Searching for regulated business


  • Business
  • Saturday, 15 Feb 2003

In a wide ranging interview with deputy group chief editor WONG SULONG and reporter LIAU Y-SING, Tan Sri Francis Yeoh talked about the strategic directions of the YTL group. Below are extracts of the interview, which have been updated. 

BizWeek: Where is the YTL group headed in the next few years? 

Tan Sri Francis Yeoh: We are looking for regulated business. It’s quite a nice risk-free business. But there is a lot of technology, financial planning and management involved in getting good quality management to mange infrastructure.  

It is a good business to have but behind it, we have to make sure the capital cost is very low and the financial mode is so superior that the cash flow qualifies for project financing. 

In other words, you can gear it up to 90 per cent that is like what we did for Wessex Water. This means that the banks take 90 per cent of the risks and you take 10 per cent and yet the majority of the profits come to you. That is a very nice business to do. 

So we will concentrate on adding more and more regulated businesses. The differences between regulated and unregulated businesses are that the latter is like California. 

The electricity power in California was unregulated, it was up to the free market, power pooling.  

As you can see (now) how California with Silicon Valley collapsed and looked like a Third World country because there were imbalances in investor’s needs, those who bought the power and also the state. 

The state left it to the people at large to balance this and you find it was imbalanced sometime in history. So the electricity prices went up to the sky, investors and some power players went bankrupt, there were blackouts and now the state has to bail out by buying electricity. So that is deregulation. That is too free (a) market. 

I happen to believe that strategic industries like water and power must be regulated. It is too important the need for an average man to be deregulated.  

We are looking for more regulated businesses here in Malaysia and also in Britain and Australia. These countries are experimenting with regulatory reforms in different experiments but regulated assets seem to work better than the deregulated assets. 

In Britain and Australia regulated assets tend to do very well despite implosions in cycles of the economy.  

For example, Wessex Water is so well ring-fenced that when Enron (which formerly owned Wessex water) collapsed, Wessex Water is still very profitable. 

YTL has been operating Wessex Water for nearly nine months now. Are you planning to leverage this experience to bid for water projects in Malaysia and elsewhere? 

Wessex has given YTL valuable management experience that we could offer to Malaysia. I feel the time is right to review the way we provide water and sewerage services in Malaysia. The British model is a very good one.  

First there is a regulatory framework.  

Second there is competition among water companies to supply better water and sewerage services.  

And third, there is public audit of the services provided so that customers and consumer groups can express their satisfaction or otherwise about the services they are getting.  

In Britain, water companies that provide bad services are fined by the regulatory authorities.  

What about power plants in Singapore? Are you still putting in a bid there?  

I think Singapore is also finding out that if you want to attract investors, you have to give them a certain amount of profits. I think Singapore’s model was to try to have a stable tariff for the average Singaporean and in the beginning probably, they thought let us do a power pool California style and let everybody bid and may the best win, and the power pool price is up to the pricing of all the different generators. 

But since California has collapsed, I think it’s better to mange your expectations, so if you are very upfront about it, you’ll say that the average Singaporean will not pay tariff within a certain band for the next 20 years. 

And here are the power plants, you bid for them.  

The Singapore government will guarantee you a certain capacity, something that an investor can live with, something where the cash flow is manageable and can be project financed. 

It doesn’t work otherwise, because if you don’t have a stable cash flow and have to borrow very high, first you can’t get good banks to lend you long-term. 

And if it is short term, the danger is always you can’t provide quality service, you may run out of money and you own this plant, what are you going to do? And if you go bankrupt and then the whole process of courts coming in to take the plant, but if you’re controlling one third of an area in Singapore, that is something quite dicey. 

I don’t think any modern state would like to suffer this kind of event. For security and strategic reasons, they should regulate it and set upfront the band of tariff price and everyone will know how to price into their assets. I think they are looking into that now. 

What sort of criteria you use when looking for an acquisition target?  

Well, the criteria of regulated assets itself from the start gives you a 50 per cent chance to do project financing subject to due diligence.  

I don’t want any recourse debt to the group. Non-recourse debt simply means I can come up with 10 per cent equity and they (banks) come up with 90 per cent. And because it’s non-recourse to YTL as a group, they have to make sure that cash flow is absolutely tip-top.  

That’s really the acid test. That’s the second criteria. And by that fact, it means the return must be reasonable. That’s the third criteria. 

What else would you like to do for YTL?  

The regulatory business that we are doing now began with out first regulatory asset with the government on land. We partnered with the government in 1986 when it wanted to boost economic growth by 2 per cent. 

It wanted to build 80,000 units of low cost houses. We partnered with the government and got the land. The regulation specified that a certain percentage had to be built with low-cost houses.  

We started with that kind of regulatory framework and with that knowledge and experience we did the first IPP (independent power plant) in a regulated way and then the Express Rail Link. Then we went to Australia now to Wessex. 

Even today, we are still doing low-cost housing. Remember we did low cost houses (at) 741 sq ft with three bedrooms in Bercham?  

That became a very popular template because it was the first time you did not have Hobson’s choice; five-storey walk-up and two bedrooms within 600sq ft that people didn’t like.  

Because we didn’t pay for the land, we provided a better designed house at RM25,000 to the people. 

Today, if you go to Bercham and look at those RM25,000 houses 10 to 12 years hence, you can see what they put on the floors, now marble. You can see how they modify their arches you can’t do that in a five storey walk-up. 

That’s our experience always find a way to give the customers good value 

All those who bought our houses in Ipoh those days have graduated and grown up, the next generation to buy our houses in Pantai Hillpark and Sentul Raya. So it works to pay attention to our customers. 

Are you concerned about the gearing level at the YTL group? 

Actually, we are in a net cash position. Our gearing, although it’s consolidated in the books, is non-recourse, so you have to take that off actually. It has to be consolidated in the balance sheet but it’s a non-recourse gearing. We still have RM4 billion that we can invest, that’s why it’s good to look for quality regulated assets anywhere in the world that understand regulatory reforms. 

So we still have a lot of unencumbered cash. 

When you do project financing, a non-recourse loan means if you put 10 per cent equity and 90 per cent gearing (and) if the project goes wrong, let’s say I buy Wessex for RM7 billion. I put my 10 per cent down RM700 million, I borrow RM6.3 billion. 

If the project goes wrong, I don’t owe the bank RM6.3 billion, it’s the project company that owes the bank this RM6.3 billion, not me. So, it looks like I borrowed and it’s gearing in my book, you’d normally assume that I owe the bank RM6.3 billion. 

But I don’t if the project goes wrong the bank can’t come to me and ask for payment. If the project goes wrong, we risk that RM700 million capital equity that we put in. 

But if the project goes right and you make a few hundred millions a year, you can get back return on equity very, very high within a few years.  

Fifty per cent of our revenues now comes from outside Malaysia. Based on our cash flow and profit, we can comfortably acquire assets the size of Wessex Water every year. 

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