To bring the Independent Power Producers (IPPs) to the negotiating table, the government has introduced windfall tax – a charge on any return on assets which exceeds nine percent for each financial year.

Windfall tax is a tax levied by governments against certain industries which enjoy super-normal profits due to an economic windfall – like a surge in palm oil or crude oil price. In the UK there was a case for a ‘one-off’ windfall tax on utilities due to high valuations on IPOs as compared to initial valuation at execution of a concession or PPA.

Power Purchase Agreements (PPAs) executed after due process of negotiation are now to be re-examined for ‘excessive’ profits.

If plants are operated with higher efficiency and/or construction costs are better managed, these should now be passed on to the off-taker. This argument suggests a tinge of socialism within a so-called capitalist framework.

If mediocrity is our goal, if anything above nine percent is a strict ‘no-no’, if abuse is to be encouraged then we should pursue the new found windfall tax vigorously.

However, if we choose to portray that Malaysia is a nation for investment (both local and foreign) and we would like businesses to succeed and pay the corporate tax (of 26 percent) then we will be circumspect on how we introduce ‘new’ taxation for an ‘old’ problem.

What’s the solution? As usual, there are at least three options:

i. nationalise the IPPs – which reverses the whole concept of privatisation (besides cost implications); or

ii. re-invest in new technologies – ie, IPPs are encouraged to re-invest in new, more efficient plants with new (or lower) tariffs while concessionary tariffs are adopted for earlier (or older) plants.

A first step, perhaps, to a more market-oriented, multi-supplier mode; or

iii. tinker with the existing PPAs and hope that the solution will be acceptable to all parties - which is never the case! (ask a divorce lawyer!)

Under our current mode, the ‘tinkering’ will take some time, bondholders will remain jittery, rating agencies will expect the worst and new investments will be deferred – in power or even other sectors.

What’s the moral of the story? Try ‘carrot first rather than the rotan’ if you want to change something. Use the re-investment strategy, to move forward the so-called PPA re-negotiation.

What’s more, it will give a filip to many other sectors. Encourage private sector initiative and galvanise the bond market with new products, instruments.

But what about reserve margin (of 45 percent)? That is a theoretical notion, it is probably around 25 percent after derating older plants and those on standby mode.

With more efficient and newer technology, less gas is used for the same output (although we have reserves for another 39 years) and effective capacity and energy payments borne by TNB will be lower.

Everyone wins, including the consumer.