Renegotiating “sacred contracts”

Corrected at 12.50pm on 20 March 2009

(highway pic © drouu / sxc.hu)

WHEN toll concession agreements were declassified in January 2009, it was a milestone for the nation because for the first time ever, these contracts could be scrutinised.

To the credit of the DAP, its politicians spent hours copying the agreement by hand at the Works Ministry because the government would not allow any copying or recording of the documents.

While the declassification indicates some movement towards transparency, what was even more revealing was that the agreements themselves show that no contract is so sacred it cannot be reviewed. At a time when taxpayers are being told that the government must honour the contracts it has signed with the concessionaires for roads, water and power, the DAP politicians’ findings are not only significant. They could help save taxpayers’ money.  

Not sacred

The LDP (© Azreey / Wiki Commons)

In 2007, politicians from the DAP and Parti Keadilan Rakyat obtained a copy of the Lingkaran Trans Kota Sdn Bhd (Litrak) 1996 concession agreement for the Damansara-Puchong Expressway (LDP) and revealed its contents to the public.

The details showed that the government guaranteed fixed toll hikes at certain intervals over the concession period, regardless of profits made. This was despite Litrak having already recovered its building costs for the expressway within a few years after the LDP was operable.

The government’s reaction was to threaten legal action against the politicians for breaching the Official Secrets Act (OSA) 1972. But shortly after, it began to acknowledge the need to declassify such agreements to prevent negative public perception.

Now, scrutiny of the declassified agreements has revealed that it is possible for the government to buy back the highways under an expropriation clause in several of the agreements.

“The government has always hidden behind the principle of the sanctity of contracts when not wanting to review toll agreements. But after looking at the declassified documents, we found that quite a number of them had expropriating (buy back) clauses,” Teh Chi Chang tells The Nut Graph.

Teh says renegotiating toll agreements would not violate the contract because the clause was already in the agreement. “It was just a matter of exercising the clause,” the economic adviser to the DAP secretary-general and member of the DAP’s Operation Restore (Restructure Toll Rates and Equity) team says.

The question is whether the government has the political will to do so, and if not, why?

Going toll-free

Under existing concession agreements, highway companies are guaranteed ever-increasing profits whether the government approves their toll hikes or not. If consumers don’t pay through increased rates, the government is obliged to compensate the companies in lieu of a toll hike, as stipulated in the agreements.

DAP recently outlined a proposal to nationalise the North-South Highway, making it, and a few others under PLUS Expressways Bhd, toll-free by 2016.

The buy-back plan would be funded by government bonds and continued toll collection for six years. There would be no extra cost incurred for the government and for consumers.

For other highways, compensation terms under the expropriation clauses were not unreasonable.

“It is noted that for a vast majority of the toll concession agreements, the government has been granted the expropriation for national interest by providing three to six months notice. The terms of the relevant compensation required for expropriation appears to be fair.

“For concessionaires not willing to renegotiate the toll rates to reasonable levels, it will not cost the government an arm or a leg to expropriate some of these highways,” says Tony Pua, an Ops Restore member and Petaling Jaya Utara Member of Parliament (MP).

Pua was asked about the issue and referred The Nut Graph to his blog, where he notes that expropriating some of the highways would actually be cheaper than continuing with compensation.

In the Ops Restore team’s letter to Works Minister Datuk Mohd Zin Mohamed sent in January, Pua gave the example of buying back Litrak, which he calculated would cost the government less than the compensation payable for retaining LDP toll rates at their present tariffs.

Where certain expropriation clauses have “unfair terms” such as requiring the government to include the loss of future profits in the buy-back price, Pua suggests the use of capital market strategies.

In the case of the North-South Expressway, for example, which is 64% owned by Khazanah Nasional, the government’s investment arm could make a general offer to buy up the balance of shares.

These were just some of the preliminary findings and solutions Pua and the Ops Restore team have drafted from a first look at the declassified concession agreements. The team is to develop a final report for the Works Ministry, due this month of March 2009.

Power plays

On another front, the similar principle of guaranteed profits for concessionaires is proving to be an unbearable burden for Tenaga Nasional Berhad (TNB) through its power purchase agreements (PPAs) with independent power producers (IPPs).

TNB is obliged to pay the IPPs
for electricity produced

TNB is obliged to pay the IPPs for whatever electricity is produced, regardless of whether TNB distributes it to consumers or not.

The utility giant’s former executive chairperson Tan Sri Ani Arope has revealed how lopsided the agreements with the IPPs were, and how they were literally forced down TNB’s throat.

Recently, current TNB chairperson Tan Sri Leo Moggie said the PPAs needed to be reviewed as they were unsustainable given TNB’s RM24 billion debt.

Shattering the myth that contractual terms cannot not be changed, Leo Moggie said reviewing long-term agreements were normal practice in many countries, including in the power sector.

(Corrected) As an example of this practice, Teh notes that Indonesian PPAs have in the past, been renegotiated. Notably, a Malaysian IPP subsequently bought a major stake in one such Indonesian power plant. While the buy-in was after the PPA had been renegotiated, Teh’s point is that the idea of reviewed contracts is not so alien after all. 

Unique problem, unique solution

The problem of unfair concession agreements appears unique to Malaysia, observes constitutional and corporate lawyer Tommy Thomas.

In Malaysia, no thanks to the OSA, and without a Freedom of Information Act, there is little avenue for citizens to rectify lopsided contracts.

As such, Thomas has suggested an Unfair Public Contracts Act that allows biased concession agreements to be reviewed.

“It would be based on the principle that public interest overrides private interests. There would also be limits to the amount of compensation paid to concessionaires — it can still be paid, but within limits based on past profitability,” he says in a phone interview.

Such a law is not common elsewhere, and as such, a “made-in-Malaysia statute might be the remedy for a uniquely Malaysian problem,” Thomas adds.

Water interests

Being transparent will likely result in some private interests being exposed and challenged.

Witness the tussle over the Selangor Water Restructuring plan between the state and federal governments. The plan essentially moves water services away from a concession system to a licensing regime.

To keep tariffs low, the state government wants to take over the management of water in Selangor and has offered to buy back the water assets and concessions of private water companies. But its price has been rejected for being too low and not inclusive of the companies’ debts.

Selangor Water Review Panel member Charles Santiago says it goes against principle to buy the debts of companies which have been making lucrative profits.

“The concessionaires have been paying high dividends to their shareholders but have not been servicing their debts. Also, when plans to restructure the water industry in 2006 were first announced, they should have taken the initiative to clear their debts then to prepare for the restructuring.

“Instead, their attitude is to just sit back and wait for the best deal from the federal government to buy over their liabilities,” Santiago, who is also the Klang MP, tells The Nut Graph.

Additionally, Santiago questions why the biggest concessionaires, Syabas and its parent company Puncak Niaga, ought to be “protected” when Syabas was found to have breached several terms under its concession agreement.

The federal government recently launched direct negotiations with the water concessionaires, prompting accusations of a bailout.

Indeed, the stakes are high for both the public and private interests. These concession agreements are worth billions of ringgit. But with concession agreements that unfairly drain public funds and tax citizens, surely renegotiating in the public’s interest would be a matter of national interest.