Asian Power - Exciting (and Frustrating)

In 1997, after 17 years in the UK energy industry, I joined an investment bank, I moved to Hong Kong, and I began to cover the Asian power sector. For anyone involved in the power industry, the insatiable demand for new capacity made Asia the most exciting region in the world. But, as I set about my new role in banking, little did I realize just how exciting this journey would become. And, 14 years later, how that excitement would still burn brightly - but be accompanied by a degree of frustration.



My first assignment was to advise Indonesia's state-owned PLN on the partial privatization of its generation company subsidiaries, known then as PJB1 and PJB2. Indonesia had already embarked upon a successful IPP program with foreign investors and now companies from Europe and the US were being lined up to take a stake in this exciting and growing economy - at that time there were no Indian giants, no Chinese majors, the Malaysian and Thai players were mainly domestic and there was no one from the Philippines who could look overseas. In 1997, the Asian power market was fertile ground for ambitious western companies looking to invest in the region's buoyant growth. And then came the Asian financial crisis.



Indonesia was hit hard. Malaysia responded with brave and bold capital controls and held its currency at a fixed rate. Thailand, having been at the heart of the crisis, stumbled and then quickly recovered (before stumbling again). China and India seemed to sit on the sidelines; two giants looking on, just beginning to embark on their extraordinary journey of economic growth. The financiers of Asian governments, and the architects of the various Asian electricity markets, who had been contemplating restructuring, regulation, competition and privatization had to drop their plans - or, as in Thailand, at least reconsider the most pragmatic way to respond to new market circumstances. And, for now, the Indonesian power sector had to remain dormant as it dealt with the political and economic ramifications of the crisis.



Over the next few years, I worked on assignments in Thailand, where I had the pleasure of meeting one of the smartest guys in the business - Dr Piyasvasti Amranand - someone well known to the readers of Asian Power; and I worked in India, mainly in Haryana and briefly in Rajasthan where, alongside a determined and diligent team from Arthur Andersen, we wondered how the Indian electricity sector could ever be privatised when its economics were being undermined by huge losses in the distribution circles. I also worked in Malaysia where I was deeply impressed by a young Dato' Yeoh Seok Hong at YTL as he remained two steps ahead of any banker he met, any lawyer he met and even any power engineer he met. Great times indeed and always exciting.



But as we moved through that decade, we began to see the tides of change in the Asian power sector. The US and European companies faced challenges in their domestic markets. Stock analysts began to attribute little or no value to overseas ventures - but these ventures also carried risk. Clearly, the response had to be to retrench from far flung markets, offload the risk, return cash to the balance sheet and await the upgrade to stock price valuations. But this was creating a vacuum in the Asian power market. The Japanese IPP companies such as Mitsui, Marubeni and J Power, together with Singapore Power (SP) and China Light & Power (CLP) had been the main Asian participants in overseas projects ranging from Australia, up to China, through South East Asia, India - and even the UK. But new Asian champions were beginning to emerge - Egco, YTL, Genting, Malakoff, Tanjong, SembCorp, Keppel Energy (and others) were followed later by the Philippines companies, Aboitiz Power, FirstGen, San Miguel and Metro Pacific. And by the end of the decade we had seen the emergence of new Indian and Chinese powerhouses with the balance sheets to dominate the build-out of their rapidly growing electricity sectors. Asia's economies were booming once again and the balance of power in our sector had now shifted from the west to the east: Asian companies were coming to the fore in Asian markets. And yet, with all that growth, and with all those very able companies we have continued to see underdeveloped infrastructure across many of the Asian countries. And this is where "exciting" becomes "frustrating".



Various consultants have estimated that US$8 trillion will be needed for infrastructure projects across Asia: and it is said that half of that is expected to come from the power sector. On the face of it, it looks like there is a huge opportunity for new power - including in renewable energy, where a number of countries have introduced legislation and incentive packages to stimulate investment. Surely the Asian governments do not need to make this investment from their own accounts. Surely they can open up their markets and let foreigners (and locals) compete to build the best and most efficient power plants to meet their needs. Surely that money could be invested in better healthcare and better education. Wouldn't that become a good win-win outcome for all parties? Well, here comes the "frustrating".



In some countries like India and China, the large domestic powerhouses have emerged (or are emerging) to soak up most of the demand; though opportunities for foreign participation continue to be available in certain niche areas. In Malaysia, the market continues to be dominated by well-financed domestic corporates with existing positions in the sector. So that appears to leave Vietnam, Thailand, Indonesia and the Philippines. Are these markets that could be of interest to new investors?



Investors (especially foreign) need to see:



•  sustainable power demand growth through increased domestic consumption (and a rise in the consumer class)


•  legal and regulatory rules that are clear and able to be financed


•  a receptive attitude to private sector (and foreign) participation
•  transparency in how privatization processes and auctions are conducted


•  liquidity in the debt-financing markets
•  some multi-lateral assistance to help some of the start-ups to get off the ground (particularly in renewable energy), and,
•  given the absence of products to hedge currency and inflation risks, we need to have confidence in the stability of the economy.

If you work your way through this list, you can see that not all of the boxes can be ticked. The Philippines has seen the highest share of transactions as it has privatized Napocor but, AES apart, the market has been secured by a handful of very capable domestic players. Thailand, once seen as an attractive market for foreign investment in the late 90s and early 00s, now seems to have become more insular with fewer opportunities available to foreign investors. Vietnam is moving in the right direction but is at an early stage in the electricity reform process – and Vietnam has currency and inflation risks that are difficult for all but the most patient and long term of investors to accommodate. And so this brings me back to my old friend, Indonesia, and also to my sense of frustration. Indonesia’s resilience and recovery from the deep crisis of 1998 is remarkable – it is now mentioned alongside the BRIC countries as one of the strongest of the emerging markets. And yet, in proportionate terms, Indonesia was investing throughout the 1990s a higher quantum of its GDP in infrastructure than it has done in the last decade. Consultants have estimated that this under-spend in infrastructure may well be costing the nation 3-4% in GDP growth. All this need for power and yet the sector continues to be dominated by the state-owned PLN and all attempts to introduce more liberal legislation to attract new funds to the sector appear to be frustrated by one means or another. But I single out Indonesia as just one example of where the Asian power sector can be frustrating. It wouldn’t take much for the Asian countries to start ticking these boxes and to open the door to more sources of capital. Whether it is protectionism or a fear of the unknown, it would be a helpful boost to the economies if funds earmarked for a too slow build-out of the power sector could be released to help the citizens to enjoy the fruits of their successful GDP growth.

There is a queue at the door of the Asian power sector and at the moment it isn’t easy to get in – but, as I said at the start, it can sometimes be frustrating but it is always exciting.
 

Robert McGregor, Partner, Actis