WE REFER to the letter “Don’t exempt IPPs from windfall tax” (July 18). It should be noted that the statements are in no way supported by facts. We would also like to voice our deep concern that an organisation that claims to represent the views of the public, such as the Consumers Association of Penang, has in this instance taken such a simplistic stance without consulting the industry or having undertaken sufficient research to substantiate the claims.

The letter alleges the following:

» “It should not be forgotten that IPPs have managed to rake in super profits year after year since they came into operation in the 1990s.”

We would point out that given the huge combined investments of RM24.6 billion put in by the 11 peninsula-based IPPs, the returns are commensurate with investments and risks involved, and are consistent with other major infrastructure industries in Malaysia and internationally.

Independent Power Producers have to manage significant operational, construction and financial risks such as price escalation during the construction of power plants, foreign exchange exposure to the cost of imported equipment, subsequent parts replacements to operate the plant during the contract period, and costs and penalties should IPPs fail to meet the commercial operation date and performance standards specified in the PPA (power purchase agreement).

» “Last year, 13 IPPs made a profit of RM3.37 billion.”

The figure quoted is inaccurate. The results of a recent survey conducted by the association of the 11 peninsula-based IPPs, which excludes TNB’s Janamanjung and Kapar power plants, showed that against a combined investment of RM24.6 billion, our combined profit before tax stands at RM2.01 billion, while combined profit after tax is RM1.53 billion.

» “This is because Tenaga Nasional was forced to agree to the overly generous terms given to IPPs in the contracts signed between them.”

The assumption that all PPAs were not negotiated on a level playing field is a gross exaggeration and misrepresentation undeserved of the sector. Industry observers frequently refer to PPAs under a three-tier or generation categorisation, the third generation of which is commonly known to include demand risk sharing with TNB.

Furthermore, TNB continues to be a member of the association and an active IPP through its Janamanjung and the majority-owned Kapar plants. Any suggestion that the company would negotiate against its own interests must therefore be viewed with some suspicion.

» “Since 1997, IPPs benefited from RM27.6 billion in gas subsidies from Petronas.

Petronas, TNB and the public have long been on the losing end because of the IPPs.”

It has been clarified in Parliament that IPPs do not benefit from any Petronas “subsidy” .

Any form of so-called “subsidy” is the res-ult of the government’s withdrawal from the Electricity Tariff Control Mechanism in 1997, due to the increased volatility in international oil pricing experienced at that time and with a view to protecting the people from this instability. TNB was instead compensated with an increase in electricity tariffs, which was further supported by fixing the gas price to the power generation sector at RM6.40 MMBTU.

Our members are contractually bound under the respective PPAs to ensure minimum wastage in the utilisation of fuels. Failure to comply will result in fiscal penalties.

As such, any “benefit” referred to is at no time a form of financial gain to IPPs. In fact, the RM27.6 billion represents the total subsidy given to the people who would otherwise have faced higher electricity tariffs.

Such misrepresentations are detrimental to the industry and its investors. It is our hope that in the future, CAP will contact the association directly for information on the industry or its members.

Dr Philip Tan
President
Association of IPPs in Malaysia

Source: The Sun – July 23, 2008