Frankly Speaking: Jul 5-11, 2010

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Private gain, public riskThe untangling of Kuala Dimensi Sdn Bhd’s (KDSB) RM723 million bond payment last week from its unpaid back taxes claimed by the Internal Revenue Board (IRB) has no doubt come as a welcome relief to the government.

The perception is that a default would be sure to have an adverse effect on government-backed bonds and consequently investments. But is that really the case?

Nevertheless, the payment of KDSB’s current debt obligation by the Port Klang Authority (PKA) does not address the issue of KDSB’s tax problem at its root. Where, it should be asked, should the money come from to pay KDSB’s disputed back taxes, which are reportedly 13 years overdue? Surely not the government.

More telling would be the precedent being set for other privately financed projects. Taking the lead from the KDSB case, should a company that has a mandate to undertake a job through a private finance intiative (PFI) fail to settle its taxes, what remedy ought to be applied by the IRB?

PFIs are the way forward to reduce the government debt burden. Under this concept, the private sector raises funds through government guaranteed deferred payments. After it completes the job satisfactorily, the deferred payments are then channelled to bond holders.

A point to note is that the primary obligation of the private company that undertakes the job is to repay the bond holders. The government’s obligation is only to the company, and not the bondholders.

What happens if the private company does not have its house in order, for example, if it is saddled with a tax problem?  Will the government deal with the bondholders directly then? If that is the case, what is the risk for the private company? Or is there such a thing like zero risk?

Hwang’s disappearing actStrange things are happening in corporate Malaysia. First we had the mysterious disappearance of Kenmark Holdings Bhd managing director and substantial shareholder James Hwang.

Now,  another chief executive — though not of  a listed company — cannot be contacted. SJ Asset Management has issued letters to inform its clients that its managing director Tan Whai Oon cannot be reached. The facts behind Tan not being contactable are still hazy. In Kenmark’s case, it’s surprising why Hwang still has not returned to Malaysia where he has fairly healthy assets in the company.

The company that the Taiwanese founded, after having gone through some stringent provisioning, still has net assets of RM1.14 per share. Although his interest in Kenmark has been signficantly reduced, Hwang is said to be the only person who can revive troubled Kenmark.
Kenmark has factories in Port Klang and machinery in Vietnam. To put it in a nutshell, there is some value in the company although it has been reduced to a penny stock.

So why has Hwang still not surfaced?

He disappeared more than a month ago. A few days after he was reported missing, Hwang issued a statement saying that he was unwell and recuperating in China.

After a month, is he still recuperating? Is he still too weak to travel? Or is there something more to it than meets the eye? Is he being held against his will or is he just too afraid to come back?

The sudden disappearance of Hwang really needs some serious cross-border investigations.

So much land, but where’s the plan?When it comes to government-proposed property development projects, the pipeline has never looked busier. Hot on the heels of the re-development of the Royal Malaysian Air Force base in Sungei Besi are plans to transform the Pudu Prison site.

The air base project will go to 1Malaysia Development Corp and its Qatar partner, while the Pudu Prison redevelopment will be handled by UDA Holdings Bhd, which is looking for joint venture partners.

Both pieces of land total 172ha, and there is more to come, according to media reports.

The question that has been asked repeatedly is, what is the best way for this valuable land to be developed. By right —  taking a cue from similar planned developments in Singapore — the government or its entities should be in the driver’s seat and the projects should not be parceled out through joint ventures or other forms of collaboration

While the government is striving to increase the number of public-private partnerships, is it really the best solution to develop such land? Surely, an open tender with the government as the master developer would be the best way to  maximise value. The other point to note is that such massive developments will lead to an oversupply that will have a negative impact on the shaky property market.

It is clear that before anything moves on the ground that the government needs to take a long-term view of how it will all pan out. In Singapore for example, there had been no new development on its iconic Orchard Road for the longest time, letting demand for the area grow naturally, until a few years ago.
Given the grand plans here, what’s needed is a set of guidelines for each plot of land to ensure maximum value for the government, and transparency.

This article appeared in The Edge Malaysia, Issue 813, Jul 5-11, 2010