MALAYSIA: Public Listing Puts Mammoth Dam Project to the Test

By IPS Correspondents Reprint | | Print |

Anil Noel Netto

KUALA LUMPUR, Jun 9 1997 (IPS) - When shares of the firm that heads the Bakun dam project are listed on the Kuala Lumpur Stock Exchange soon, businessmen and activists alike will be closely watching the figures flashing on the electronic board.

All eyes will be on whether the public will snap up all 375 million shares being offered by Bakun Hydroelectric Corporation (BHC), owner and operator of the dam project that is one of South- east Asia’s largest infrastructure projects.

In a sense, BHC’s public listing in July or August will be a gauge of public confidence in the Bakun dam as a financially viable project.

The six billion U.S. dollar dam project, to rise in the jungles of Malaysia’s Sarawak province, is already one of the region’s most costly and ambitious megaprojects.

Apart from its financial costs, the project has drawn controversy because it would involve clearing some 700 square kilomtres of jungle and building in remote parts of Sarawak. Some 10,000 natives are to be displaced by the dam.

Power generated by the dam will be supplied to peninsular Malaysia through a 648-kilomtre submarine electric cable, touted to be the world’s longest. When completed, the 205-metre high Bakun dam, the highest and largest rock-filled dam, can produce 2,400 megawatts of power.

But whatever its promise, analysts say investors should keep in mind that the dam is projected to be up and running only in 2003. In other words, they say people should consider the long construction timetable before plunging into BHC stocks.

Potential cost overruns, delays, and operational risks are some of the variables that could undermine the viability of the dam, touted as a “national project” by Prime Minister Mahathir Mohamad. A World Bank study notes that delays are not unusual in large hydroelectric projects.

“Malaysia has never undertaken a project as large as Bakun,” says social reformer and financial expert Dr Subramaniam Pillay.

BHC plans to raise 2.4 billion dollars in two rounds. In the coming initial public offering, BHC will offer 1.5 billion shares at 80 cents a share. It also plans a one-for-one rights issue next year to raise another 1.2 billion dollars at least.

Most of the 1.5 billion shares in this month’s initial public offering will be taken up by Ekran Bhd, which has a 32 percent stake in BHC, and its partners.

Other partners include the Sarawak state government, which has 19 percent stake in the firm. The remaining equity is held by state-owned agencies, such as the Sarawak state government and national power company Tenaga Nasional.

The remaining 375 million shares will be offered to the Malaysian public and foreign investors.

The construction giant Ekran Bhd is headed by Sarawak tycoon Ting Pek Khiing, who caught Mahathir’s eye when he built a hotel on Langkawi island in record time. But Ekran does not have experience in dam construction and was awarded the Bakun contract without open tender, analysts say.

Some say there is a possibility that BHC’s public listing may not be quite the huge success anticipated, given the variables inherent in the project and listless market sentiment at present.

A World Bank study on hydroelectric projects points out that cost overruns from geological problems are the norm in hydroelectric projects. A report by investment analysts from Delphi International of London states that “the long term performance of the dam is uncertain”.

“Investors considering taking equity directly in the project through BHC are advised to reconsider: returns will be slow to emerge and inadequate in size, especially given the risks involved”, Delphi International said.

The report says the size and type of the dam could result in settlement and leakage problems, adding that further study is needed into the long-term reliability and durability of the undersea cables.

As in other dams, sedimentation could reduce project life, the report noted. Subramanian adds that operational risks such as the possibility of earthquakes and lower rainfall could also affect the dam’s operations.

Analysts evaluating the float of Bakun’s shares say some investors have shied away from them citing the dam project’s low internal rate of return, and low projections of its average return at the stock exchange.

The reported internal rate of return of the Bakun project is 11 to 12 percent, lower than the 15 to 20 per cent posted by independent power producers in Malaysia and below the average return of some 14 per cent per annum at the Kuala Lumpur Stock Exchange.

“High risks require high returns. Low returns can only be justified by low risks and Bakun is not a low-risk project,” said Subramaniam, who also chairs the finance programme at a local university.

“There is no way a sane investor should buy the shares if the return is not much more than the 14 percent expected return of the market as a whole,” he explained.

A group calling itself the ‘Concerned Non-Government Organisations of Bakun’ recently released a packet highlighting financial misgivings about BHC’s listing.

But many individual investors do not really thoroughly study a stock’s fundamentals before buying into it. They often treat initial public offerings like raffle draws, with neat profits going to the lucky investor.

Thus, BHC may yet be fully subscribed. And if it is not, the shortfall is likely to be borne by underwriters.

Still, BHC officials are hoping to raise the funds they need to the Bakun project off the ground. But getting money for the massive project is not easy, judging by the results of the firm’s recent efforts to get some help from the Malaysian government.

Ekran recently asked the government to guarantee a one billion ringgit credit facility for BHC, needed to tide the firm over until the public listing brings in money.

Instead of a guarantee, the government provided only a ‘letter of comfort’ that confirms its support for the Bakun project but does not commitment it to repay debts.