Investing in Overseas Power Projects: Some Practical Considers for Malaysian Companies

Globalisation post World War Two has resulted an increase in cross-border investments by capitalist entities who are constantly on the look-out for better investment opportunities. With the exponential growth and advancement of technology, investors (including Malaysian companies) may not simply stay in the comfort zone of their home country but would rather explore the global stage and look for potential investments abroad.

Malaysia is a relatively small market of about 31 Million¹ population with GDP estimated at about USD 365 Billion² in 2019 compared to advanced countries like neighbouring Singapore, China, US, Germany and France. In Malaysia, the total production of energy supply in Malaysia is 112,867 (ktoe).³ Sources of power generation in Malaysia include fossil fuels, hydro, solar, and biomass sources.

To expand, in addition to the available opportunities in the country, Malaysian investors may look beyond the Straits of Malacca and South China Sea to find bigger and more lucrative business ventures. Below are some of the considerations for Malaysian companies seeking to invest in overseas power projects:

Safety Of Investment

When investing abroad, a key concern for an investor is the security of its investments. For substantial sum of investment in the energy sector, the power generation business may be vulnerable to risks influenced by local politics and the current energy policy of the target country. For example, the UK Government has announced its plan to put their coal-powered energy plant to a complete stop by 2025⁴. Closer to home, the previous change of government in Malaysia in 2018 has seen four IPPs cancelled by the Government.⁵

To ensure the safety of one’s investment, the investor must first conduct risk assessment on the project covering various aspects including legal, political, environmental, financial and social. From the legal point of view, a comprehensive understanding should be grasped by investors on laws applicable to the power business such as business operation laws, land laws, energy supply laws, fuel supply laws, environmental laws, local government law, and the planning regulations.

In addition, an investor has to consider all options available to protect its investment and this may include a neutral dispute resolution procedure and mechanisms such as arbitration proceeding. Due to the confidential nature of arbitration proceedings, many corporations prefer incorporating arbitration clause in the sale and purchase agreements and shareholders agreements.

Subject to the local laws of the respective countries, investor may address the uncertainties of its return of investment by incorporating a put and/or call option in the shareholders agreement of the project company which enables it to increase or reduce its investment after a certain period of time. For example, if the project goes smoothly, an investor may exercise its call option to increase its shareholding in the project company.

Alternatively, if the investor sees that the project faces a potential disruption and reduced profit, it may exercise its put option to reduce or completely sells of its shares in the project company to the other shareholders.

In addition, some countries may require the foreign investor to partner with a local entity. In doing so, the investors is recommended to conduct the necessary due diligence to evaluate the trustworthiness, credibility and the capability of its potential local partner to undertake the project given the size and duration of the investment.

Barriers To Entry

One of the major concerns in investing in power sectors abroad is the barrier to entry put up by local governments. Like Malaysia, the power generation industry is highly regulated by many countries to, amongst others, ensure the security of energy supply for the nation, maintain electricity at affordable rates, minimise pollution to the environment, prevent unethical business conduct or illegal activities such as corruption and money laundering.

As an example, in the case of China, Mark Hutchinson, vice president of APAC power and renewables consulting at global energy consultancy Wood Mackenzie who spoke Asian Clean Energy Summit in Singapore in 2019, said that “Right now, China’s renewable energy sector is government driven. Going forward, it will be more economically driven” and “the Chinese have their own homegrown technology in wind and solar, so there’s little room for foreign players to participate.”⁶

In addition, with majority of the energy companies in China being government owned or controlled, it is almost impossible for any foreign investor to participate in the energy sector in China.

Energy Source Based On Country

For companies looking to invest abroad, they must always consider the availability and the viability of utilizing the available source to produce energy in the country they plan to invest in. As an example, nuclear energy may seem to be the most advanced, but in 2019, it actually accounts for only around 10% of the total energy production in the world⁷ and thus, there are many other sources of energy to be considered by investors.

Apart from China, US, India, and Russia who are considered the biggest power producing countries in the world,⁸ Scotland has already built the world’s largest floating wind farm⁹, Japan is leading in solar power generation via floating solar panel¹⁰ while Morocco is building the world’s largest concentrated solar farm generating more than 500 MW¹¹ annually utilising its location near the equator. Therefore, companies must first analyse the potential of each energy source depending on the destination of investment.

Cost Of Investment

Along with offshore investment, investors must always keep in mind the, sometimes hidden, cost of currency exchange and tax structure of the respective countries that may burden and, to a certain extent, diminish the profit of the whole investment scheme. A country that frequently revises its tax policy may cause uncertainty to the return on investment for long term power projects. Therefore, we always recommend investors to appoint tax and financial consultants from the country of the target company to advise them accordingly.

Direct Shares Purchase Or Via Stock Exchange

To invest, an investor has to decide on the manner of investment which is either by way of acquisition of shares through sales and purchase agreement or by way of buying stocks of companies owning power concessions which are traded at stock exchange.

Buying traded public shares is a quick and no-negotiation way of investing compared to direct shares acquisition. However, for transactions at the stock exchange, an investor must factor in the cost for brokerage which at times can be costly and there are limited number of companies available at the stock exchange.

Investing in a power project by way of buying shares over the stock exchange also may not provide investors with a high degree of control as there may be limited number of shares being traded.

Moreover, an investor who purchases the shares at the stock exchange would not likely be able to appoint its directors in the power project company to provide direction and steer the target company accordingly in contrast with an investor who acquires the shares privately which usually allow him to nominate its own directors depending on the number of shares it owns.

Ultimately, both methods of investment have its own pros and cons. The investor should decide on the method of investment depending on its aspiration and the degree of control envisaged over the target company.

Conclusion

In addition to appointing local tax and financial advisors, the investor is also advised to appoint a local counsel in the country that it is investing in. Azmi & Associates is the sole Malaysian member of the following networks:

1. Terralex (www.terralex.org) which is a network of 163 law firms with around 21,000 lawyers across 113 countries; and
2. First Law International (www.first-law.com) which is network of lawyers in more than 100 jurisdictions.

With trusted local partners available within our reach, Azmi & Associates is able to provide clients with seamless, fast, and secured legal services for our clients to invest abroad with a peace of mind.

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¹ https://data.worldbank.org/indicator/SP.POP.TOTL?locations=MY&name_desc=false

² https://www.imf.org/external/pubs/ft/weo/2019/02/weodata/weorept.aspx?pr.x=59&pr.y=4&sy=2017&ey=2021&scsm=1&ssd=1&sort=country&ds=.&br=1&c=548&s=NGDPD%2CPPPGDP%2CNGDPDPC%2CPPPPC%2CPCPIPCH&grp=0&a=

³ https://meih.st.gov.my/documents/10620/bcce78a2-5d54-49ae-b0dc-549dcacf93ae

⁴ https://www.theguardian.com/business/2018/jan/05/uk-coal-fired-power-plants-close-2025

⁵ https://www.nst.com.my/news/nation/2018/10/424997/yeo-4-ipp-projects-cancelledgovernment

⁶ https://www.cnbc.com/2019/11/04/chinadoes-not-need-foreign-help-in-renewableenergy-wood-mackenzie.html

⁷ https://www.world-nuclear.org/informationlibrary/current-and-futuregeneration/nuclearpower-in-the-world-today.aspx#:~:text=Number%20of%20Operable%20Reactors%20Worldwide&text=Around%2010%25%20of%20the%20world’s,from%202503%20TWh%20in%202017.

⁸ https://www.nsenergybusiness.com/features/top-electricity-generating-countries/

⁹ https://www.bbc.com/news/uk-scotland-49125399#:~:text=Scotland’s%20largest%20

offshore%20wind%20farm%20has%20been%20officially%20opened%20by,energy%20to%20power%20450%2C000%20homes.

¹⁰ https://www.weforum.org/agenda/2019/03/japan-is-the-world-leader-in-floating-solarpower/

¹¹ https://www.ecohz.com/renewable-energysolutions/powerplants/noor-solar-power-inmorocco/#:~:text=Noor%20Power%20Plant%20in%20Morocco,kWh%2Fm2%2Fyear.

Written by:

Mohd Farizal Farhan Abd Ghafar & Mohd Salahuddin Saufry Hamzah (general@azmilaw.com)