So, in actuality, it was not easy for Maju to finally get Perwaja. Apparently connections will only get you so far. Maju has a huge advantage over other bidders in that it has placed a RM120m deposit with Ministry of Finance and that it had been managing Perwaja since mid-1996. Unbelievably, there was even a proposal by some internal government whiz kid that they should package Perwaja together with Antara Steel in Johor and National Steel Corp (the steel company in the Philippines controlled by the Malaysian government) . A Swiss party had expressed interest in taking over all three steel mills. The proposal was basically to save Malaysian government from the sticky and thorny problem that is the NSC. The government wanted to solve a few problems in their steel portfolio in one fell swoop.
At its height, Perwaja was losing RM40 million a month. When Maju took over, its losses were trimmed to RM10 million a month. Now the losses are said to be less than RM3 million a month. Perwaja's predicament is shared by the steel industry as a whole. The economic crisis pulled the rug under the feet of the major players. Even established producers like the Lion Group is grappling with unresolved debts of RM10 billion. Perwaja, even back in December 1995, had accumulated losses and liabilities of RM2.9 billion and debts of several billion more. The government's involvement then, in the form of loans, capital and bank guarantees, was RM5 billion. Perwaja, which is grossly over-staffed, has 2,300 workers but only needs less than 1,000 (in the late 90s). It is only operating one shift due to the reduced demand. Maju is said to be proposing to reduce the workforce by 55 per cent but the government did not go for it.
Maju has submitted a plan to the MoF to reduce Perwaja's operational losses. The plan includes exporting the billets from Kemaman to neighouring countries and sourcing billets from steel manufacturers in the northern region for the Gurun plant to reduce transportation costs. Maju's plan also entails an upgrading of Perwaja's facilities to produce high quality billets and wire rods. Perwaja's most successful product is structural steel. The Gurun plant is one of the few in the region with the facility to produce structural steel. However, it faces stiff competition from imported structural steel coming in from Thailand.A sore point was that the government has paid RM5.68 billion in loans owed by Perwaja since 1998. The ACA has only managed to trace RM76.4 million.
Maju Worked Hard To Rejuvenate Perwaja
From 2001 to 2004, Maju Group basically dug in their heels to rejuvenate both plants under Perwaja. Thanks to a strong recovery in steel prices, Abu Sahid and his team basically knew it was time to cash out and reduce risk after slogging for over 9 years to get Perwaja this far. In November 2005 Kinsteel Bhd has forged a strategic alliance with Maju Holdings. both parties will manage Perwaja, according to a joint statement from the companies.
The deal involves Kinsteel acquiring 51% equity interest in Perwaja and 51% equity interest in Maju's Gurun assets, consisting of a bar and wire rod milling mill, beam and section mill, wire conditioning, nail processing and wire mesh factories with total annual capacity of 1.1Mt. Maju would retain 49% equity interests in Perwaja and the Gurun assets and acquire a substantial stake in Kinsteel.
The rest was a fairy tale as Kinsteel caught a brilliant wave alongside the meteoric rise in commodity and building materials' prices over the last 2 years. Now Kinsteel wants to list Perwaja Steel - yes, buy, merge, fix, then list ... in these kind of situation its best to be cautious, particularly when Kinsteel has been a brilliant performer over the last 2 years.
Perwaja's IPO@2.90
a) The IMF estimated asset write-downs resulting from the 2007-2008 credit crisis to be US$1.1 trillion. By most estimates, only half has been written down so far. In all likelihood, corresponding to defaults on 20% to 30% of home mortgages, we should be looking at another US$500 billion in writedowns. (8% of 2007 GDP)
b) U.S. national debt of US$4.4 Trillion. This figure is obtained from the “Long-term Financial Outlook”, U.S. Government Accountability Office, Jan. 2008. The risk is high that the national debt will continue to grow through deficit spending for many years to come. This gigure is likely to continue to grow in the coming years. (31% of 2007 GNP)
c) The unfunded liability of the Social Security System is estimated to be US$6.7 Trillion (Government Accountability Office, Jan. 2008). Thats the problem with having a lot of social safety nets that is not properly funded. (48% of 2007 GNP)
d) The unfunded liability of Medicare is estimated by the Government Accountability Office to be US$34.1 Trillion. This is the motherlode. One can argue that the liability will be funded over a very long time, but the amount will also grow as well. (347% of 2007 GNP)
e) The cost of imported oil. Despite all the hoo-hah, oil is one of US smallest problem. Yearly import cost is between US$825 billion to US$1 trillion. The danger is if the cost of oil were to go to US$180 in 3 years and the American consumption patterns does not change, then we are looking at maybe US$1.8 trillion. (6% of 2007 GNP)
I am glad that there are plenty of intelligent readers out there and their comments on many issues are quite enlightening. Here are a few on "oil strategy" which is worth reproducing here:The pictures you posted and together with the music are really refreshing. I like it. The fast retreat of oil from US147 to 124 per barrel is a good indicator that we have seen the peak of oil which is likely to remain unsurpassed for at least the immediate future.
As to whether 120 will be breached, it may not be able to do so in its first attempt.
Crude oil prices 'could hit $170 per barrel'. Prices for crude oil could rise as high as $170 per barrel this summer, according to the president of Opec. Chakib Khelil, predicted the increase from their current levels of around $134 per barrel in an interview with French television station France 24. He told the broadcaster: 'I foresee prices probably between $150 and $170 this summer. 'That will probably decline a bit toward the end of the year.' According to Mr Khelil among the factors set to influence the predicted...
Raising the rate will not change inflation as it is a supply driven not Demand driven inflation. And if indeed the oil price and other commodities are on the way down, why raise rates now? I think Zeti is doing a better job than Ben ! or Greenspan. Traditional economic theories are no longer accurate in times of uncertainty like now. Look at the Eurozone. Is inflation coming down after ECB raised the rates? NOPE.
Note the timing of collapse of the oil trader in US and the reversal of oil futures a few weeks ago. Reported in The Edge recently. And Congress is debating 12 bills on measures to curb energy speculation. What would u do if u are a hedge fund? U take profit in case the Congress actually pass any of the law - since u have no idea of the outcome of the debates.
Net Long positions have dropped by more than 10% in the last few weeks alone from 1.36m to 1.21m. [The Edge] If LONG squeeze happens, oil may crash through USD100. There is no safe asset class anymore. Liquidity - the SWFs and a lot of mutual funds are sitting on piles of cash. Not the banks anymore.
Windfall tax on commodities, why not? But Windfall tax on IPPs? Come on. While many are focusing on the wealth amassed by IPPs due to the lopsided agreement sign years back. Many aren't bothered by the fact that a contract should be respected by all parties involved. It would seem the people wouldn't mind a contract being changed forcefully in this case if it is in their benefit. May I remind everyone the Constitution of Malaysia is also a form of contract. And do you think people would agree if their arms are twisted to accept a new constitution that don't benefit them? Myanmar comes to mind here.
While democracy enshrines the appeasement of the majority, being among the bigger crowd doesn't mean they are not wrong in their judgement and thinking. IPPs are not enjoying a windfall in profits anyway at the moment, but they are completely shielded from the costs while the common people are suffering from it. That is the reason why they are unpopular. Without upholding the integrity of a contract, why bother with it anyway if the other party's arms can be twisted whenever it suits the government to sign a new treaty.
Anonymous said...The returns for IPPs are in a way agreed between the IPPs and the relevant parties in this case TNB when the agreements were signed. Although the terms of the IPPs favours the IPPs, this cannot be used on as an excuse to impose windfall tax or to force renegotiation of the IPP contracts. Even if the IPPs make more profits from what was planned earlier, it can be due to the efficiency of the IPPs and surely you cannot penalise the IPPs for that. If that's the case where is the motivation and incentive to do better? This may lead to more wastages. Sanctity of contract is important to continue attract investments and is critical for investors's confidence and believe in the system.
Salvatore_Dali said...skid and anon,
yr contention is on the contract part of things ... the gov is not NOT honouring the contract but imposing a windfall tax because they benefited from "positive developments in the sector" which affected the livelihood and caused dislocation in some other parts of the economy ... if we use that argument then windfall tax cannot be applied to any kind of companies or sector... because there is contracts and there are implied contracts ... these are fiscal measures which the gov is allowed to do, you cannot hide behind contracts, these are measures over and above ...
does it mean gov cannot raise corporate tax now? surely they can... windfall tax is akin to an increment in corporate tax ... can the gov raise export duties for certain sectors as it sees fit, surely they can... its the same principle ... u can go on and on with import duties, real prop gains tax ...fiscal measures r fiscal measures ... by asking the IPPs to come back to the table to renegotiate may be tantamount to coercion or blackmail i agree .. but there is very little justification to say u cannot impose windfall tax because u signed a contract... the contract does not protect u from fiscal measures just as CPO companies has no protection from windfall tax
Anonymous said...Agree that govt can take fiscal measures etc but windfall tax should be a tax on a windfall. Are IPPs getting a windfall? One may argue that getting the contract itself is a windfall but clearly that is a separate issue/matter altogether. Will agree that plantations and other commodities are having a windfall due to abnormal circumstances and windfall tax should be imposed on them.
skiddtrader said...Dali,
I have no qualms with taxing corporations who suddenly find themselves with windfall profits such as plantations. Even the US is thinking about taxing their mega oil companies extra. But while the commodity sector experience a sudden "positive developments in the sector" to use your quote, IPPs have not experience this. Instead they are actually immune to the sudden "Negative developments in the business environment", which are being felt across the globe.
A contract between companies never are immune to fiscal measures by the government, but in this case the other party in the contract is actually the government themselves. And thus the sanctity of contract is violated in this scenario. The action to levy the IPPs is NOT directly dis-honouring the contract, but implying that it is levied because the IPPs did not re-negotiate with TNB is in all its means, un-ethical.
How can businesses actually trust any contracts or agreements signed with the government if they know they can be back-stabbed any time the governments feels like it. I'm not saying what the government did is illegal in the eye of the law, but it is completely unfair, un-ethical, short-sighted and more of a popular measure rather than an economic one.
Salvatore_Dali said...skid,
i can understand yr stance n u have some strong points, and in an international court of law u prob will win...
yes, its a contract... the contract is based on certain parameters and assumptions, e.g. cost structure, ... we have to be aware that much of the cost structure is already subsidised by the gov... the gov has been short sighted with that part, no doubt about it... is it unethical, probably not because the public is bearing less subsidy now... the contract basically allows the IPPs to continue to be subsidised at the old cost structure .... every single company and citizen in Malaysia has to bear the higher cost of fuel... can or should the IPPs hide behind the sanctity of the contract? Its debatable..
Is the gov unfair, yes a bit...
Is the gov basically blakmailing the IPPs to renegotiate, prob yes...
Is that unethical, not really if you take all decisions as being equitable, i.e. winners and losers in every economic decision = to tax the IPPs would yield a positive benefit to the nation, yes at the expense of IPPs...
Does that minimise the sanctity of gov contracts, unfortunately yes...
but I am not losing sleep o ver it, its not like the IPPs have been railroaded here, they have a very lucrative contract that was badly negotiated and rushed by the previous gov..., in fact the ex CEO even resigned because of that...
Windfall tax is a tax levied by governments on certain industries when they experience above-average profits or windfall profits as the term suggests, due to economic conditions. They are primarily levied on companies in the targeted industry that have benefited most from the economic windfall; most often they involve commodity-based businesses. Through the proceeds from the windfall tax, governments are able to bolster funding for social programs.
The flip side – its opponents claim that such taxes reduce companies’ initiatives to seek out profits. They also believe that the profits should be reinvested to promote innovation that will in turn benefit society as a whole.
IPPs – contentious issue
Windfall taxes will always be a contentious issue debated between the shareholders of profitable companies and the rest of society. The recent 30% windfall tax that was imposed on Independent Power Producers (IPPs), according to some, should be reviewed due to its wider implications on capital markets.
IPPs, which finance the construction of their power plants through the issuance of bonds, might see a reduced cash flow due to the tax payment. CIMB Group chief executive Datuk Seri Nazir Razak had said that the tax would affect raising funds for future infrastructure projects. IPPs accounted for 21% of all ringgit-denominated bonds issued.
The windfall tax, effective July 1, will be 30% of earnings before interest and tax (Ebit) that is above the 9% threshold on return on assets (ROA).
Penjanabebas, an association of 15 independent power producers, warned the levy could affect their ability to meet loan obligations. It said the sector issued bonds and loan notes estimated at RM20bil in 2006 and the new tax could lead to a downgrade of their bonds.
Nazir added: “There are no winners in this IPP windfall tax because ... borrowing costs in Malaysia will go up and further increase incremental cost of borrowings to the government and corporates. The higher cost of borrowings will far exceed the money that they (government) hope to raise from the IPPs windfall tax”.
Palm oil gets hit
Under the Windfall Profit Levy Act 1998, a windfall levy would be imposed on crude palm oil (CPO) and crude palm kernel oil (CPKO) when the prices are in excess of the threshold of RM2,000 per tonne.
Under the proposed windfall tax framework, palm oil producers in peninsular Malaysia would be charged tax amounting to 15%, and 7.5% for Sabah and Sarawak.
At the same time, the Government is also abolishing the existing cooking oil cess from July 1. However, the price of cooking oil will remain the same as it will be subsidised by proceeds from the windfall taxes.
The Government said plantation companies in Sabah and Sarawak were charged a lower windfall tax as they were already paying sales tax to their respective state governments.
Strangely and in stark contrast to the reaction from power players, not many palm oil companies were up in arms when the government levied windfall tax on CPO.
Utilities and plantations – the difference
It is safe to say that the windfall tax may be unfair to IPPs as they had raised funding for their business, while on the other hand, CPO companies generally invest from retained earnings.
Hold that thought. Does that mean that if CPO companies were to switch their capital requirements strategy to bonds, would it make the windfall tax inequitable to them as well?
This is my humble opinion. On paper, singling out industry sectors and corporates to pay up arbitrary taxes makes little sense. However, I would agree to a windfall tax if certain developments cause certain sector/companies to make supernormal profits and due to these developments, it has a direct and negative effect on a wider strata of the nation.
However, slapping tax arbitrarily on any sector that makes supernormal profits is not the way to go. The government needs to clearly explain the windfall tax and the actual disbursement of the income generated from such taxes.
It ought to be used directly to alleviate the “suffering and dislocation” triggered by the very developments that these companies and sectors have benefited enormously from.
On that premise, it may be easy to justify the imposition of windfall tax on CPO companies and IPPs.
Crying crocodile tears
Tariffs in Peninsular Malaysia are not subsidised.
Yet both TNB and independent power producers (IPPs) are profitable and credit-worthy. IPPs began selling to the national grid in late 1994 and today five IPPs account for around 35% of installed generation capacity in Peninsular Malaysia.
As these IPPs are virtually risk free (courtesy of long-term power purchase agreements – PPA) and profitable, the IPPs based in Peninsular Malaysia have agreed to contribute 1% of their audited annual revenue to a special fund – the Malaysian Electricity Supply Industry Trust Account (MESITA) in the 1997 –2000 period.
As part of its trust deed, the MESITA funds could be used for 5 approved activities and among them are energy-efficiency program and energy R&D.
The windfall tax is supposed to kick in ONLY IF their rate of return exceeds 9%. As such, the hoopla over that hitting IPPs fund raising activity in the future and that of other infrastructure projects, in my opinion, is a bit over the top.
Genuine bond investors who understand fully that the windfall tax would kick in above the 9% rate are likely to shrug their shoulders.
The main interest of bondholders is to get their money back, plus interest. Even if these IPPs were to make a rate of return of 6%, bond investors would be happy as they do not participate on the upside profits of the company. However, the windfall tax formula should be based on after EBIT has been deducted for interest paid out - that would be more equitable.
But on one aspect, I would side with the IPPs – the tax should not be recurring.
If the tax was recurring, the taxable amount would increase over time as net fixed asset falls, especially for IPPs with big-capacity plants like the 2,400MW Tanjung Bin plant and the 1,400MW Jimah plant. That would make little economic sense.
In that case, and if it’s not going to be one off, the government should adjust their windfall tax accordingly. For example, in 2008, 30% above 9% ROA; 2009 only on ROA above 10% and 2010, on ROA exceeding 11%. Even so, the time frame should not be over a prolonged period, one to three years is about right.
With that, for future infrastructure projects, I doubt very much that yields would go up solely due to the windfall tax issue.
Firstly, it’s not something completely new and alien. We have done it before and many countries have done it before without dire consequences. It just ought to be well planned and justifiable.
Secondly, the windfall tax would only kick in at supernormal levels which should not concern bond investors. If anything, it should concern the shareholders of IPPs more, not the bond holders.
But again, this is important – the government needs to clearly articulate that the windfall tax (es) will be used to alleviate hardship caused directly by the developments which have brought about the windfall in the first place.
Some say that the windfall tax may create a perverse incentive for mis-declaring profits. Well, that is a whole different kettle of fish but I believe we have in place appropriate rules and regulations to deal with that.
Narrow window
Generally, there is only a very narrow window when windfall tax is justifiable.
Investor confidence could be derailed if these taxes are perceived to be arbitrary and irrational. If that happens, risk premium is likely to rise for the entire market place.
The group that most affected by windfall tax is shareholders of the companies affected.
Their loss is equal to the actual windfall tax collected. The loss will be reflected in lower share price. For example, investors may have bought the stocks on the assumption of rising CPO prices or iron-clad agreements with IPPs, which paint a rosy earnings outlook picture. To penalise these investors may be unfair.
Intriguingly, there has been very little “noise” on the adverse impact such windfall tax would have on shareholders but a lot of hue and cry on the implications for bondholders.
Why treat shareholders with such dismiss while at the same time, molly coddle bondholders?
Windfall tax on gaming?
There are rumours that windfall tax will also be imposed on gaming companies. Such a move would be clearly arbitrary as gaming companies had nothing to do with or benefited from the oil price or commodity price surge. To do that would wreak havoc on the valuation and integrity of a properly functioning stock market. Yes, the government could easily raise taxes on gaming, but please don’t refer to it as a windfall tax. If that’s true, then gaming companies are likely to be whacked in the coming budget.
But what is truly fair?
In a booming property market, the government may impose a 50% additional property gains tax on property sales, or impose a restriction that one must hold a property for at least 12 months before selling. Is that fair? At the same time, it could be deemed equitable for the long term interest of the sector and economy.
I do not believe there exists a truly free market economy anywhere in the world. That only exists in economics theory. This is why – for every single fiscal decision made by the government, there will always be winners and losers.
photos: Maggie Cheung Hor Yee
The catalyst for higher equity prices appears to be that President Bush will sign Congress’s housing bill, which solidifies support for the mortgage guarantors Fannie & Freddie, both of which are rising sharply. Even troubled banks like Wachovia Corp was up 6.2% after a 29% gain on Tuesday on the back of a quarterly report which detailed major losses at the firm.US Treasury Secretary Paulson was confident that Congress would approve his housing rescue plan this week and so far they are moving forward as planned. The plan is to pass the Housing Bill before August recess that includes provisions to extend credit lines to Freddie and Fannie, Treasury purchase of equity stakes and a new regulator. Bill would extend FHA guarantees to refinance $300 bn fixed-rate mortgages for 400k homeowners w/ negative home equity as lenders take a 15% hair cut on principal; its cost would be recovered by profits of Fannie, Freddie and FHA fees on lenders/borrowers with some adjustments.
"We need to act in the short term because the [government-sponsored enterprises] are vital institutions in our capital markets today and are vital to emerging from the housing correction." Mr. Paulson said his "highest priority" is to stabilize the financial markets and financial institutions, which have been suffering this year in wake of the subprime mortgage crisis and related credit crunch. "Today our No. 1 priority is market stability as we work through the current market stress," he said.
As part of his efforts to stabilize the financial system, he said he had no choice but to ask Congress for new authorities to prop up battered mortgage finance giants Fannie Mae and Freddie Mac. "I would rather not be in the position of asking for extraordinary authorities to support the GSEs," he said. "But I am playing the hand that I have been dealt."
Meanwhile, Mr. Paulson said continued stresses in the financial markets should be expected until the housing market fully stabilizes. Still, he said the failure of IndyMac Bank shouldn't lead people to believe the U.S. banking system is at risk. "The American people have every reason to remain confident that the U.S. banking system is sound," he said, adding that 99% of the country's banks are well-capitalized. He added that periods of economic difficulty aren't new. "We will work through this period, as we always do," he said.
At the same time, he urged banks to continue to raise capital, noting that U.S. financial institutions have already raised more than US$150 billion. Mr. Paulson said it will take "additional time" to work through the current market turmoil as the markets and banks reassess risk and re-price securities across a number of asset classes and sectors. Meanwhile, "additional bumps in the road" can be expected," he added. Mr. Paulson highlighted the need for improved market infrastructure and increased transparency, especially in the over-the-counter derivatives market and the tri-party securities repurchase system. He also said "we need to get to the point where large, complex financial institutions are not perceived to be too big or too interconnected to fail."
The Treasury secretary also called for new powers to manage the impact of the failures of large non-depository financial institutions, such as large hedge funds. "Over the last few weeks, the need to move more quickly toward an optimal regulatory structure that establishes a prudential financial regulatory system, focused on promoting long-term market stability, has become all the more apparent," he said.
Bill Gross, who manages the world's biggest bond fund (Pimco, a unit of Munich-based Allianz SE, has US$830 billion of assets under management.), said it's not possible for government sponsored mortgage-finance companies Fannie Mae and Freddie Mac to raise capital without the Treasury Department's support. `Let's be blunt: to the extent the Treasury suggests they'll never have to use their authority, that's a sham,'' said Gross of Pacific Investment Management Co. ``It's fallacious to suggest that the agencies could issue capital, preferred stock, without the co-participation of the Treasury. I don't think that's possible.''``To suggest that the Fed or a central bank should raise interest rates in the face of a significant asset deflation, a significant housing deflation, is certainly the wrong approach, to put it mildly,'' Gross said. An increase in the target rate for overnight lending between banks amid rising unemployment ``would be tantamount to raising interest rates in the mid- 1930s,'' he said. The U.S. dollar will continue to fall against currencies of emerging-market countries, Gross said. The dollar will also weaken as the U.S. federal budget deficit, which widened to US$163 billion last year, swells to as much as US$1 trillion and leads to larger sales of U.S. government debt, he said.``Three years hence, we will see a trillion-dollar deficit to support the U.S. economy,'' Gross said. ``That's a lot of paper, and that's a lot of compression downward of the value of the U.S. dollar against most other currencies.'' U.S. Treasuries including Treasury Inflation Protected Securities, or TIPS, remain ``overvalued'' relative to assts like mortgages and corporate bonds, Gross said.
Comments: If you read Paulson's words carefully, you will come to the conclusion that the Treasury will be bailing out Fannie & Freddie. Not only that, his sentiments point directly to more bailouts, and that the end is not over by a mile. This lends credence to my belief that the USD will be on a steep decline over the next 12-18 months. That's because each major bailout will depress USD. Paulson has to choose his words carefully in that he does not want a stampede out of USD or GSE debts and US Treasuries, but he obviously has little choice. Gonna have to negotiate my pay to be unpegged to USD...
photos: Pancake Khemanit
If you checked some of the information posted in NYMEX and CFTC, you can notice that the speculation interest had dimmed for a while lately. My prediction last couple of weeks that USD120 /barrel had reached. It will hover around USD100-USD115 next few months, unless geopolitical situation change again. If Dali prediction is correct, equities will rise. In short term, I am positive on equities.