1MDB bursts into the power scene

1MALAYSIA Development Bhd (1MDB) chief executive officer Shahrol Halmi wastes little time getting down to business.

Walking into the lobby of 1MDB's office in downtown Kuala Lumpur with a cup of coffee in hand, he sits down and immediately starts talking shop.


Shahrol: ‘The plan is to go and tweak the whole energy value chain.’
His topic was what's on most city dweller's minds at that moment during a wet morning. Heavy rain had swelled the banks of the rivers and drains and flooded parts of the city.

To him, that issue must first be defined, studied and then an action plan must be drawn on how to solve it. The bigger picture to an age-old problem.

It's part of the reason why the fund sensationally paid RM8.5bil to acquire the power assets of Tanjong Energy Holdings Sdn Bhd from T. Ananda Krishnan.

For years, the argument has been that the cost of power is a burden on the Government with independent power producers (IPPs) making tons of money.

“As a matter of principle, I believe the Government will make sure that whatever new-gen power purchase agreement (PPA) is signed will be based on a competitive and commercial basis,” he tells StarBizWeek.

“And speaking as a citizen, I don't think they have any other choice. Even if 1MDB were fully government-owned, we would expect it would have to be a level playing field, which is why we are confident of Dr Ong Peng Su (CEO of Tanjong Energy) and his team because as I understand it, the local Panglima, Pahlawan plants are running at above the bar that TNB (Tenaga Nasional Bhd) has set.”

1MDB's entry into the power game was sealed after it bought Tanjong Energy, which owns generation capacity in Malaysia, Egypt, Pakistan, Sri Lanka, Bangladesh and the United Arab Emirates.

Those utilities have a generation capacity of 3,951MW and a water desalination capacity of 16 million imperial gallons per day.

New business and game changer

The purchase of the power generation assets makes 1MDB the second largest independent power producer in the country.

Shahrol plays down the “nationalisation” aspect of the purchase, saying 1MDB is government-owned and not the Government.

“But over the longer term, the plan is to go and tweak the whole energy value chain. If you look at it, this is chapter one of the book. There will be other moves made by the Government to see how we can have a longer-term answer,” he says.


Tanjong Energy plant in Telok Gong.
Analysts feel the entry of 1MDB into the IPP club might soften the stance of the producers which have acted collectively in their negotiations with the Government.

They have been steadfast in protecting the business, which analysts said are backed by contracts, a position Shahrol understands.

“They have their shareholders to worry about. They are supposed to fight for maximum returns for their shareholders.

“Then it becomes a protracted process, and the results may not be ideal for the long-term future of the country. I think what the Government is looking at is let's find an answer.

“It is not very obvious. You adjust one thing and then there are unintended consequences. Let's work on finding an answer but to do that you need real capability and expertise and transparency on the financial models on the providers' side,” he says.

One of the key determinants of the renegotiations with the first generation IPPs is efficiency.

He says the efficiency of some of the older plants is hovering at the mid-30% level where two-thirds of the fuel is wasted to produced energy.

Shahrol says the current generation plants are about 40%. Ideally, newer technologies would push the efficiency of the power plant and that is in line with what the Government is trying to achieve.


“If you think about it, for each unit of gas, you're already subsidising this much. If you're burning into the air half of it, then the push for efficiency is definitely there.”

He says Tanjong Energy, which owns one first generation plant, is already looking at what to do with that power station whose PPA is set to expire in 2016.

“But my understanding is that they are already looking into upgrading it. What's the cost, the efficiency, and the terms that we can negotiate with the Government. These guys are quite good. They are proactively looking into the technological improvements already,” he says.

Getting into the energy sector is one of 1MDB's mandates. It has been assumed that will be looked from solely the Malaysian perspective but the purchase of Tanjong Energy and its foreign power assets throws that assumption out the window.

Springboard overseas

Reports yesterday indicate 1MDB may conduct a sub-sale of those foreign power assets, but Shahrol sees a lot of value in keeping the group intact.

“The management is executing a good strategy of growth both domestically and internationally, and we are fully supportive.”

During the interview on Thursday, Shahrol says he is comfortable with the risks 1MDB is taking when buying the power assets in more volatile countries.

“We are comfortable with it because we've done a very detailed examination of whatever information that is available. We had a look at all the data, and the conclusions we drew, from both the technical and financial advisers, is that this is a very sound and strong cashflow business in a sector that is only going to grow when the world economy grows,” he says.

“Because with more people and more economic activity, you will need more power. That's why we think it is a good business to own, plus we are comfortable with the quality of the management.

“They have proven their track record with the delivery of not only the local power stations but also the regional assets.”

He says the political risks from assets being in Egypt and Pakistan are also scrutinised.

“We have taken a deeper dive and the facts show that actually in Egypt, the power plants are generating a significant percentage of the electricity in the country.

“The track record has shown that the government, even when it was in turmoil, continues to pay for the very simple reason that if people's lights are turned off, it is going to make things worse.

“And so the plants are run professionally and are quite efficient, even by international standards. We look at that and say, OK, this is something that can be managed', and it is done on a purely commercial basis. Similarly with the other plants. We actually deep-dived on each one of the situations. We deliberated extensively at the board and drew the conclusion that overall, the value that we paid was quite good.”

1MDB's role is to develop Malaysia but there is significant international exposure in the power assets under Tanjong Energy.

Shahrol says the team at 1MDB thought about how this purchase will change its focus but feels that there is already in place the existing structure to keep the Malaysian projects going.

“The idea is that there is stuff to do here as well as overseas. Then the question is resource allocation. I can put on record that we have had a lot of interest from our Middle East partners. There are a lot of synergies.

“Malaysia's energy sector is seen to be very vibrant because the (new) PPAs are coming up and new technology is coming in. Because the Government has clearly articulated its attention to move into this sector and gets exposure to this potentially very high growth market.

“There has been talk of an Asean grid. Look at it from an Asean perspective,” he says, adding that Malaysia has the potential to be the hub for an Asean electrical grid.

Shahrol says Datuk Azmar Talib, who is 1MDB Real Estate Sdn Bhd deputy CEO (operations), and his team have come up with a strong proposition to deliver two of the key projects under 1MDB, which are the KL International Financial District and Bandar Malaysia.

“So we thought about going to find an instant energy capability. Energy is a sector 1MDB has to go in; it is a mandate of ours. So, when this opportunity came up, we took a look at the team, its capability, the track record, and said okay.”

With Tanjong Energy having met the expectations of 1MDB with their track record, professionalism and governance, Shahrol feels the purchase will be a good way for 1MDB to go and quickly build proven capability in the energy sector.

Does this signal 1MDB's move into the regional and international market in other segments?

Not necessarily, says Shahrol.

“We will still be focused on the sustainable economic development of the country. We will do stuff overseas where we see eventual synergies that bring development to the country,” he says