Business Commentary

Can lop-sided privatisation of the past be legally unwound?  

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TheMole
Written by TheMole

 March 23, 2018

By Salahuddin bin Hisham

 IN December 2015, Prime Minister Datuk Seri  Mohd Najib Abdul Razak admitted that when the ERL deal was signed in 1997, it was lop-sided.

 That was not the only lop-sided deal in favour of concession owners that the public and financial community have been talking about for decades. For instance, the North-South Expressway is being viewed by many as lop-sided.

The government guarantees to pay the concession owner should the traffic and traffic growth get below the minimum agreed level. However, there is no cap to the agreement and concession holder could make as much on the upside without sharing the contract.

 It is an agreement that could be considered void if it is unenforceable.

 Since yours truly is no lawyer and does not pretend to play one, so we ask whether it is considered unenforceable or impractical for an agreement based on a business model to make the highway jam to the hilt at public inconvenience?

A hot political topic that remains till today is the privatisation deal to award YTL as the first Independent Power Producer and signed the first Power Purchase Agreement (PPA).

The cost per KW was higher than what Tenaga Nasional Berhad (TNB) was producing through their plants. TNB was forced to purchase every power it generated.

TNB shareholders and staff complained for years of profit in the tune of billions of ringgit belonging to them being registered in another company. Among the justifications to have IPP was the fast track requirement to prevent another power trip and reduce the financial burden to TNB.

However, the political argument against YTL was that they added and contributed nothing.

Generator, technical expertise and management came from ABB. Land belonged to TNB and according to former TNB staff, was forced to lease to them at cheap rate. Gas energy source came from Petronas at subsidised rates. Money was lent by consortium of banks and made viable by the PPA from TNB.    

The original IPP deal had long been seen as lop-sided in favour of the concession owner, translated into lower profits for government and public-owned TNB, and consumers had to bear higher electricity tariff.  

The lop-sided privatisation deal resulted in higher cost to consumers was also highlighted by a friend yesterday.

He said those days Sri Jaya buses were plying the route at 15 to 60 sen but once DRB-Hicom was awarded the privatisation, Intrakota raised charges to 90 sen immediately. The reason then cited was capital expenditure to get better buses.

This friend argued that the government could have assisted Sri Jaya to upgrade their buses progressively. That way consumers dis not have to absorb the huge start-up capex of Intrakota.

More annoying to him was that a successful Bumiputera company was forced to close down and the subsequent Bumiputera-controlled bus company failed later.  Today the government has to step in to restructure and directly involved in the public transportation of Klang Valley.

These examples are not the only privatisation deals of the past that resulted in higher costs to consumers and caused great discomfort to public together with basically “stealing” away money meant for the government.  

At a time when the opposition is blaming Good and Services Tax (GST) as the cause of sharp price rise, they conveniently forget that the privatisation legacy of Tun Dr Mahathir Mohamad was responsible for the rising cost of living today.

Among the main components in business and the cost of living are energy and transportation. Changes in the cost of these two items will find its way in every expect of business and life. An increase in the two componenst will produce a multiplied rise.

To sustain prices, the government will have to bear more subsidy in its expenditure. The total amount of subsidy to be borne by Najib’s government inherited from Dr Mahathir also was untenable. The 2009 projection that the government would bankrupt due to subsidy by 2019 was a fair projection.    

Removal of subsidy may have attributed to the price rise but the reason for price increase was the bad economic macro-management policies inherited from past administration.

The lop-sided privatisation agreement for concessions on transportation, energy and many more hardly considered consumers interest as priority. Majority of past privatisation deals were in-built with automatic price increase mechanism in the agreement.

There is a term in law called unconscionable contract. It is one that is so one-sided that it is unfair to one party. It leaves one party with no real, meaningful choice, and usually due to major differences in bargaining power between the parties. Thus, the agreement is unenforceable under law.

With politicians in office being too powerful then, duress, misrepresentation and undue influence with possible elements of coercion, threats, false statements, or improper persuasion by one party could have made agreement lop-sided.

It favours concession holders friendly to these politicians.

It makes no business sense back then for the need to create another public-listed outfit called EON to market Proton cars that saw up EON making money and could own bank but the manufacturer Proton was making pittance and surviving on endless government subsidy, bailout and protection.  

The usual advise to business people is to walk away from lop-sided agreements.

But when government officers are forced to accept deals handed down from above to the interest of well-connected businessmen, the interest of the public, government and nation are compromised.  

Is there legal ground to reverse such lop-sided privatisation deals, which come with obviously bias terms with profit guarantee, too profitable margin, exit options in event of loss, etc.?

There should be legal ground to deem them illegal, thus they could be taken back by force and the government could restructure them to be more fair to all parties especially public.

 

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