Media Statement: Petronas and the IPPS must help reduce power tariffs

Here's my first "official" statement for the DAP ....

Media Statement by Teh Chi-Chang, Economic Advisor to DAP Secretary-General, in Petaling Jaya on Thursday, 22nd January 2009: Petronas and the Independent Power Producers (IPPs) Must Help Reduce Power Tariffs

Our national utility company, Tenaga Nasional Berhad (TNB), has just reported a RM944m net loss in its latest quarterly result for the three months ended November 2008, after accounting for a RM1.4bn translation loss on its foreign liabilities.

TNB reported the loss despite the 24% tariff hike in June 2008. The additional revenue from the tariff hike was utilised to cover higher fuel costs including gas payments to Petronas and higher payments to independent power producers (IPPs).

Therefore, Petronas and the IPPs, not TNB, were the biggest beneficiaries of the June 2008 tariff hike. The 24% tariff hike adds about RM5.5bn per year to TNB's revenue:
1.The bulk of the additional revenue, 76% or RM4.2bn per year, goes to Petronas which more than doubled the price it charges TNB for gas to RM14.31/mmBTU from RM6.40/mmBTU;
2.The other major beneficiary is the IPPs. Capacity payments to new IPP Jimah alone will take another RM700m per year (13%). TNB has to pay these capacity payments even though it has no need for the new capacity at present.

Various parties are now clamouring for power tariffs to be cut to help mitigate the poor economic environment. It is clear TNB cannot afford to lower power tariffs. Not only is it making accounting losses, it is also suffering cash outflow. For the same three months ended November 2008, it suffered a RM164m cashflow deficit.

We are concerned that TNB will have to cut corners on maintenance and upgrading work if it is forced to lower tariffs. Unreliable power supply and frequent breakdowns will adversely affect the economy and business confidence.

Therefore, we call on Petronas and the IPPs to contribute to national interest. We agree that power prices should reflect the cost of production. In Malaysia, the cost of production is inflated by high gas prices and by power purchase agreements (PPAs) which have been termed “grossly unfair” by Tan Sri Ani Arope, executive chairman of TNB between 1990-1996.

Some IPPs have earned returns on capital as high as 40% per year. This is equivalent to recovering their total capital in less than 3 years. The PPAs are for 21-year periods. The IPPs earn pure profit for the next 18 years. We recognise that private enterprises deserve fair returns for the risks they take. However, returns of 40% per year are excessive for IPPs which can usually expect to make only 10-15% in competitive environments.

The DAP calls on the Barisan Nasional federal government to renegotiate these PPAs in the interests of the Malaysian public. Certain PPAs already have clauses allowing government takeover in the event of power industry restructuring. In the event that new, fairer contracts cannot be amicably renegotiated, the DAP calls on the government to invoke this clause to protect Malaysian consumers from further monopolistic pricing. The management of these IPPs can then be outsourced via transparent and competitive open tenders.

I'm taking a Chinese New Year break. Next post will be in February. Happy holidays!

Efficient govt will lower business costs far more than cheap power

Over the weekend, the Real Estate and Housing Developers' Association of Malaysia (REHDA) joined the chorus for reduced electric tariffs. President Ng Seing Liong reportedly said the move was “essential for them to ease their burden in terms of doing business.”

Really, how much of the cost of a house is due to power tariffs? 5% at most? So, even if power tariffs are cut by 20% as REHDA requests, developers' costs will go down 1%. Do you think the savings will come to you and me, the housebuyers? Or will the developers happily pocket the savings as extra profit?

Power in Malaysia is already very cheap – far cheaper than in Singapore, for example. And yet, in Singapore, which its government admits will be in recession this year, no-one is clamouring for cheap power. It is accepted that power is a product for which a fair price has to be paid. Instead, the Singapore government is working on various stimulus packages to help the local economy along.

Back home here in Malaysia, far greater savings could be made if productivity were improved. Take a look at any property development site. Look at the wastage in materials and the inefficient working practices. If REHDA and its members focused on this instead, I'm sure they could find 1% of cost savings. And on the government side, cutting red-tape and smoothening implementation will help developers cut costs too, if they no longer have to employ runners and “consultants” to keep things moving.

Cheap power does not benefit the average Malaysian, and will kill our economic competitiveness. All this focus on cheap power detracts from the real issue – the biggest savings and gains are to be made if the BN government practices Competency, Accountability and Transparency.

Labu LCCT – make it genuinely private

Air Asia boss Tony Fernandez has taken his lobby for a new terminal at Labu on-line. Do take a look.

I personally doubt the practicality of having Air Asia's proposed Labu terminal so close to the existing KLIA at Sepang. The two runways will be only 7km apart. A jet plane coming in to land travels at about 350km/hour, so it can cover this distance in just 1.2 minutes. I am worried about safety issues, compounded by Labu having separate air-traffic control from Sepang. How will they coordinate?

But Air Asia on its website says “AirAsia regards the safety of our passengers and staff as of utmost importance. We will not compromise on this issue”. Taking this at face value, we should certainly support all private sector initiatives that add value to the Malaysian economy, and benefit the rakyat, even more so in these trying times.

Any economically viable low-cost-carrier-terminal (LCCT), whether at KLIA or at Labu or wherever else in Malaysia will help add value to the Malaysian economy. A viable LCCT means many flights, which means more connectivity and greater potential for business and tourism activities. It may also help spur development activities around the LCCT.

The key though, is economic viability. Air Asia believes that its passenger traffic will soar by nearly 60% in the two years to 2010. It expects to carry 15.7m passengers in 2010, from just 10m last year in 2008. I think that's a heroic assumption. Airlines elsewhere all over the world are reducing flights and leaving planes parked on the ground because passenger traffic has collapsed.

But perhaps Air Asia does have a magic formula that can generate such strong growth in this weak environment. And if Air Asia and Sime Darby, as private sector entities, believe enough in their capabilities to put their own capital on the line, we should not stand in the way. However, there must also be NO taxpayer involvement. The BN government should publicly and firmly say there will be no direct, or indirect government involvement whatsover:

1)Besides the cost of the Labu terminal and the runway, the cost of any other ancillary facilities such as new roads and highways to connect to Labu will be 100% privately borne;
2)There will be no government guarantees or reassurances to lenders (like there were for the toll highways);
3)Labu will compensate the government for the cost of providing services such as immigration, customs and air-traffic control (ATC);
4)In the event of Labu being not viable for whatever reason, including passenger growth being less than Air Asia's forecast, the government will not provide any assistance whatsover as it is a pure private sector initiative.

Concession agreements – what happened to motorists' interests?

Whenever a new toll highway was announced, the BN government promised motorists would get smoother rides and faster travel times in return for paying toll.

These promises were never codified in the concession agreements. All the concessions we have viewed so far do not contain any service level agreements. The concession agreements essentially give the concession-holders the right to collect toll in return for constructing the highways.

But what about the main purpose of these highways: convenience for motorists? There are no service level agreements for the concession holders to comply with. So you and I are now stuck in traffic jams, pay toll and get stuck in jams again, and there appears to be nothing we can do.

We paid the toll. The toll fee is supposed to buy us a product - smooth travel. The concession-holders did not deliver the product (smooth travel) to us, even though we have paid. Quite clearly this is an injustice. The BN government should step in to redress this state-of-affairs.

Unfortunately there is no scope within the concession agreements to demand compensation. But the government can apply moral-suasion and appeal to the concessionaires to behave as good corporate citizens. Here's the logic:

1)It is clear traffic on the toll highways is well above expectations. The number of cars using the highways far exceeds the concessionaires projections. The highways were not built to carry so much traffic. That's why we have to endure traffic jams.
2)Because the traffic is above expectations, the toll companies must be collecting far more revenue than they expected.
3)This excess revenue does not “belong” to the toll companies. They have not provided the expected service – smooth traffic flows – in return to motorists.
4)This excess revenue should either be: (a) returned to motorists in the form of toll discounts (lower toll rates x above-expected traffic flows = same revenue as projected by the concessionaires) or my preferred alternative: (b) collected by the government and used to improve public transport. Of course, if (b) is done, there must be transparency in the total funds collected and how they are actually used.

Do you agree? If you do, write to the Works Minister and and make the above suggestions.

Viewing highway toll concessions – back to the pen-and-paper age

I joined DAP MPs Tony Pua and Nie Ching at the Works Ministry on Friday to take a look at the highway toll concessions that were recently declassified.

The civil servants were civil and polite but had to enforce archaic conditions. Besides the fact that each person can take only one agreement at a time for two hours, we are not allowed to use notebook computers while viewing the agreements! So there we were, about 14 people in all, taking notes the old-fashioned pen-and-paper way. This in a premises with Wi-Fi!

I appreciate the BN government making the agreements public – at least we can now discuss these without the Official Secrets Act (OSA) hanging over our heads. But I would point out salient points have never really been top-secret in the first place – pertinent details are available in Rating Agency Malaysia reports, and have also been given to bankers and analysts as the toll concessionaires raised borrowings or listed themselves on Bursa Malaysia.

Also, the very restricted viewing arrangements are hardly conducive for proper analysis. It would be far more useful if we could make copies of the concessions for thorough analysis instead of having to go to the Ministry every time we need to confirm something. In this internet age, surely the documents can be made available on-line. Or at least, provisions should be made for the public to buy hard copies.

The current arrangements also mean that, practically speaking, the documents are public only to Klang Valley residents. Someone staying in, say, Ipoh can hardly be expected to travel all the way down to KL just for a 2 hour viewing; and even then, he may not get to view the concession he's interested in if someone else has already taken it! There is only one copy of each agreement.

For the benefit of the 15m Malaysians who don't live in the Klang Valley, how about truly making the documents public, Mr Works Minister? Post them on the internet.

On Wed – some of my thoughts on the concession agreements.

Private hospitals = licence to over-charge

I was appalled when the BN government tried to privatise Institut Jantung Negara. I am all for government getting out of business. But medical care should not be a business.

We deserve competent, reliable medical care at reasonable prices. But that has become increasingly hard to find as the BN government disregards its healthcare responsibilities. The result – highly lucrative private hospitals, profit-driven doctors and astronomical medical bills.

This is my unfortunate recent experience at a private hospital in Kuala Lumpur. The bill was covered by medical insurance, but it still left a very sour taste in my mouth as I felt completely exploited and taken advantage of by the hospital.

Yes, it is a private hospital, and private entities are entitled to make fair profits. But this hospital was gouging the patients. It certainly wasn't making an honest profit because it 1) Forced patients to accept unnecessary services and 2) Over-charged for medical supplies. Besides which it was clearly not operating efficiently.

Operating efficiently can be a matter of perception, so let's stick with the facts, stating with the unnecessary services forced on patients:

a)After registration, a porter escorted us to the relevant hospital department. We were shocked when told this was compulsory. Why? Surely the hospital sign-posting is clear enough for two able-bodied adults to find their own way. Why pay someone just to do this? The savings can go towards cheaper medical bills;
b)On arriving at the ward, the nurse was very insistent on us ordering a “Complimentary meal”. Who are we kidding? The cost of the meals is surely built into the hospital charges. Meals can be made optional. Some patients coming out of anaesthesia simply cannot consume any food, some prefer home-cooked food and some wish to just go straight home-sweet-home. Waiting for a hospital meal just means more unnecessary time in the ward, which means more costs;
c)Which brings me to an interesting point. The hospital in its “Conditions of Service for Inpatients” says it will take “approximately an hour to process the bill”. Also, it says, “half day room charges are applicable … if patients are discharged after 12:00pm”. My question: if the doctor gives the patient clearance to go by 11.15am but the hospital only produces the bill at 12.15pm, is the patient liable to pay the extra half day charge? And is this why the nurses are so keen to have the patients eat the “complimentary meal?”
d)Then, there was a “complimentary” toiletry kit at the bedside comprising a plastic water jug, small towel, shampoo, soap, powder, comb, toothbrush, toothpaste and toiletry bag. That “complimentary” word again. How about just having the convenience store downstairs stock toiletries at reasonable prices?
e)And finally, two bottles of “complimentary” water. Again, unnecessary cost, not to mention the environmental impact. Surely the hospital can instal water coolers;

The gouging does not end there, Besides the unnecessary items, the hospital over-charges for medical supplies. Just two examples: a) RM10 for a pair of surgical gloves. A quick search on the internet shows US$90 for 200 pairs, or about RM1.70 per pair. The hospital was charging 6x as much!; b) RM3 for cotton buds. The doctor used the grand total of 3 sticks. I think I can buy an entire pack for RM3;

The over-charging was clear only because I asked for the detailed bill, which, by the way, took 10-15 minutes to produce. The hospital usually just gives a summary bill, which presumably most patients just sign because it's covered by insurance. Isn't it normal, good business procedure to show the detailed bill when requesting payment?

Even with the detailed bill, three items were not adequately explained (i) gaseous supply; (ii) medication; (iii) nursing procedure. We did not use any gas, nor take any medication and there was no observation by the nurses.

Private hospitals are taking advantage of a captive, disadvantaged market. People who are ill just want to get better. They don't have the time or energy to shop around or argue. This is when new laws are appropriate – to protect the weak and level the playing field. The BN government, instead of chasing poor families to belt-up, should come up with a law to force private hospitals to clean up their acts.

Until it does, you and I end up paying for the higher costs and the unjustified profits. You don't notice the cost at first, because it's covered by your medical insurance. But the insurance company needs to make money too. Ever notice how your medical insurance premiums keep going up? It's in our interest to keep private hospital charges fair.

Some insurance companies have been pushing the hospitals to be fairer. Help them to help you. If you have a similar experience and agree with me, write to your insurance company so they have the facts to help them negotiate.

US home prices plunged a record 19% yoy in October

Home prices in the 20 largest US cities plunged a record 19% in October 08 compared to a year ago. Compared to the previous month, Sept 08, they were down 2.2%. This is based on the Case-Shiller home price index released by Standard & Poor's of New York. David Blitzer, chairman of S&P's index committee noted that home prices are back to March 2004 levels.

Watch out for more troubles at US banks, including Citi. The US government's Nov 08 bailout package for Citi includes backing for US$306bn of property-related troubled loans and securities. But remember the fine print – Citi is responsible for the first US$29bn of losses. That can be quite easily incurred with just a 10% haircut on the US$306bn total; while residential property prices are already down nearly 20%. I'll bet Citi will be looking for more capital injections again this year.

There will be plenty more holes for Citi to fill. The US$306bn is only a small portion of Citi's total assets. Citi has another US$1.7 trillion of “assets” on its balance sheet, “assets” which include credit card, auto, small-business and personal loans. On top of that, there is about another US$1 trillion of “assets” not on the balance sheet (yet!) but in various special-purpose vehicles.