• Abstract and Figures
• Public Full-text

----~----------~·~-----------------------~-----------------------~----~--- COVER STORY ter success rate in the balloting proce . Everyone then focuses on the potential return. Of late, because of the market downturn since the end of March, another question is beginning to resur­ face: what is the risk? Investor~ will have to focus on both these issues - risk and reward - in the forthcoming li-. ting of BHEC. The danger for im es­ tors is in not focu~ing suffi­ ciently on the risks of the new listing creates in­ vesting public. All the better if project, for that can result in terest in the financial it is a large one - with more quite distorted valuations on the community and the in- shares to go around and a bet- company be1ng floated. Aliran Montlrly 1997: 1714) Pagt 2 Floating The Bakun Sha~ Roller Coa~tcr On The KLSE US-Aided Tobacco j.)nn~ In Asia Conquest The Myth~ or 'Constructive Engagement' Independent But Still In Bondage 12 La,)outond G1"8phkbyLtttorSI}~rlmp.-...iuo 61. bl Flwr. \\'bfu Saw Khaw Lean. Current Concerru. 16 I'•~ Wtld, 10300 Pulau Pin•n•, Ma.la.)"io. Thinking Allowed 19 Ttl: 1\0.1·2621377 ··Ax: 1\0.1-262.2376 J] Subscription 32 Aliran is a Malaysian non-governmental organisation listed on the roster of the Economic and Social Council of the United Nations. Guided by universal spiritual values. Aliran strh!!s for gl!nuine unity by promotmg Published by Aliran Kescdaran Ncgara (ALIRAN) ,odal justice and human dignity Membership is open to 12. Jalan Pantai Aziz Ibrahim, all MaJay:.;ans above 2 1. If you arc interested in joining 11900 J'ulau J>inang, ~lala}~ia. (Postal Addnoss: P 0 Box 1049. Allran, pleao;c contact the Iron Secretary at the address 10830 l'ulau J'inang, '\tata,~iu.) !thown in this page. Tel/ Fax: 604 -64157115 A/iran Mfmthlv 1997: 17(2) Page 3 -----------., GREATER RISK the year 2003 and there is much that borne by the contractors. ABB of can go wrong between now and Sweden/Switzerland. If any of the The issue then is: what cost of eq­ then. Hence, its cost of equity is costs for the construction of what is uity should one usc? The basic ap­ necessarily higher than that of specified is higher than e~timated. proach advocated in finance text Tenaga and Malakoff. ABB bears the burden. However. if booh h to look at the stock mar­ during construction it is discovered ket return and then adjust for the What are the major risks for BHEC? that the design has to be changed, riskiness of the particular company These can be defined into three then the cost of the necessary 'varia­ in question. The market return main categories: tion orders· will have to be borne should be over a suitably long pe­ byBHEC. riod to average out short-term • Delays anomalies in market return. Over a • Cost over-runs Nobody really knows whether all 20-year period, the KLSE has re­ • Operational risks the aspects of construction of this turned 13.7 per cent on a com­ ma~sivc dam and connecting trans­ pounded annual b~is, which is a Delays can tum what appears an at­ mission link have been or even can fair estimate of cost of equity for a tractive project into a financial be taken into account in the design company whose shares are neither nightmare. For every year a project plans. This introduces much uncer­ more nor less risky than the aver­ is delayed, a high interest cost has tainty in a'iccrtaining the ultimate age market (or in technical par­ to be paid (which builds up each cost of the project. This is not pecu­ lance, where the beta is one). year with higher debt) and the posi­ liar to Bakun alone. A World Bank tive revenues. necessary to pay stud)' on hydroelectric projects in­ But how risky is a company like those debts. are pushed back. If it is dicated that almost all of them had BHEC? How do you decide given seriously delayed. the banks will be cost over-runs and delays. that it is not yet listed? A tempta­ very reluctant to lend more money tion that promoters of the project to a project that has thus become Operational risks relate to whether will lead you into i!> to look at the riskier. In Malaysia. ~>erious delays the dam will operate as planned. average riskiness of other power have not been a problem for infra­ ABB is providing a performance company shares on the market, i.e. structure projects: but Malaysia ha~ guarantee for the first few years. But Tenaga and Malakoff. The riski­ never undertaken a hydro project as this will not cover the risk of a ma­ ness or these shares, based on their large as Bakun and no country in jor canhquake. The island of Borneo fluctuations relative to the market, the world has installed a 600km is seismologically much more active is comparatively low. Their share underwater se.a cable to connect the than West Malaysia and this risk is prices do not fluctuate as much as source of power supply (Bakun naturally under-estimated from this most of the market. Technically dam) with the consumers of that side of the South China Sea. Also. speaking, they have a low beta electricity (in West Malaysia). if siltation is greater than expected, which reduces the cost of equity for then this IS not a design fauJt and the!>e companies relative to other It is difficult ar the outset to quan­ the nsk of Joy.er than estimated listed companies. tify the risk of cost over-runs. Cer­ water flow will be borne by BHEC tainly, this is a problem that our shareholders. To use the betas of power compa­ projects have faced in the past. The nies that are already operating to North-South Expressway, which Another operational risk can arise estimate rhe cost of equity for initially was estimated to cost RM4 from the vagaries of the weather. BHEC is another mistake to watch billion finally cost RM6 billion in­ The dam will get enough water if out for. The betas (share fluctua­ stead. The cost for the Pergau dam the yearly rainfaU is close to the av­ tions) of these stocks is low because in Kelantan is reported to have erage that has been calculated based I the companies have steady doubled from initial estimates. on past rainfall data. Howe\'er. cash fl ows and earnings that areal­ yearly variations can mess thing~ uu• ready streaming in. The positive With the Bakun project, an element quite a bit. It has been estirn:lled that cashtlows for BHEC only come in of risk of cost over-runs is being if there is lower than a' erage rain- ----- A/iran Monthly 1997: 17(4) l'agt 4 fall for three years in arow, the dam vesting in companies that are al­ If this is the rate of return that eq­ will be unable to generate the mini­ ready up and mnning, why should uity investors will get from the mum amount of power tharir is sup­ they invest in a start-up company project, it is not surprising that for­ posed to supply Lo Tenaga and with earnings only six years down eign investors are showing only SESCO. Given the bigger varia­ the road (assuming no delays)? lukewarm interest. Plans to offer a tions of weather that we have been That is six years of risk for things portion of the shares to foreign in­ experiencing in the last few years lOgo wrong. vestors are now being scrapped. (perhaps due to the greenhouse ef­ Why should _investors take a return fect?). one should not ignore such There is much potential downside below the market average for a possibilities. but litllepotential upside-at most, project with risks much higher than ifthe work is speeded up, the dam practically all listed companies? If After the initial guarantee period, might be completed slightly ahead this is an issue that cannot be sold any risks of any sort of under-per­ of schedule but that would only to foreign investors, is it one that formance will result in below-ex­ raise concerns over the quality of local investors should be subscrib­ pected retums for investors in the construction. (The Nortb-SouthEx­ ing for? company. There would be greater pressway was completed 14 months assurance that problems will not ahead of schedule, but within three No doubt the proponents of the suddenly crop up after AB B · s guar­ years an embankment holding up a project will want to go ahead be­ antee period is over if the propo­ hillslopc collapsed and the earthfell cause once the project is running, nents of the project had vast expe­ onto the highway, ki11ing a lorry at­ the earnings may be huge and rience in hydro-power operations. tendant.) cashflows strong. Bur to look only ButEk:ran's experience in this area, at potential returns without taking prior to undertaking the BHEC The only reason investors would into account potential risks is to ig­ project, is zero. buy BHEC shares is ifthe projected nore the basic lesson of finance return was substantially higher than theory: high risks require high re­ Here, we must re-emphasise that the average market return. That turns. Low retums can only be jus­ risks for this project come not only would then compensate them for tified by low risks andBakun is not from operating the dam, but also the risks they have to bear. The rate a low-risk project.

Load more

  40

Copy Link