Published August 15, 2008

Independent power producers pay windfall tax

Capital markets, big bond issuers could take a hit if tax is not modified

By S JAYASANKARAN
IN KUALA LUMPUR
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MALAYSIA'S independent power producers (IPPs) have begun paying a windfall tax after the federal government refused to modify it. Genting Sanyen, for example, made out a RM5.74 million (S$2.4 million) cheque to the government yesterday, implying a total annual bill in excess of RM60 million.

'The government never got back to us,' said Philip Tan, Genting's executive consultant, referring to reported talks between the IPPs and Kuala Lumpur over the tax. 'So we paid up rather than face penalties.'

On July 1, the government slapped a 30 per cent 'windfall' tax on any IPP whose return on assets exceeded 9 per cent in a financial year. But the tax is calculated without taking into account interest and finance costs - and the IPPs are some of Malaysia's biggest borrowers. Their outstanding bonds total RM34 billion, or 16 per cent of Malaysia's entire corporate bond market.

Unless it is modified, the tax - which is recurring and not one-off - could seriously hurt at least two IPPs, undermine the country's capital markets and damage the balance sheets of big bond issuers and investors like investment bank CIMB and the Employees Provident Fund (EPF).

CIMB chief executive Nazir Razak has warned that there will be 'unintended consequences'.

The two IPPs that will be most affected are Malakoff, the biggest, and Teknologi Tenaga Perlis Consortium (TTPC), mostly because one has been privatised and the other is in the process of being privatised.



Malakoff has been privatised by MMC, a listed company owned by tycoon Syed Mokhtar Al-Bukhary. TTPC is being taken private by Pesaka Ventures, an unlisted company with close links to the ruling United Malays National Organisation.

'Having company debt is one thing,' a senior IPP executive told BT. 'But shareholder debt is quite another because shareholders will be banking on dividend payouts from the IPPs to service their loans. With the windfall tax, that may no longer be possible.'

It isn't clear how much tax TTPC will have to pay, but analysts have estimated Malakoff's bill at RM270 million.

MMC raised more than RM11 billion to finance Malakoff's privatisation through bonds that pay as much as 8 per cent a year. Many of those bonds were bought by EPF, which is also a major shareholder in MMC. Analysts fear Malakoff could go into default if the windfall tax becomes permanent.

Pesaka Ventures announced an RM830 million plan to take over TTPC early this year. It is not clear whether this has been finalised. But bankers would certainly not be enthusiastic about funding such a massive buyout.

The bonds of the big three IPPs have been sold down, and trading in the secondary market is virtually non-existent. Big bond holders like CIMB and EPF could face huge mark-to-market losses.

Since 2004, the federal government has been trying to get IPPs to renegotiate their power purchase agreements with national utility Tenaga Nasional, many of which were seen to be lopsided against the state utility. But the private companies baulked, citing the sanctity of contracts.

The government did not push the issue - until now. With rising fuel and gas costs, IPPs were seen to be making obscene profits at state expense. So on July 1, the government gazetted the tax, causing an immediate uproar and, according to some sources, drawing protests from CIMB, EPF and even the central bank.