Electricity tariffs down – another RM3.5bn pa wasted

One week after BN's deeply unpopular move to wrest control of Perak comes a crowd-pleasing reduction in power and gas tariffs. You might be happy to hear your monthly electricity bill will be cheaper, but don't let the BN fool you. You got a mere few crumbs. Politically-connected and influential entrepreneurs got far more, all at the expense of our long-term future.

Let's take a look at the power tariff cuts first, The average tariff reduction was 3.7%, but the biggest winners were industrial users who will see their bills come down by 5%. Commercial users benefit from a 2.7% average cut while domestic consumers, ie you and I, bring up the rear with a 2.4% reduction.

It is thanks to Petronas that we will enjoy the lower power bills. It is now charging the power sector RM10.70/mmBTU for the gas used to produce electricity, down 25% from RM14.31. Petronas also instituted a deeper 32% cut in the gas price to industrial users – it is now down to RM15.00 from RM22.06/mmBTU.

I'll reiterate here that I am against blanket cheap power and fuel. Across-the-board tariff cuts benefit even those who don't need or deserve the support.

Consider one beneficiary: Top Glove, the world's largest glove maker. Its chairman Tan Sri Lim Wee Chai reportedly said the company will pass on most of the savings to its customers ie foreigners! On top of that, he maintained the company's 15-20% profit growth target for the year. So, even without the cut in gas prices, Top Glove was already expecting 20% profit growth. Does it need or deserve a fuel subsidy? Bear in mind half its workers are foreigners too! All we have done here is reduce Petronas's income, and made some foreigners richer.
(The Edge 13 Feb 09, pg 8)

Elsewhere, investment analysts have been busy upgrading their profit forecasts for steel and cement producers, by as much as 30%. There had been no hint in the past that these steel and cement producers were in danger of going under. Investment analysts were still maintaining profit forecasts for these groups. And now I've been proven right – the cheaper power does not flow through to Malaysian workers, it goes to increased profits.

I estimate the gas price cuts cost Petronas RM3.5bn pa. Rather than enriching entrepreneurs in low-value added low-margin industries, this sum could be better deployed enhancing Malaysia's competitiveness. Here are two alternatives:
1)Set up a fund to pay allowances to and retrain c. 80,000 retrenched workers (assuming RM9,000 retraining cost per worker and RM3,000 allowance per month for the worker for one year). The multiplier effects of this across the economy will be so much higher. People will be willing to maintain consumption if they know there is still some sort of safety net should they be retrenched.
2)Set up a body to help manufacturers and industrialists improve their energy efficiency. Funds can be provided for one-time purchases of energy efficient equipment.

As it stands now, this power cut reduction is another example of poorly thought policy, spending our scarce resources inefficiently. An average 3.7% tariff cut does not make a big difference to any one user. The Associated Chinese Chambers of Commerce and Industry Malaysia has itself pointed this out, saying “.. it is a dismal reduction ...”

Plugging leakages at the BN government itself and reducing the cost of doing business should lead to similar savings. But BN is busy politicking and entertaining double-crossers and politicians with outstanding corruption charges.

Perak imbroglio another indictment of Barisan's poor ethics

I was about to post a blog on stimulus packages, the inept delivery of even the modest RM7bn initial stimulus announced last year and how we can emulate some of what Singapore proposed in its Budget for 2009. But the turn of events in Perak makes this moot.

The Barisan Nasional (BN) is quite clearly still focused on politicking and seeking to wrest, by hook or by crook, what the people don't want it to have – the right to govern in 5 states in Malaysia. Rather than using its vast majority in Parliament – just 8 seats short of 2/3rds! - and all the resources it controls as Federal government to help Malaysia navigate this global economic storm, it is still politicking, nearly one year after the general elections.

Some would blame Anwar and PKR for starting this cross-over nonsense. I agree, and it is also the DAP stand, that individual cross-overs are unethical and a betrayal of the will of the people. In our political system, we vote for the party as well as the individual.

The mainstream media is trotting out comments by various “experts” justifying party-hopping. Their logic is it can be OK for MPs and assemblymen to hop because it is difficult to tell what exactly the people voted for – whether the individual or the party.

Against this argument, I have one simple question: Would these cross-over reps have been elected had they stood as independent candidates? Highly unlikely. Therefore, if they had truly lost faith in their respective parties, the honourable thing to do is to resign, join the new party and seek re-election again.

Right now one could be forgiven for casting aspersions on their motivations for hopping. We might be able to accept the hopping if they gave good, clear reasons why they chose to hop. What has changed in PKR and DAP between then and now to cause them to revisit their allegiances? Are they privy to bad practices that we, the rakyat, do not know about? In that case, it is incumbent upon them to bring these to light. But there have been no such statements.

Also, consider the willingness of BN to accept two assemblymen with pending corruption charges. What signal does this send?

Air Asia says: We'll take your money, even if we chuck you off the plane

I recently booked an Air Asia flight/holiday. The email confirmation sent by Air Asia did not carry sufficient details. You know Air Asia imposes a variety of charges. Air Asia's marketing speak calls it 'consumer choice' – you pay only for what you want. I think there's a fine-line between consumer choice and price gouging which Air Asia has crossed, but that's a different story.

Anyway, I went to Air Asia' Terms and Conditions of Carriage to see if check-in luggage was also a 'consumer choice' item or already included in the fare.

That's when I came across this very unfair clause:

“6.1.3 Unavailability of Seat: There is a chance a seat may not be available for you on your flight even if your booking is confirmed. This is due to the common practice in the airline industry of overbooking. In the event of such unavailability of seat, we shall at our option, either:
* carry you at the earliest opportunity on another of our scheduled services on which space is available without additional charge and, where necessary, extend the validity of your booking; or
* should you choose to travel at another time, retain the value of your fare in a credit account for your future travel provided that you must re-book within three (3) months therefrom.”

Yes, overbooking is a common airline practice. But common airline practice, in the event that they do have to off-load passengers is to 1) ask for volunteers; 2) compensate the volunteers via cash payments and seat upgrades on the next available flight or3) even cash payments on top of full refunds of their airfares.

Air Asia's terms are extremely unfair. You, the customer who has already paid, will not get the flight you want. On top of that, you can't even get a refund! It's Air Asia's choice to put you on a later flight (too bad if it means the meeting you were going for would have already ended) or give you credit for another flight, which is valid for only 3 months! (too bad if you can't get leave again). No cash refund for you, even though it is Air Asia that is not delivering on its contractual obligation.

OK, some will say, if you hate it that much, then don't fly Air Asia. You have a choice not to fly Air Asia. But there are also grounds for government to step in here and legislate in the event businesses take undue advantage of small consumers. I remember an Unfair Contract Terms Act in the UK governing this. Any lawyers here to add more colour on this subject?

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.