What's wrong with TNB ....

TNB is a company that has a monopoly in the distribution of electricity. Yet, for years, it's complaining about shortfall in profits or losses. If it's not one, it's the other.

And because of this, it's always complaining to the government to revise tariff rates upwards in order to make up for its shortfall. It is always complaining that if its loss or shortfall is not due to translation loss (due to unfavourable exchange rates on its loans), its due to other operating costs that have gone up. Lately, it claims that it doesn't receive enough gas from Petronas and had to operate its generators using expensive fuels, resulting in a loss. Prior to this complain, it said that it had problems with imported expensive coal for its coal-fired generators. It tried to mitigate this problem by being involved in a coal mining company in Indonesia, ostensibly, to be able to obtain cheaper coal, but then after a few years, it got out of the coal mining business.

Because of this, it gained sympathy from the Federal Governtment to charge us consumers additional tariffs. And we consumers paid for these extra charges. Lately, it claimed that it suffered losses from Jan 2010 to Oct 2011 due to lack of gas supply, and had increased tariffs as a consequence. Surprise of surprise, today it was announced that the Federal Government and Petronas would jointly compensate TNB for their losses, when we consumers have already compensated TNB by paying electricity at the new tariff rates. Would TNB then reverse its rates ? Knowing TNB, never !

But the funny thing is that TNB never complains about the IPPs, those private electrical companies (e,g. YTL Power, Sime Darby, Genting Sanyen, to mention a few), that supply power to TNB for TNB to supply us. These IPPs, when on standby, have the luxuries of charging TNB a certain amount (which TNB has to accept) even without giving a kilowatt of power, and when these IPPs really provide power to TNB, their fuels are subsidised by Petronas ! TNB is imposed with a double whammy of charges yet it never raises a whimper of complains ! All it ever does is moaning and groaning about not making enough money as an excuse to raise tariffs. We consumers have been taking this lying down.

In his Memoir, A Doctor in the House, ex-prime Minister Mahathir Mohamad specifically states on Page 504, about the arrangement with an IPP following a national blackout that, for a while, cripple the industry. [He states "following the breakdown in electricity supply, the government issued the first license to an independent power producer (IPP). Unfortunately, the government negotiators were not familiar with drawing up power supply agreements with IPPs. They followed a US model which included a Take or Pay clause: a certain payment had to be made to the IPP whether or not the national power company sourced power from it, and that IPP made huge profits as a result. We did try to renegotiate the agreement but the IPP company refused. Subsequent agreements on power 0ff-take from IPPs did not have this provision].

Who the first IPP was, was not mentioned, but I suspect it's non other than a company in the YTL group.

There was a time when TNB marketing policy was that the more electricity comsumed, the less was the tariff rate beyond a certain amount of power used. The idea was to encourage the public to use more electricity. There were no complains about shortfall of profits or losses then. This policy was, however, reversed (may be in the late 70s) to one that the more electricity consumed beyond a certain amount of kilowatthour, the more the public pays. In fact, the tariff escalated, even to this day. Does it mean that the idea was to discourage the public from using more electricity ? Yet, despite this grossly unfair and predatory tariff rates, TNB complains on losses or shortfall in profits !

I can only attribute TNB's problem to inefficiency in the administration, due mostly to its inability to handle power thefts especially for supplies to large consumers like factories, shopping complexes and the like. Power thefts committed by individual households are insignificant compared to those installations that consumed large amounts of power.

I remember way back in the late 1990s when the Mahathir administration proposed to set up the Bakun dam to generate 2.4 gigawatt of power in Sarawak and tap some of it into Peninsular Malaysia. There were a lot of protests by the local (for wasting money, helping cronies, etc) and international (for environmental damages, etc.) communities for such additional power when it was claimed, even during those days, Malaysia was having more than enough power for Peninsular Malaysia. Mahathir, however, pushed his proposal through and, after some hiccups, finally managed to have the power dam built in Bintulu, albeit now producing 900 megawatt of power, with provisions for installation of another 1.5 gigawatt in the future.

Banks can never ever lose ....

Without a doubt, the banking business is a lucrative one. Some say that it is a fraudulent business since the law allows that a banker ( a vogue term now is a bankster to rhyme with gangster) can lend 90% of its clients money to other borrowers keeping the remaining 10% in the safety of its vaults. The idea of the 10% reserve is for the bank to be able to repay to the client if he decides to withdraw his money. Even if the clients wishes to withdraw money that makes up all the 10 % reserve (or even all his money), the bank can still meet its obligation; because there is such a thing as the interbank system by which, when a bank is short of money, it can borrow from another bank. Of course, the borrowing bank has to pay interest, at the overnight interest rate plus a service fee, to the lending bank. This is how banks scratch each other's back in times of difficulty.

To keep it simple, let's say that a client keeps his money in the form of a fixed deposit, to earn a 3% annual interest. The bank, in turn, lends out 90% of the client's money to earn itself a 6% annual interest. So the bank makes a gross profit of 3%. Not really much when you think that the bank makes as much as the client. But wait, the bank makes money without any capital at all because it makes money out of the client's capital. From the clients point of view, his return on investment (ROI) is a mere 3% whereas from the bank's point of view his ROI is an infinite percentage. Of course, in practise, the bank could only make 6% on 90 % of the client's deposit and has to bear the 3% cost of the 10% deposit that lies in his safe, doing nothing, plus other operating and admistrative costs. While the bank's ROI is not quite infinite, it's still a huge percentage. Further, a bankster earns more on savings deposit since it bears less interest cost and earns even more on current accounts deposit since it bears no cost at all. And that's how a bankster makes a lot of money.

The above describes, what some economists say, as a form of Fractional Reserve Banking. It is fractional in the sense that the bank is allowed by law to lend a larger fraction of the deposit (in this instance, 90%) and conversely is required to hold the smaller fraction, a minimum of 10% of the money deposited. It's not a breach of central banks regulation if the bank's reserve deposit is more than 10%, but the converse is illegal and punishment can be severe. There's no money creation here since the initial deposit still remains in the bank's vault plus the money that the bankster holds in his hand that he's about to lend.

Money is created only when the bankster starts providing loans amounting to 90% of the original deposit. The money created is commercial money (as distinct from the original deposit money which can be cash, gold, stock certificates, land titles, etc.) given out in the form of credit or an overdraft with the bank. The borrower in turn deposits the borrowed money (the money that he withdrew, to the hilt, from his bank's overdraft facility) to a second bank, which holds 10% for reserves and lends out the money to a second borrower a further 10% less than the original deposit. This process is, say, repeated to 9 more borrowers (and 9 more banks respectively down the line, on the same terms as the first bank) with the result that the amount of money lent out approaches nearly 10 times the original deposit in the first bank. This is what is meant by money creation, increase in money supply, as a direct result of the system of fractional reserve banking. And with interests thrown in to increase further the money supply, money seems to be created from nothing. And that's why some economic school of thought reckons that this system is an outright fraud !

The weakness of this system is obvious. Yet, most central banks (and all commercial banks under the respective central banks) in the world practice this system. The weakness is that if all depositors of the banks decide to withdraw all their deposits, there's no way that these banks can come up with the money because they have only just the 10% of the deposits. There would then be a bank run, which is something all banks dread. But human behaviour is peculiarly strange in that banks know that their depositors never withdraw all their money at once. And so long as this behaviour remains, banks have no fear of a run on their banks and the system of fractional reserve banking remains stable for a while. But there are some notable exceptions when depositors lose confidence in a bank or the banking system of a country. And this is where the Central Banks come in as "the lender of last resort". To prevent a bank run, the troubled bank merely appeals to the Central Bank to lend money, as the system guarantee to support any bank within its fold. In most cases, the central bank steps in to rescue.

On the extreme opposite is the Full Reserve Banking in which banks are required to keep 100% of the clients' deposits. There's no fear of a bank run since the banks have all the money to meet immediate demands. Some school of thought reckons that this is the better system since there is no or less money creation or increase in money supply. It is a system favoured by the Austrian School of Economists. But where would the bankers obtain their sources of money to make loans ? The answer is that they have to get it from the shareholders of the banks, that is, from their own sources of capital; in which case, they have to be careful to whom they are lending, and are especially subject to extra vigilance from the bank shareholders. The funds are limited, since the paid up capital of the bank is itself limited, and the amount given out as loans may not be even more that 50% of the shareholders funds. The bank is forbidden to use the depositors money as it's against the law.

But this system is not conducive to a growth in the economy of a country, since by its very nature, no money, except from shareholders, is available for the bank to lend. It might even defeat the purpose of a bank except for it being just a depository of money. The bank may even have to charge the depositors a fee or "negative interest" on the amount deposited. Consequently, the economy of a country runs the risk of becoming stagnant or, if prolonged, going into a severe recession. A better system implies that some compromise should be formed between a full reserve and a fractional reserve banking system. In order to gradually control inflation, by bringing it down to manageable level such as 1% or even less, a central bank could gradually contract the money supply, by gradually increasing the bank's statutory reserve by 10% annually say, to such a point where the risk of a bank run becomes minimised and a deflationary situation is avoided.

Compare the bank business with other type of trades that provide similar financial services. What I have in mind are the money lending, loan sharking, and the pawn shops, businesses that provide loan to their clients. Ever wonder why these other businesses charge their clients high rates of interest.

Unlike the pawnshop business, the money lenders and the loan sharks have to use their own capitals when making loans. No body would ever deposit money to people involved in these 2 trades as though they were bankers. Clients that approach them are those who are in need of a loan - borrowers, not savers. The interest rates they charged are exorbitant, depending on who the clients are. A high risk client may be slapped with a 10 % interest per month and only allowed to borrow for not more than 6 months, usually, 3 months in the case of loan sharks. Not only that, defaulters are charged at much higher punitive rates if payments are not on time.

One may think that with interest rates so high, the loan sharks make a lot of money, more so than a bank does when it lends the same amount of money as the loan shark. In reality, the loan shark perpetually runs the risk of defaults. There are perhaps more defaulters than good borrowers. And it is a business that is illegal, that, often times, requires strong arms tactics to enforce its terms, and attracts police harassment. The money lending business is better in that it is subject to the Money Lending Act, loans are usually covered by property, chargeable interest better than a bank's and at higher rate too. But better still is the pawn shop business where interest charged to borrower is at 2% per month, and collaterised by way of, usually, gold jewellery or watches of reputable make e.g. Rolex, to be redeemed not later than 6 months. Unscruplous pawn shop owners may resort to shortchanging their clients by gold thievery. The pawnshop owner is secured when lending its money. Unclaimed pawned items are usually sold for better than the loan amounts, including interest.