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Anwar please not again ; it’s threatening

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Once again, Pakatan has pushed a populist scheme that bears little relation to reality.

Instead of offering rational ideas that would benefit the nation, the Opposition has introduced another plan that could only possibly threaten national energy stability.

Their latest attempt to win votes offers to cut power rates – something that sounds very nice on the surface. But it doesn’t factor in countless hidden costs and their ramifications. The entire analysis is built on bad math and a weak understanding of the energy industry.

Earlier this month, PKR’s investment and trade bureau chief Wong Chen said that should PKR ever take Putrajaya, it would cut the prices Tenaga Nasional Bhd (TNB) charges for energy and reduce their independent power producers'(IPP) return of investment (ROI) from 19% to 10%”.

Wong says even if the return of investment (ROI) was at 10%, which is the global benchmark, it was still an “obscene profit” for the IPPs.

But, here’s the kicker: Wong, presumably from the Tony Pua school of figures, isn’t that good at reading financial statements – getting his math very wrong according to some highly ranked IPP senior managers.

One senior executive claimed that Wong’s comments reflect his ignorance of the workings of the power industry. He says Wong’s analysis only looked at one payment to the independent power producers (IPPs) whereas a reputable financial analysis would have studied the entire year.

It gets worse.

“The time value of money, which is basic in financial economics, is ignored in his [Wong’s] analysis – there is a need to consider capital investment made in a year and also the annual earning streams recurring for 21 years, to work out the true ROI, and not just taking into account one payment in one particular year” said the IPP senior manager.

More worryingly, Pakatan’s plan to force IPPs to take a 50% cut on revenues would have serious consequences throughout the financial markets.

Any cut could trigger a loss of confidence in the markets causing defaults in IPP bonds. When investors get the jitters they pull out or hang back which means lower prices across the board and a greater cost of doing business for the rest of us.

However, all the senior IPP managers interviewed agreed that it was important for Malaysia to take steps to manage the impact of an eventual tariff increase.

Pemandu, the government’s efficiency unit, said TNB must raise its tariff rates at least 41% because fuel costs have gone up 200 per cent since 2000.

Even worse, by initiating cheaper tariffs the industry would be artificially supporting energy’s cheap price. Artificial support is not a solid foundation and encourages instability in supply chain security among other problems.

“Under-priced fuel will also discourage investments in ensuring supply adequacy and security. If unchecked, this will result in higher risks of blackouts/brownouts,” said another IPP manager.

Perhaps the RM10 billion a year the Opposition want to spend supporting energy prices could be used for improving education, increasing national security, public transportation improvements and healthcare services.

Instead Pakatan can only offer the rakyat a short-term solution that will have long-term negative ramifications for Malaysia.  – thechoice