Sumber: FEER

Electrical Fault

By S. Jayasankaran

Issue cover-dated September 28, 2000

The road to hell is paved with good intentions. That might just about sum up the recent debacle at Tenaga Nasional.

The Malaysian government, which owns 53% of the giant power utility, has long wanted to separate the posts of chief executive and chairman in hopes of improving corporate governance. It has already made similar moves at state oil giant Petronas and state phone company Telekom Malaysia. So when Ahmad Tajudin Ali's contract for the two top jobs at Tenaga ended on August 31, it wasn't renewed and a new chairman was appointed the next day.

So far so good. But in naming Jamaluddin Jarjis, a member of the Supreme Council of the ruling United Malays National Organization, to the chairman's job, the government said nothing about a new CEO.

Worried that Tenaga was falling under political influence, the markets recoiled and the company's share price plunged. And as the largest-capitalization stock on the Kuala Lumpur Stock Exchange, it took the entire Malaysian bourse with it. Between the end of August and September 18, the KLSE composite index fell 7% and Tenaga's stock price was down 13% at 11.10 ringgit ($2.90).

Fuad Jaafar, the company's senior vice-president, is now acting CEO. Jamaluddin, who holds a doctorate in power engineering, told reporters that the price falls had nothing to do with his "political" position and that the company's operations were in "experienced hands."

On the first point, at least, some observers disagree, suggesting that Jamaluddin's ties to the ruling party reinforce concerns over rising politicization of state companies. "In an environment where we need more professionalism and less politics, this sends the wrong signal to the market," says the chairman of an investment advisory firm in Kuala Lumpur.

Tenaga's trials are just the latest in a series of events pointing to growing policy unpredictability in Malaysia. Flip-flops on issues ranging from exchange controls and foreign buyouts of companies in strategic industries to reform of the banking and broking industries have spooked foreign portfolio investors since the start of the Asian Crisis in 1997.

"A lot of foreigners had bought Tenaga simply because it was the one monopoly not faced with intense competition," says Edmund Cheah, the chief executive of Kuala Lumpur Mutual Funds, the country's biggest private pension plan. "Now there is a question on whether decision making will be political." Despite the government's controlling stake in Tenaga, it has long been seen as professionally managed.

At the core of investors' concern is the question of electricity tariffs. Tenaga desperately needs to raise prices by 6%-8% to maintain earnings. Any move would, of course, hit millions of Malaysians' pocketbooks and do little to help the government's popularity. But analysts say Tenaga's management had indicated in private briefings early this year that it would push for an increase. That led a number of brokerages to upgrade their earnings forecasts for the company and call it a "buy."

Asked whether he will request a tariff increase, new Chairman Jamaluddin told the Review: "We're ruling nothing out. Our priority is protecting shareholder value." But in early September, investors took their cue from Energy Minister Leo Moggie, who said Tajudin hadn't requested a tariff increase. Several analysts slashed their earnings forecasts by 15%-20%, feeding the sell-off.

The need for higher tariffs is not new. A rate increase was proposed in 1997, but was scrapped after the Asian Crisis hit. In the year to August 31, 1999, Tenaga recorded net profit of 773 million ringgit ($203 million) on more than 12 billion ringgit in sales, a strong turnaround from a 3.2 billion ringgit loss the year before. But Tenaga also has more than 20 billion ringgit in debt, much of it denominated in foreign currency.

The demands on the company's financial resources stretch beyond interest payments. Under arrangements with eight independent power producers, Tenaga is required to pay by capacity, not usage. So even if supply outstrips demand, Tenaga has to pay for full capacity--bills that account for 35% of the company's overall costs.

Further pressure is on the horizon. December will bring the expiry of an agreement with Petronas, the national oil company, that was signed when oil prices were low. Under the contract, Petronas supplies gas to Tenaga at almost half the present market cost. A new contract factoring in current oil prices would push Tenaga's costs up by at least 500 million ringgit.

During his five years in office, Tajudin pulled Tenaga out of the red by slashing costs, refinancing U.S.-dollar borrowings in yen and cutting capital expenditures. He won praise from analysts for plans to sell stakes in six generation plants--plans Jamaluddin is expected to carry out.

Still, without a tariff increase, there is little the new chairman can do to jump-start profits. "I suppose it's nice when company shareholders care more for customers than earnings," says Amar Gill of CLSA Global Emerging Markets in Kuala Lumpur. "But it's not good business."