YTL a Malaysian grown utility giant
The Star BizWeek, 15 February 2003
|Father and son - Tan Sri Yeoh Tiong Lay (left) and Tan Sri Francis Yeoh
COVER STORY: THE YTL COUP
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. Here are extracts of the interview, which have been updated.
TAN SRI FRANCIS Yeoh should have been on the cover of the fourth issue of BizWeek in August last year.
In fact, the pages on the YTL story had already been laid out for printing on Friday night. The theme was about YTL’s corporate coup in winning over Wessex Water Ltd in Britain and the future plans of the Malaysian utility and construction giant.
However, on Thursday night, BizWeek got wind that London police had raided the home of Colin Skellett, Wessex’s managing director and he was being charged with taking a bribe of one million pounds sterling from YTL. (Fifty-seven year old Skellett, known as “Mr. Clean” in the British water industry, had maintained that the money was an incentive payment for him to stay on with Wessex)
The news had the potential to change the complexion of our story. I rang up Yeoh at 11.00pm and he confirmed the police investigation. I told him we would have to defer the story, and he agreed.
“Let the police do their job. Wait till the investigations are over. We had done nothing wrong and I am confident that we will be vindicated,” he says.
Last week, five months later, London police announced that they were dropping their investigations and said that they had found no criminal offences being committed.
When I met up with Yeoh earlier this week for another interview, he was sanguine about the whole episode.
“I am glad the matter is closed and we can now get on with the job of providing better services to our customers and share value to our shareholders,” Yeoh says.
“And thank you for having faith in me,” he added.
So where does the YTL group go from here? Well, in the first place the Wessex investigations had not slowed or derailed any of YTL’s operations or expansion plans. YTL remains a finalist for the bid for British Midlands electricity utility.
Negotiations are going on well with Tenaga Nasional on a power producer agreement for the Jimah power station that YTL is building in partnership with the Negri Sembilan royal family. The plant would be using coal, which would mean a cost savings of RM8 billion over 25 years.
Wessex’s performance had been above expectations and this has whetted YTL’s appetite for regulated assets.
Yeoh asks: “I don’t know why many businessmen find regulated businesses boring. We find this business exciting. What’s so boring about an asset that is producing profit year after year?”
YTL, Yeoh says, is evolving to be a global services company.
He went on to elaborate. For more please read the YTL story on pages 12, 13 and 14. – WONG SULONG
Searching for regulated business
Exclusive interview with Tan Sri Francis Yeoh
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 bailout 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 manage 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 do 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 nonrecourse, so you have to take that off actually. It has to be consolidated in the balance sheet but it’s a nonrecourse 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 RM63 billion.
If the project goes wrong, I don’t owe the bank RM63 billion, it’s the project company that owes the bank this RM63 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 RM63 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.
YTL a Malaysian grown utility giant
| Yeoh at his workplace
“We started from a low base of low cost housing and that’s why all our products must be low-cost. We want to offer world-class products at Third World prices,” Yeoh says
YOU can say that Tan Sri Francis Yeoh and his YTL group are in love with operating regulated utilities.
The answer is not hard to find: YTL is one of the pioneers in this business in Malaysia, and now has an impressive list of regulated utilities across three continents.
To hear Yeoh tell it, the regulated business sounds so simple and profitable.
First, you must have a government who understands business; namely the need to allow the investor/operator of the utility a decent profit.
On the other hand, the investor/operator must provide quality products and services at reasonable prices to the consumers.
But of course, it is not as simple as that It takes years for YTL to build up the expertise and reputation to undertake these huge projects.
But now, with RM4 billion cash in its coffers, YTL Corp is on the lookout for more regulated utilities assets.
Its most celebrated corporate coup to date is the purchase of water and sewerage company Wessex Water Ltd in Britain from the bankrupt Enron of the US.
YTL Power won the coveted asset after edging out other big name rivals that included British banking heavyweights Royal Bank of Scotland and Abbey National, along with Goldman Sachs.
YTL also has a third of ElectraNet Pty Ltd, with a A$980 million concession operating 5,566km of high voltage transmission lines and the principal electricity transmission service provider for the state of South Australia.
To further secure its long-term earnings, YTL is in a joint-venture with Jimah Power Holdings Sdn Bhd to develop a RM5bil 1,400-megawatt coal-fired power plant in Negri Sembilan. It also has a 40 per cent stake in Express Rail Link Sdn Bhd, the concessionaire of the KLIA Express train service that links KL Sentral in Brickfields and the Kuala Lumpur International Airport.
In contrast, its planned investment in a US$600 million power plant project in Hwange, Zimbabwe fell through after it drew criticism that the Zimbabwean government was transferring ownership of assets to non-Zimbabweans instead of indigenous Zimbabweans.
But given the tattered state of Zimbabwe’s economy and the political situation in that country, it is probably for the better that the project did not proceed.
From corporate deal clincher to street party host, online education provider and avid supporter of arts, YTL has done well to transform itself from a construction company to a global infrastructure conglomerate.
Stock analysts who cover the group have given strong ratings to the group for its entrepreneurial spirit, professional management, focus, and geographical spread.
ABN-Amro Asia analyst Lucius Chong, who called a “buy” on YTL’s stock, says the group had the benefit of a “solid” management team as reflected in the approach that it took during the last financial crisis.
“During that time, there was a great temptation to make more acquisitions, to go out with all the guns blazing. But, YTL took a very measured and progressive approach,” Chong says, adding that relative to other infrastructure companies, the quality of the group’s earnings was good.
An analyst with KAF Research agreed that the conglomerate is well managed, adding that it is logical for YTL to seek to acquire more regulated assets that will ensure a stable stream of earnings in view of its sizeable cash pile.
According to Yeoh, YTL learnt about the virtues of regulated businesses as far back as 1986 when it built low-cost houses in Bercham.
“We had a deal with the government where we were given the land without a charge. In that way, we didn’t charge the buyers the premium on land either, so they could get their houses at RM25,000 and we could make a small profit. Because we didn’t pay for the land, we could give a better designed house at RM25,000.
“We started from a low base of low cost housing and that’s why all our products must be low-cost. We want to offer world-class products at Third World prices,” Yeoh says.
World-class products at Third World prices
Who the hell is YTL? Asked one English newspaper when it was announced that YTL had pipped a number of better-known international bidders for Wessex
WHEN reporter Liau Y-Sing (now with Reuters news agency), photographer Samuel Ong and I were ushered into the office of Tan Sri Francis Yeoh, he was in a happy mood.
He had just been informed that his eldest son, Keong Yeow, had gained admission to the Imperial College of the University of London for an engineering degree.
“He had three A’s for Physics, Maths and Business,” Yeoh said proudly, as I extended our congratulations.
So the first of a new generation of Yeohs is equipping himself to take over the YTL business empire that has grown, in a span of 50 years, from a small Malaysian construction company to a global infrastructure and utility group.
Francis Yeoh, representing the family, is one of five Malaysians listed on Forbes’ “Billionaires List.”
He had been spending a lot of time lately in Europe and visiting the newly acquired Wessex Water Ltd in Britain, which was acquired from the bankrupt Enron.
The Wessex acquisition was a corporate coup, and sparked a lot of interest, curiosity and envy about YTL.
“Who the hell is YTL?” asked one English newspaper when it was announced that YTL had pipped a number of better-known international bidders for Wessex.
I asked Yeoh whether he was pleased with the purchase.
“Very much so. It had many more upsides than we thought it had. The Wessex management is with us and they are very pleased with the new owners like us. They’re one of the best water companies in Britain and we want them to be the best,” he says.
Right now, YTL is looking whether Wessex could do better with its capital expenditure. The water utility spends about RM500 million annually on capital expenditure, and Yeoh feels there could be big savings in this area, without sacrificing quality and standards.
“They will benefit from our ability to manage capital cost very efficiently because YTL in Malaysia has been able to build power plants 40 per cent cheaper.”
Yeoh is very proud of the water processed by Wessex. He flies some of the water to Malaysia and serves it at YTL’s hotel outlets that include the Kuala Lumpur Ritz Carlton and the JW Marriott.
“You can drink Wessex water from the tap, he says.
Therefore, Yeoh sees opportunities for the YTL group in water and sewerage projects in Malaysia.
I asked him about his visit to Europe.
“There are many European companies which own regulated assets in Britain. Many European companies are in trouble because they have over expanded and (are) over geared. So they might be selling some of their assets to reduce debt There might be some interesting British assets they might be thinking of disposing of,” he says.
I asked him whether YTL is looking at utility projects in China and India, where the need is obviously huge.
“The time is not right,” Yeoh says. These countries, Yeoh pointed out, still had a problem appreciating the fact that the investor had to be allowed to make a reasonable profit from his investments; not forgetting that the bankers and other financiers also need to be assured of a reasonable return.
Regulated businesses normally are capital intensive and have a long gestation (period); the government must ensure that the terms of the agreement do not change during the life of the contract.
While the demand is huge in both China and India, the fact remains that most of the population in these countries are unable to pay for these services.
Yeoh says: “For an investor to do well in these countries, he must be able to do world class utilities at Third World prices. We have succeeded in doing this in Malaysia, but for China and India, you would also have to consider the currency risks.”
“In one project in Thailand, the Thai government guaranteed the baht at 26 to one US dollar for the duration of the concession (the baht is now 42 to the US dollar). Are the governments of China and India willing to guarantee that kind of risk?” he asked.
We returned to YTL’s businesses in Malaysia. The YTL group is involved in construction, property development, hotels, and power generation and most recently, in the construction and operation of the Express Rail Link (ERL) between Kuala Lumpur and the KLIA.
Since YTL has so much expertise in operating regulated businesses, would it be interested in the construction and operation of toll roads in Malaysia?
“I reckon we are a bit late in this business,” Yeoh says. “The North-South Expressway (operated by PLUS) is a fantastic business, but where else can you build a toll road nowadays? But toll roads in Europe are worth a peep.”
We turned to how the Yeoh family manages the business, and how decisions are made.
Yeoh says: “My father is chairman of YTL Corp, and I am managing director of the parent company and its subsidiaries, My (four younger) brothers and (two) sisters are executive directors.”
“One day, I presume I will take over the chairmanship when my father retires, and one of them will be managing director. But they are being put to the test, like I had to when I joined the family business.
“So while the Yeoh family provides the entrepreneurship, we have a set of management that is non-family, all of them professionals. They sit in my ‘Cabinet’.”
“There are 30 of them including my family members and we meet every Monday, To an extent you can say we govern like ministers and the results are there for you to see – we produce world class products at third world prices, and we do it year after year,” he says.
Partly because of their Christian upbringing, the Yeohs are most reluctant to retrench staff.
Yeoh says: “When you retrench somebody, it’s not one person that is affected. He or she has a family and it’s heart wrenching to see the lives of so many people changed for the worse. It’s a horrible feeling to have to sack.”
“That’s why we make sure the YTL companies do not over hire. That’s also the reason why YTL is moving away from cyclical businesses to regulated business, and even if it’s a cyclical business, like cement production, we organise our operations in such a way that we minimise the need to retrench.
“So I may be soft in the heart, but I am not soft in the head,” said Yeoh. “Either by design or luck, the Yeoh family seems to have the magic touch,” says Yeoh.
When YTL got the award to build the first independent power plant at Paka in Trengganu, the company took a ringgit-denominated syndicated loan, instead of the traditional US dollar-denominated loan.
When the Asian financial crisis hit in 1997, and Malaysia had to peg the ringgit at RM3.80 to the US dollar, YTL did not suffer the ringgit’s sharp depreciation.
The Malaysian economic recession also provided YTL an opportunity to buy cheaply into Taiping Consolidated Bhd (now renamed YTL Land & Development) that owns the upmarket shopping centre Starhill and the adjacent JW Marriott Hotel, and the Sentul Raya property project, all in Kuala Lumpur.
And earlier this year came the Wessex acquisition. The Christian in him would not allow him to take any credit for any of these.
“I like to say categorically, and you must quote me, sometimes I like to take the credit. But I think God writes the scripts and I am a wiggly willing pencil.”
After 90 minutes, it’s time to go. “Tan Sri, could we take a picture of you and your dad before we go? I don’t think I have seen a picture of both of you for many years.” I said. We walked through the connecting door.
Tan Sri senior felt he wasn’t dressed for the occasion. But the gentleman he is, he obliged.