1Malaysia Development Berhad (1MDB), the heavily indebted and scandal stricken Malaysian fund, may be starting to get to grips with its problems having finally completed the sale of its power unit, Edra Global Energy, earlier this week. 1MDB reached an agreement with China General Nuclear Power Corporation to sell its domestic and overseas power assets for a total cash consideration of M$9.83 billion ($2.3 billion). The deal also includes roughly M$6 billion in debt held by Edra. 

The announcement is positive news for 1MDB since it removes most of the fund’s short-term liabilities and provides much needed breathing room as the fund looks to restructure, although the implications for Malaysia’s power sector are potentially far-reaching.

Edra comprises a portfolio of thirteen power projects, eight overseas and five domestic. The Malaysian assets comprise the following:

• 440MW Telok Gong 1
• 720MW Telok Gong 2
• 330MW Tanjung Kling
• 75% of 762MW Kuala Langat
• 75% of 700MW Jimah East

The international assets are as follows:

• 5MW Port Said East in Egypt
• 5MW Suez Gulf in Egypt
• 55% of 682.5MW Sidi Krir in Egypt
• 10% of 2,000MW 160 million gallons per day Taweelah B in Abu Dhabi
• 55% of 450MW Meghnaghat in Bangladesh
• 55% of 360MW Haripur in Bangladesh
• 55% of 110MW NEPC in Bangladesh
• 1% of 157MW Fauji Kabirwala in Pakistan

1MDB acquired the assets from domestic conglomerate Genting and local tycoon Ananda Krishnan in 2012. The investment fund was widely viewed to have overpaid for the assets, which were acquired for a combined total of around M$12 billion in equity.

1MDB’s activities largely went unnoticed until a series of embarrassing leaks were published, which appeared to show the deliberate siphoning off of funds from several individuals connected to the fund. 1MDB also racked up debts totalling M$42 billion, according to the company’s last financial statement, and the collapse in the value of the ringgit has put even further strain on the company’s balance sheet as a portion of its debts were issued in US dollars.

The problems facing 1MDB reached a crescendo earlier this year after the company had to postpone the repayment of a M$2 billion bank loan. Ananda Krishnan, formerly with Abu Dhabi Commercial Bank, was installed as chief executive and announced a restructuring plan, which would see the fund sell off its existing power assets.

The sale

Having aborted plans to list its power assets on the Malaysian stock exchange, 1MDB launched a formal sale process earlier this year and pulled in two bids from CGN Power and Malaysian state-owned utility Tenaga Nasional Berhad (TNB). TNB was rumoured to have submitted a bid for about M$8.2 billion in equity, which was viewed as a fair estimation of the portfolio’s value, although 1MDB eventually opted for CGN Power’s bid.

1MDB’s decision to select the highest bid was understandable considering its sizeable debt burden. Since it had to seek approval from the Malaysian government for an exemption to the country’s foreign investment rules, which caps foreign ownership in the independent power producer (IPP) sector at 49%, this triggered much opposition.

“If you apply or give a one off exemption it sets a very bad precedent for the future since it sends a message to the private sector that you can always lobby the government for more favourable terms” says Rafizi Ramli, vice-president and Secretary-General of the People’s Justice Party.

He adds: “I have a problem because once you open the floodgates in this way local contractors may not be able to compete with foreign companies for future IPP tenders, especially when you are facing Chinese state-owned enterprises, which have a much lower cost structure.”

Edra accounts for around 14% of Malaysia’s total power generation, not an insignificant amount and there are concerns that this figure may rise further especially as Chinese contractors increasingly seek to expand aggressively into overseas markets.

Implications

The sale has also triggered a second concern, which has gone comparatively unreported and that is that CGN Power may seek to recoup its investment through renegotiating some of the existing tariff structures with TNB and the Malaysian Energy Commission.

Edra owns two concessions, which are due for renewal in 2016 and 2020, and given how aggressively the ruling party, the United Malays National Organisation (UMNO), has courted Chinese investors recently, the cynical view is that they may have given some assurances to SGN Power about future tariff increases. This would seem to contradict the rationale often put forward for increased private sector participation in the domestic power sector, which is the lower tariffs generated for consumers through increased competition.

Malaysia’s Energy Commission has eschewed public tenders in favour of direct negotiations for two recent concessions. These were Track 4A, which was awarded initially to a consortium comprising SIPP Energy, TNB and YTL Power, and Track 4B, which was awarded to 1MDB. This has strengthened the belief among some critics that lack of competition is stifling the domestic power sector.

For 1MDB the sale provides a welcome respite from the almost ceaseless cascade of scandals and bad press that has engulfed the investment fund over the last year. Having covered most of its short term liabilities, the company hopes that the cash generated from its two real estate developments, Tun Razak Exchange and Bandar Malaysia, will be sufficient to pay off its outstanding debts and draw a line under the company’s problems. For Malaysia’s power sector more broadly the consequences are potentially far-reaching however.