Contracts review may involve taxes


  • Business
  • Saturday, 07 Aug 2004

NEWS that the Government wants a relook into lopsided privatisation contracts while maintaining the sanctity of such agreements has led to suggestions that some sort of taxes may be involved. 

“That may very well be the case, since it would appear to be one definite way of addressing the issue,'' said the head of research of a local brokerage. 

A research report on Tuesday discussed whether the operators of regulated assets such as water, power and roads may face the prospect of seeing their existing contracts being torn apart and replaced with terms that are friendlier to the Government. 

The report indicated that might not be the case, since Prime Minister Datuk Seri Abdullah Ahmad Badawi was reported to be in favour of maintaining the sanctity of contracts. 

“There are other ways to achieving this. The Government will not be able to touch the original contracts without compensation,'' said the research head. 

The subject of lopsided contracts stemmed from concessionaires of privatisation contracts making super-normal profits on terms no longer deemed fair by the Government. 

Those contracts were generally given to concessionaires with the first-mover advantage and those providing unique services to the Government. 

“There are a variety of reasons why such contracts seem rich nowadays. The interest rates were much higher then, and the companies could have undertaken operational improvements that have boosted their returns from their concessions,'' said an analyst. 

“Furthermore, the risk of making the first move in any privatisation project was there.'' 

Companies that were among the first to secure privatised projects generally got the best deals. Analysts say terms and conditions being offered to new players in the scope of privatised projects are not as lucrative nowadays. 

For the power sector, Rating Agency Malaysia noted that the newer power purchase agreements (PPAs) have industry-restructuring clauses that allow the agreements to be renegotiated should power pooling be adopted in Malaysia. 

“This clause also allows the PPA to be terminated, and bondholders to be compensated, in the event Tenaga Nasional Bhd and the IPP are unable to reach a mutual agreement on new terms,'' it said. 

Analysts, however, say that any move to have privatisation contracts between the concessionaires and the Government reviewed without adequate compensation can lead to various ramifications. 

One way around this is by introducing a tax on either the revenue or profit of concessionaires. 

The report suggested that a windfall tax or a cess fund could be either introduced or increased in Malaysia. 

“That is one way of doing it. The Government has done this with palm oil,'' said an analyst. 

The report said that windfall taxes adopted by the water sector in Britain could be introduced locally to allow the Government to share the upside potential from cost savings or efficiency gain. 

The power sector in Malaysia already contributes 1% of revenue from the sale of electricity to a cess fund for rural electrification. 

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