Costly waiver

If the government gives the UEM Group-Employees Provident Fund (EPF) joint venture the waiver on taxes and levy it seeks for the takeover of PLUS Expressways Bhd, it would set a dangerous precedent and could prove to be costly.

The joint venture, which is offering RM23 billion to take over all assets and liabilities of PLUS, is seeking a waiver of all taxes incurred in respect of the highway concession assets for the rest of the concession period,  which expires in 2030.

This effectively means the government will have to give up on taxes that average RM430 million a year based on PLUS’ income tax expenses for FY2008 and FY2009. Conservatively, the amount of taxes, based on an average of RM450 million per year, would amount to some RM9 billion over the next 20 years of the concession.

Although the RM9 billion is collected over 20 years, the present value of this stream of tax savings should conservatively not be impaired by the time value of money. This is based on the assumption that PLUS’ cost of capital is low, much lower than its annual growth of toll collection.
Thus, the tax savings, if granted, will effectively increase the value of the concession from its current price tag of RM23 billion.

The argument put forward for the tax waiver is that the compensation due to PLUS for not allowing toll rate hikes is much more than its tax expenses. Also, at the moment, part of PLUS’ compensation is paid by deducting the tax liabilities. So why the fuss?

That’s because if the UEM-EPF JV is given a blanket tax waiver for the rest of the concession period, it would set a precedent for all other concessionaires. Tomorrow, Tenaga Nasional Bhd could also seek tax relief for being deprived of passing on its cost of electricity to consumers. Is this what the government wants?

Apart from a tax waiver, the UEM-EPF JV is also seeking relief from all taxes, stamp duty, real property gains tax and other levies related to the acquisition of PLUS’ assets and liabilities.
If this is granted, similar incentives would also be sought by other mega mergers, especially the property players.  There will be no end to creating exemptions for everyone.

Without fear or favour
A mind-numbing 18 months after the news broke, former Selangor menteri besar Datuk Seri Dr Mohd Khir Toyo has been charged with land fraud over two plots of land and a mansion worth millions, which he apparently got for almost half the price. Khir allegedly bought the property in May 2007 for RM3.5 million from Ditamas Sdn Bhd director Shamsudin Haryoni, who had bought it in December 2004 for RM6.5 million. Khir and Shamsudin, who was charged with abetment, both pleaded not guilty.

The menteri besar’s post is a powerful one, given that its occupant can, among other things, approve or reject land applications and development plans, authorise or reject the use of public funds and appoint persons to positions of authority. Thus, it is imperative for the MB to conduct himself in a manner that does not give rise to any doubts about the possibility of conflicts of interest arising from his actions.

The property case is not the only controversy that Khir’s name has been associated with.
Questions that were raised at the hearing of the Selangor State Assembly’s Select Committee on Competency, Accountability and Transparency (Selcat) since September 2009, over the revelations of expensive trips to Disneyland Paris, Disney World Florida, Morocco and Jakarta, shopping expeditions and glittering functions costing RM1.7 million, paid for by Selangor government subsidiary Permodalan Negeri Selangor Bhd, remain in the air.

Nor are these the only issues about the prudent use of public funds under Khir’s watch that call for a proper accounting. More importantly, it is not just Khir who needs to clear his name, but the institutions of accountability, including the Malaysian Anti-Corruption Commission, Inland Revenue Board and the Attorney-General’s Chambers that need to be seen to be acting without fear or favour.

A question of timing
Fourteen months after its listing, Xidelang Holdings Ltd (XDL) last week proposed a private placement of up to 40 million new shares, representing a 10% stake in the company.

The placement, which is estimated to raise RM20 million, may not go down well with shareholders who subscribed to the company’s initial public offering (IPO) in October last year at 58 sen each. Based on last Friday’s close of 47 sen, the IPO subscribers have seen the value of their investment decline by 19%. This is notwthstanding the 1.5 sen in dividend that the company paid in September.

According to the company, the price for the placement will be determined based on “market-based principles” and at a level that is “in the best interests of the company”, after taking into consideration the five-day volume-weighted average market price.

The question is, assuming XDL continues to underperform, would the placement be done at a premium to the IPO price? If it is not done at a premium, wouldn’t it amount to value destruction for XDL’s IPO shareholders?

In addition, the rationale for the placement exercise is not for business expansion or acquisition of new assets, but for working capital purposes, according to XDL.  This raises another question. Why would the company need to raise funds for working capital when it had just raised RM58 million from an IPO last year?

XDL should have raised more funds from its IPO last year, instead of turning to the market again for capital in such a relatively short period. Also, why a placement? Why not a rights issue to give all shareholders a chance to participate in the exercise?

This article appeared in Corporate page of The Edge Malaysia, Issue 836, Dec 13-19, 2010