Thanks to Skiddtrader, we have dissected the justifications for a windfall tax on IPPs further. The debate basically centers on the sanctity of a contract given by the government. Makes for interesting reading, and also a timely salute to a great man who tried to stop the lucrative and excessive terms for the first generation IPPs.
Comments: All the debate and disagreements over windfall tax on IPPs is a refreshing exercise. It points to maybe a government who might not give out "extremely lucrative contracts" going forward (still can hope, right). Khazanah is basically trying realign a very slanted agreement favouring IPPs in the past. Naturally a lot of people will find it hard to give up what is already a goldmine. This episode further highlights the unheralded good deeds, professionalism and impeccable integrity of Tan Sri Ani Arope (readers will note that I almost never address people by Datuks or Tan Sris, for obvious reasons - but for this case he deserves to be lauded and respected). I do hope we do not live in a country where good guys finish last. I salute you Tan Sri Ani Arope for standing up for the good of the nation. We need more people like you. How about reinstating Tan Sri Ani as the Executive chairman of TNB now, guys?
StarBiz: TNB and the IPPs
When Information Minister Ahmad Shabery Cheek and former deputy prime minister and de-facto opposition leader Anwar Ibrahim took the stage for the recent debate, the name of former Tenaga Nasional Berhad's (TNB) executive chairman was mentioned.
Anwar said that Tan Sri Ani Arope resigned because he was not in favour of the government' s stand on the independent power producers (IPPs). Tan Sri Ani was TNB's executive chairman from 1990 to 1996 and it was during his tenure that the first generation IPPs were created. Tan Sri Ani is known for his honest and no nonsense way of doing things and former high court judge, Dato Syed Ahmad Idid justly described the Penang-born scientist as follows:
"Tan Sri Ani was and remains an upright person and had to suffer because he did not agree with the IPPs getting away with too much ... and consumers have to pay."
"I am not anti-IPPs per se. It is good to have other players but it has to be done fairly. It has to be fair to the consumers, not just TNB, which is a conduit. TNB, because of the electricity hike, has been treated as the whipping boy. The focus should be on the consumers," Tan Sri Ani once told StarBiz in an exclusive interview.
When the generous terms were given to the IPPs, Tan Sri Ani said all of his other peers around the world asked what was happening. They said they would like to have a share in the IPPs. They said (the contracts to IPPs) were "too darn generous."
When Anwar touched on the IPPs, Shabery Cheek replied that it was implemented when Anwar was Finance Minister. It is interesting to note that in the StarBiz interview, Tan Sri Ani was asked "How was the Malaysian model of IPPs created?" and he answered "Ask our Prime Minister."
He was also asked "How was the process of negotiations with IPPs conducted?" and he replied: "There was no negotiation. Absolutely none. Instead of talking directly with the IPPs, TNB was sitting down with the EPU (Economic Planning Unit of the Prime Minister's Department). And we were harassed, humiliated and talked down every time we went there. After that, my team was disappointed. The EPU just gave us the terms and asked us to agree. I said no way I would."
Tan Sri Ani also said the pricing and terms of the contracts was all fixed up. "This is the price, this is the capacity charge and this is the number of years. They said you just take it and I refused to sign the contracts. And then, I was put out to pasture."
He described the terms agreed by the EPU as "grossly unfair. "At 16 sen per unit (kWh) and with the take or pay situation, actully it was 23 sen per unit. With 23 sen, plus transmission and distribution costs, TNB would have had to charge the consumer no less than 30 sen per unit. If mix with TNB's cost, Tan Sri Ani said the cost would come down but that was at TNB's expense because the utility company were producing electricity at 8 sen a unit. "We can deliver electricity at 17 sen per unit," he said.
Tan Sri Ani also said that "nobody produces excess electricity like Malaysia and it goes to waste because there are no batteries to store that power. TNB only needs a reserve of 15 per cent to 20 per cent."
In the interview, Tan sri Ani told StarBiz that he felt sick of the process of awarding the IPP contracts. "It was morally wrong and not fair. If it is legal and not fair, I will not do it. If it is fair and illegal, I still won't do it. It has to be legal and fair. We work for the consumers, workers and shareholders. TNB is morally obliged to these three, but the consumers come first, otherwise we won't be around. It is then the workers and the shareholders."
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.
9:45 AM
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.
11:34 AM
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
12:21 PM
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.
12:49 PM
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.
9:49 PM
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...