Bakun puzzle

Malaysian Business, Jan 16, 2008 by Charles Raj

THE RM6 BILLION BAKUN HYDROELECTRIC DAM PROJECT HAS NEVER been one of the country's easiest infrastructure projects to undertake.

For more than 10 years since its inception, the power project has been bugged by environmental issues, engineering problems and cost overruns.

Latest indications are that the project, which can generate 2,000MW of power at its peak, will be complete in 2010. Following that, 1,500km in undersea cables costing RM15 billion will be laid to transmit the electricity from Bakun to Yong Peng in Johor.

The cable contract, which was not tendered out, has been awarded to the new Sime Darby Bhd. It is expected to be complete in 2013. So, at the end of the day, assuming there are no unexpected further cost overruns, the total cost of Bakun will be a whopping RM21 billion.

That's a lot of money for a single project.

Analysts are now beginning to wonder how viable Bakun will turn out to be in the end, especially if it is not allowed to dictate the price of its electricity to Tenaga Nasional Bhd.

The latest turn of events has brought to the fore two main issues. First, why is there a need to spend a colossal RM15 billion (which is more than twice the construction cost of the project itself) to transmit electricity hundreds of kilometres away?

And second, would it not have been easier for Bakun (and a lot cheaper) to find customers within Sarawak itself?

Going by recent news reports, there seems to be plenty of demand for electricity in Sarawak. For example, five months ago, Australian mining giant Rio Tinto Aluminium Ltd expressed interest in wanting to set up a RM7 billion aluminium smelter plant in Similajau near Bintulu in Sarawak jointly with Cahya Mata Sarawak Bhd, a unit of the state government. The shareholders of Bakun are Sime Darby with 60% while the rest is equally held by the Finance Ministry and the Sarawak Government. Incidentally, the awarding of contracts or privatisation comes under the purview of the Economic Planning Unit (EPU) of the Prime Minister's Department. The minister in charge is Datuk Seri Effendi Norwawi, a Sarawakian.

Rio Tinto's smelter at its full capacity would need a substantial amount of electricity, and given its location, is well placed to tap Bakun's electricity. So, it would be surprising if a deal is not struck between Rio Tinto and Bakun.

But sources say that given that Sime Darby is going ahead with its undersea cable project, could it be snubbing Rio Tinto? Why would it be spending billions on laying cables if it had a ready buyer for its electricity?

Or, perhaps, the question should be: Why in the first place is Sime Darby proceeding with the undersea cable? Do the financials add up?

Currently, some feel there is an oversupply of electricity capacity in Peninsular Malaysia. Tenaga Nasional has said the electricity capacity for Malaysia excluding Sarawak exceeds peak demand by 43% while in Sarawak it is only 10%.

Peak demand for energy in Sarawak is expected to rise to 860MW this year and to 1,174 MW by 2015. And that does not include demand from new smelters. Thus, there is a growing demand for energy in Sarawak.

Todate, there are no indications that Sime Darby and Rio Tinto are about to strike a deal soon. If Rio Tinto goes ahead with its smelter, it should begin production in 2011. Bakun should be completed in 2010 with a capacity of 2,400MW.

So, Bakun will have a ready buyer in 2011. Why wait for another three years before being able to sell electricity? Why take the risk? What if there are insufficient buyers then?

Perhaps this is what minority shareholders of Sime Darby must be asking themselves too.