had already been running Budget deficits for the past 12 years, through the good times. In fact, the deficit for this year, 2008, will hit 4.8%, higher than the 3.6% initially forecast, even with record high oil and crude palm oil prices. Next year, in 2009, there will be a lot less government revenue with oil prices down by more than half and lower corporate and income tax collections.

Fortunately, and ironically, there has been plenty of fat in the system. Most would agree that there is tremendous leakage when the Barisan government spends money. Cut out the fat, and spend what we have on projects with the maximum impact on the local economy – so small scale grassroots projects please. Mega projects with high foreign input costs should be carried out only if truly necessary.

Besides the short-term spending, the Barisan Nasional government must reconsider its economic policies. The government has been increasing its role in the economy over the years. The federal budget has increased 57% over the last three years! That is not healthy. Sustainable economic growth is always private sector-led.

The amount of capital investments in Malaysia is very low poor. We were the only Asean nation to record net capital outflows last year . And if foreign exchange rates are any indicator, we are considered a worse risk than Thailand, where quite literally there was blood in the streets. The ringgit has depreciated against the baht in the past year.

Now is the time to ask the hard questions and implement the solutions. Why is investment lagging in Malaysia? Why has the perception of our country deteriorated so much? We were once seen as close to Singapore in terms of stability and prospects; we are now compared with lesser peers.

Create a conducive environment for private sector investment. And don't just focus on the foreigners. Remember the locals too. There are many Malaysian millionaires and billionaires with cash to spare. What will it take to get them to put it back into the Malaysian economy?

As for what businesses and individuals can do, Tan Sri Ramon Navaratnam said, “Be lean and mean.” Time was short and he was closing the discussion at the open forum on The Global Financial Crisis and its Implications on Malaysia. Elaborating on his behalf, we should all be looking at ourselves and asking how we earn our income. No-one owes us a living, and in my working life, my guiding philosophy was “My employer must consider me good value.” That's the only way to job security, no matter what you do. If you're a businessman, it's “My customer must find me good value.” I'm not saying cut prices – there is a difference in price and value, which can be the subject of another blog – I'm suggesting there's also substantial room for customer service, productivity and efficiency improvement in Malaysia.

For those lucky enough to have spare cash, I personally believe this is a buying opportunity . Traditional financial theory says markets are efficient. My experience is that markets are made up of people. These people may be smart, may be very highly qualified, may be very intelligent but they are humans with very human emotions. There will be periods of euphoria and periods of pessimism.

We are entering a period of pessimism. I had drinks with a friend recently. He used to be a happy punter in the stock market. Conversation turned to personal portfolios and I recommended a stock at 1.5x P/E. His first reaction – what will earnings be next year? I said, even if earnings go down by half, the stock would be at 3x P/E. But still he wasn’t convinced – and this was a guy happily buying in the bull market when P/Es were well in the teens or 20s.

It won't be an easy ride. Warren Buffet last month said, "…. the leaks are now turning into a gusher. In the near term, unemployment will rise, business activity will falter and headlines will continue to be scary … ..…… Let me be clear on one point: I can’t predict the short-term movements of the stock market.”

But he added, “…fears regarding the long-term prosperity of the nation’s many sound companies make no sense. These businesses will indeed suffer earnings hiccups, as they always have. But most major companies will be setting new profit records 5, 10 and 20 years from now..”

The plunge in share prices has been indiscriminate. Prices of shares in good, and bad, companies are cheap. Hunker down for tough times, do your homework, find companies you’re comfortable with and put your spare cash in the stock market. “Be fearful when others are greedy, and be greedy when others are fearful.”

It will be hard to maintain equanimity in the coming months. News flow will be more negative than positive. Tan Sri Ramon at the forum reminded us that economic cycles come and go. He's seen 6 in his lifetime. We will survive this; the good times will roll again, and I’m sure we’ll see another crisis after that.

Finally, on Sunday: Who's to blame?

Malaysians subsidising foreigners …

Picking up on the likes of Maybank, Telekom, Astro, Genting, Maxis and YTL investing chunks of money overseas ….

It can be argued they have grown too big for Malaysian markets and this is part of normal corporate development. Some would say we should be proud that Malaysia has been able to grow such large companies.

I see no reason to be proud - all these companies are either monopolies or operate in cosy oligopolies with limited competition in Malaysia. All the extra funds they have are from the supernormal profits they reaped from you and me, the average Malaysian, thanks to the government protecting them from competition.

Take Astro, which has a government-granted monopoly on satellite tv. While it was operating in highly competitive Indonesia, it was charging Indonesians less than Malaysians. And consider Telekom, spending huge sums overseas while giving us atrocious Streamyx service, charging us RM25/month minimum fixed line charges and crying to the government that it cannot afford to spend on broadband in Malaysia (and successfully getting a subsidy!).

Investments overseas don’t generate that many jobs for Malaysians. But the investments are paid for by Malaysians through inflated prices and poor service in Malaysia due to the lack of competition. Government policies need rethinking. If our companies are big enough to go overseas, they are big enough to face competition here in the local market. Local consumers will then benefit from lower prices and better services.

Even the philanthropists are sending money overseas!

The University of St Andrews in Scotland has named its new GBP40m (RM210m) medical school the B.C. Sekhar School of Medicine, after Tan Sri Dr B.C. Sekhar, a former chairman of the Rubber Research Institute of Malaysia, reported the New Straits Times on 20 Nov.

Sekhar's youngest son Datuk Vinod Sekhar reportedly said his father loved creating solutions for problems that ailed the world. "This is what the School of Medicine and Science is about. It's a school that has a fully integrated scientific approach to research which will allow for faster solutions to be created," he said.

Here’s a point to ponder: Why did the Sekhars choose to spend their largesse in Scotland and not at home here in Malaysia? First, it was businessmen going overseas – the likes of Maybank, Telekom, Astro, Maxis, Genting, IOI and YTL Corp, for example. Remember Malaysia was the only ASEAN country to experience net capital outflows last year?Now even the philanthropists are taking their money out.

What’s wrong with Malaysia? We, the general public, know the answers – inept government, inefficient bureaucracy, out-dated policies …. Now if only the BN government would stop their internal party politicking and get on with preparing us better for the coming global recession.

A primer on subprime (3 of 5): Brace for tough times

Equity markets have generally risen from their year-lows as confidence returned that financial markets would not completely collapse, thanks to governments supporting the banks. The respite is welcome, but I believe the trend is still downwards.

I expect global economic growth to come in near zero, or even negative next year. The International Monetary Fund (IMF), which has been coming up with new, ever-lower forecasts, now projects 2.2% global GDP growth. It's hard to see how even that can be achieved with the United States, the the world’s largest consumer nation, in recession, Eurozone suffering and the Arab economies struggling to deal with oil prices well below levels they had come to think of as normal.

Economic growth will also be hurt by the credit being curtailed. A commercial banker friend tells me his bank is revoking credit lines, even of clients who are not showing any signs of distress. The bank is conserving capital in anticipation of tougher times ahead. Already Maybank has reported an increase in total NPLs.

Some ultra-pessimists are suggesting deflation and depression. With so much capacity, companies desperate for cash flow to stay afloat will slash prices and be happy with just covering variable costs. That is a possibility, but I am hopeful governments, central bankers and regulators have learnt from the Japanese lesson and will act to combat that scenario.

The base case is ugly enough. US banks are not out of the woods yet. The latest survey of syndicated debt (ie loans given out by three or more banks) found that US$373.4bn of such loans were “criticised” ie in actual or potential difficulties at the end of 2Q08 - this is nearly triple the US$114.1bn recorded in 2007. Even more worrying, the report said many of the loans could move to more severe status such as substandard, doubtful or loss-making. Such “classified” credits were also rising rapidly, soaring 128% to US$163bn.

Not surprisingly, potential capital-crimping bad loans has reduced banks' willingness to lend. The latest quarterly Fed survey in the first two weeks of Oct found a great majority of banks had “continued to tighten their lending standards and terms on all major loan categories over the previous three months.”. Prime (or good borrowers) were affected along with borrowers with poor credit histories.

1. 95% had tightened lending terms to large and medium-size businesses;
2. 20% had cut limits for existing credit card accounts held by prime, or strong credit, customers.
   

I see at least one more cycle of bank issues in the US. The contracting economy and tighter credit will hurt businesses and consumers, which in turn will lead to more loan defaults and another round of bank failures. In the meantime, the rest of us in Malaysia who didn't get to enjoy the party during the boom years will have to suffer along.

Part 3 on Wed: What we can do.

Cut your EPF to 8%; pay more taxes!

If your pay is about RM4,500/month, and you have no life insurance, you will actually pay more taxes if you decide to reduce your EPF contribution to 8%.

That's because up to RM6,000 of EPF contributions and life insurance premiums are tax-deductible. Here is the calculation:

1. You earn RM54,000 per year. 11% EPF = RM5,940, which is tax-deductible. There is also RM8,000 of personal relief. So your net taxable income is RM40,060. The tax on that will be RM2,183 (tax rate is RM1,525 on the first RM35k and 13% on the next RM15k).
2. The EPF contribution is reduced to 8% = RM4,320. That is equal to RM1,620 extra in your pocket every year. Very nice? Did you realise that's not all yours? That extra is now taxable income! So your net taxable income is RM41,680 and you will be paying RM2,393 of federal income tax.
   
3. The BN federal government will be taking an RM210 (RM2,393 vs RM2,183) of taxes from you ie 13% of that extra which you thought was all yours.

Of course, the better-paid employees with hefty life insurance premiums are already well over the RM6,000 ceiling for tax-deductibility, so they won't be affected. But aren't these measures supposed to help the poorer?

Is that why the BN government made the 8% option automatic? Perhaps you'd better head over to EPF and insist you want to keep paying 11%.

The End of Wall Street's Boom

Here's an excerpt from an article on www.portfolio.com, by Michael Lewis, whose Liar's Poker was one of my inspirations:

When a Wall Street firm helped him get into a trade that seemed perfect in every way, he said to the salesman, “I appreciate this, but I just want to know one thing: How are you going to screw me?”

Heh heh heh, c’mon. We’d never do that, the trader started to say, but Moses was politely insistent: We both know that unadulterated good things like this trade don’t just happen between little hedge funds and big Wall Street firms. I’ll do it, but only after you explain to me how you are going to screw me. And the salesman explained how he was going to screw him. And Moses did the trade.

Read more.

A primer on subprime (2 of 5): Why governments had to bail out the banks

The virtuous cycle was trundling along. The economy was doing well (thanks to consumers spending on borrowed money), asset (house) prices kept increasing which meant default rates hit all-time lows as even the sub-prime borrowers were able to either flip their houses or service their loans at the low rates. The low default rates made financial institutions even more confident and they offered increasingly attractive loans to consumers.

At the peak, banks offered “No money down” mortgages and arrangements such as ARMs (Adjustable Rate Mortgages). ARMs allowed borrowers to pay very low interest rates for periods of two to three years. After that, market rates would be charged and principal repayments also started, but borrowers were convinced that by that time property prices would be higher. They would just sell their property, repay what was necessary and still reap a healthy profit.

Some alarm bells were raised. Some pundits suggested mortgages were increasingly being offered to people who couldn’t afford them. But regulators, lead by Alan Greenspan, said markets had found new ways of dealing with and pricing risks and there was no systemic problem (ie individual institutions that took on too much risk may go under, but the entire financial system was robust)

With hindsight, Greenspan was proven hugely wrong at enormous cost to the taxpayer. All good things must come to an end, eventually.

There are only so many people and so many potential housebuyers. After years of scraping the bottom-of-the barrel for the marginal borrower, to the point where lenders closed one eye as borrowers over-stated their incomes so they could go for bigger mortgages, there were no more new borrowers to be found. No new borrowers meant reduced demand for properties, which meant asset prices started to fall.

The house of cards started unravelling. Default rates on the CDOs turned out to be higher than expected. Even AAA-rated CDOs turned sour. Not surprising – considering the mortgages on which these CDOs were based were given to consumers with poor credit histories or to consumers who could not afford them.

Wait! Weren’t some CDOs backed by credit default swaps (CDS)? The CDSs turned out to be not worth the paper they were printed on. The institutions that were supposed to pay-up were woefully under-capitalised!

The problem was made even worse by the absence of open markets for these CDOs. These were traded over-the-counter with valuations based on complex mathematical models. But investors had lost faith in the assumptions going into the models so values could not be determined with certainty.

Also, it turned out that the banks were also liable for some of these CDOs. To entice investors to take the CDOs, the banks had agreed to buy back at least some of these if default rates turned out to be higher than expected. No-one expected the default rates to be that high, but when they hit that level, the banks had to buy back, incurring losses.

This lead to inter-bank credit markets freezing. Any bank, on any particular day, could be a net borrower in the inter-bank market. It is not bad management, it is just a matter of cash flow. For example, a company the bank had already approved a huge loan to draws down that day. The bank knows another borrower is due to repay tomorrow, but in the meantime, it has to borrow today to cover the gap. Tomorrow, when a loan is repaid, it may become a net lender in the inter-bank market.

But the inter-bank market froze. Banks became reluctant to lend to each other as they could not tell if the other bank would still exist tomorrow. Imagine if you were the bank lending to Bear Stearns or Lehman the day before they went under!

Initially the US Federal Reserve and the European Central Bank tried to restore the inter-bank market by making funds available for banks to borrow on more favourable terms and cutting interest rates. This did not help: 1) Banks were unwilling to take Federal funds because it would indicate weakness; and 2) cutting interest rates did not help because it did not address the core issue – banks were unwilling to lend to each other at any price.

The financial problem was turning into a real economy problem. Because banks could not tap the inter-bank market to cover short-term cash shortfalls, every bank wanted to be net cash. They started cutting back on loans to companies and individuals. In turn, companies and individuals would also want to hoard cash. The curtailing of credit facilities threatened the foundations of the economy – business activity would slow leading to job losses, bankruptcies and recession.

British Prime Minister Gordon Brown in the end got it right. Contrary to his long-held views, he extended government backing to the banks. This led to a flood of central banks around the world, including Malaysia, to guarantee deposits. With government guarantees, banks became willing to lend to each other again and credit markets were restored.

Next on Saturday: Brace for tough times

Open forum on global financial crisis and Malaysia

On Wednesday evening I participated in an open forum on The Global Financial Crisis and its Implications on Malaysia, organised at Universiti Malaya by the Centre of Public Policy Studies. The 5 member panel of Datuks, Drs and one Encik (me :-) had a very good 2 hour dialogue with members of the public, very ably moderated by Tan Sri Ramon Navaratnam. The Nut Graph was there …

A primer on subprime (1 of 5): On CDOs, SPVs and CDSs

I prepared this in anticipation of a forum that ultimately did not materialise. It’s not so topical now, but better late than never ….

The roots of our current crisis are in the US housing and consumer-credit boom. This was fuelled by the Wall Street innovation called CDOs – Collateralised Debt Obligations.

The amount that any financial institution can lend is constrained by the capital it has. Historically, banks kept the mortgages on their balance sheets – these are their assets on which they earn interest income. Against these mortgages, they had to keep a certain level of capital aside to insulate against defaults.

Then, Wall Street invented special purpose vehicles (SPVs) just to buy and pool thousands and thousands of mortgages together. These SPVs raised the money to buy the mortgages by issuing their own securities – the CDOs. Banks were happy to sell their mortgages to the SPVs because it freed up their capital to make new loans.

Basic financial/statistical theory is that it is hard or impossible to predict if any single mortgage will default. But if you have a pool of, say 10,000 separate mortgages, you can be reasonably sure that, say, 98% will be fine and 2% will default. So the SPVs issued CDOs with varying risk levels. If you had a senior CDO, you got paid before everyone else. Of course you also received a lower interest rate than another investor buying a junior CDO, which would suffer first if the default rates were higher than expected, but that interest rate was still more compelling than other alternatives.

Wall Street and the SPVs managed to convince the credit ratings agencies (like Moody’s and Standard and Poors) that the more senior of these CDOs deserved AAA credit-ratings, suggesting they were very safe for pension funds and insurance companies to invest in. And on top of that, a new market in credit derivatives (CDS – credit default swaps) allowed buyers of CDOs to purchase insurance against default.

Markets were working like a dream. Banks rushed to give as many mortgages as possible. Millions of poor Americans who were hitherto considered poor credit risks (sub-prime) became new homeowners, millions of existing homeowners got to upgrade and others were able to “unlock home equity” ie take a mortgage on the rising value of their houses to spend as they wished.

Banks’ profits went up from the mortgages they generated. They didn’t care about the risks because these mortgages would quickly be sold to SPVs. The SPVs had no problems selling the CDOs to investors. Investors were happy because they got higher interest rates on the CDOs, at apparently little incremental risk. Even the junior CDOs did well. Everyone was happy. Investors made high returns and financial institutions and CEOs reaped billions in profits and millions in bonuses.

Then the gears jammed ….

Next (on Wed): Why governments had to bail out the banks

Forex reserves plunged 7% in 2 weeks

Our foreign exchange reserves plunged by or RM26.2bn in the last two weeks of October. This was a 7% fall in just a fortnight, taking our reserves down to RM345.6bn as at 31 Oct 2008.

Given that we are still running a trade surplus, the reserves must have fallen due to capital flows.

Foreign investors had been leaving Malaysia. Data on the equity market is impossible to find, but debt market data shows foreign investors sold RM19.1bn of debt papers in Aug, accelerating from RM4.2bn in July. I’m sure the outflow continues, not helped by inflation at a 26-year high, the government saying the 2008 deficit will be worse at 4.8% (from 3.1% initially forecast) despite record high oil revenues and raising the 2009 budget deficit forecast to what many consider an optimistic 4.8% (previously 3.6%). Foreigners now hold just RM81.5bn of debt paper as at end Aug, down from RM100.6bn in July and the peak of RM126.5bn in April.

Perhaps locals too joined in the exodus. You would be worried if you could be arrested "for your own protection." The ringgit continued to plunge against the US$, down another 2.7% in Oct, after falling 7.3% in the 6 months ended Sept. Yes, it’s true investors have been exiting emerging markets generally, and the dollar is finding unexpected strength, but we are doing poorly even when compared to Thailand. Last month, a bank offered me 8.7 baht to the ringgit. I was shocked. Last year I got 10 baht. I had expected 11 or 12 baht this time because quite literally there was blood on the streets in Thailand.

What does this say for confidence in the ability of the Barisan Nasional government?

RM7bn stimulus plan – effective only if execution is transparent

I am among those who still don’t understand Budget 2009 as presented by the BN government; and I certainly believe its forecasts and base assumptions are way too optimistic. However, the BN is the federal government with a comfortable majority in parliament, so the Budget will be passed. And I may, happily, be proven wrong and the world and Malaysian economy will rebound sharply next year.

So let’s focus on the Budget, and specifically, the RM7bn stimulus plan announced last week by Finance Minister Datuk Seri Najib Razak. A leading investment research house put it succinctly: “.. based on past experience … economic packages introduced by the government have not been effective in preventing the economy from rapidly slowing.”

Let’s look at the plan again, starting with the bits I like.

1) RM1.6bn is allocated to various small scale projects – village roads and community halls, repairing schools …. Excellent. This is the type of spending I advocate – locally oriented with maximum immediate impact to the community and local economy.

2) RM1.0bn goes to education and skills training programmes. Another excellent move. Now is a good time to retrain and improve local employee productivity.

3) RM1.0bn towards bolstering public transport and better facilities for our men-in-uniform. Again, wonderful

So that’s RM3.6bn (about half the package) going to projects that should directly help Malaysians. I say should because I fear for the implementation. Take public transport for example. There have been huge allocations already in the past few years, but the system is still atrocious. Some might say it’s gotten worse, what with LRT accidents!

Taking another case, who decides which private institutions get to run the training programmes? Forgive me for being cynical, but I see many “consultants” and “advisers” already counting their fees. To maximise the impact of these programmes, I call on the BN government to make public the specific project awards and the contractors. Better yet, put the projects out on open tender. Make it easy for anyone to apply. Let’s cut out the middle-men and the “consultants” and “advisors”.

Moving on the bits I am ambivalent about, RM1.5bn is going to building low and medium-cost houses, reviving abandoned projects and increasing the number of business premises in small towns. I fully support decent, affordable housing for all. But there is also a huge overhang of unsold properties. Instead of building more and adding to the supply, how about finding a way to utilise the existing stocks? And what is this about increasing the number of business premises? Commercial property development is best led by the private sector, not government.

Finally, RM1.9bn (a quarter of the RM7.0bn) is earmarked for an investment fund to attract strategic industries and high speed broadband. Government should get out of the business of funding businesses. It’s investment record isn’t particularly good, and entrepreneurs with good ideas should be able to find capital on their own. Government’s role should be to facilitate setting-up businesses – streamline the bureaucracy and cut out the red tape. As for broadband, I would love to have broadband, but I think the cost is over-stated and Telekom, with its atrocious service record, should not be leading this.

So there you have it, only half the package has direct impact on Malaysians, if properly executed; and I would appreciate a report next year on the performance of the investment fund.

Tenaga runs on gas and coal, not oil

Electricity tariffs were raised 24% in June. Oil prices have since fallen dramatically and people are now demanding Tenaga reduce power tariffs. But our electricity is generated using gas and coal, for which prices are still high.

In fact, the main beneficiary of the 24% electricity tariff hike is Petronas, which more than doubled its gas price to Tenaga – to RM14.31/mmBTU, from RM6.50/mmBTU! Besides higher gas prices, Tenaga is also incurring higher coal prices, which at about US$95 today are still 25% higher than the average US$76/MT Tenaga incurred in its last financial year ended Aug 08. The pain will be made even worse by the depreciating ringgit.

Some numbers will illustrate this. That 24% tariff hike will add about RM5.5bn pa to Tenaga’s revenue. Of that, RM5.3bn goes to third parties, leaving Tenaga with just a measly RM200m of the RM5.5bn additional revenue:

1. RM4.2bn (76%) goes to Petronas to cover the increased price of gas;
2. RM1.0bn to cover higher coal prices:
   a. RM0.3bn because of the the US$ increase in price to US$95; and b. An additional RM0.7bn due to the weaker ringgit, assuming an average RM3.70:US$1 instead of RM3.30
3. RM135m for capacity payments to new IPP Jimah.

In fact, by next year, Tenaga will be in a negative situation again because capacity payments to Jimah will rise to RM 700m! If you want lower power tariffs, the appropriate targets are the IPPs which have earned exorbitant returns and Petronas, not Tenaga.

Tenaga is under-appreciated. Its services have improved tremendously in recent years. So tremendously that we don’t appreciate how much effort goes into delivering that stable and reliable power supply. If Telekom were running the power sector, we would still be suffering frequent brownouts (noisy fixed lines is the telecoms equivalent), blackouts (unstable Streamyx connections) and some areas without power at all (sorry, tak cukup kapasiti di sana untuk talian baru).

And yet Telekom gets a RM2.4bn handout of taxpayers’ money to do high-speed broadband while Tenaga is pilloried for high power tariffs which are not its fault in the first place.

If there’s one GLC to target for inefficiency, it’s Telekom. Why do we still have to pay Telekom RM25/month for fixed line ‘rental’? My housing estate was built in the 1970s. Surely after over 30 years Telekom has already more than covered its capital cost of laying down the telephone lines. And then there are the huge issues with Streamyx ….