Why is Prestariang suing the government?

TheEdge Mon, Jun 03, 2019 05:53pm - 4 years View Original


ON April 15, Prestariang Bhd announced to Bursa Malaysia that its subsidiary, Prestariang SKIN Sdn Bhd (PSKIN), had filed a suit against the government for terminating the RM3.5 billion National Immigration Control System (SKIN) it was installing for the Home Ministry.

Prestariang is seeking compensation of RM732.86 million for work done before the 15-year contract awarded to it in August 2017 was terminated unilaterally via a letter dated Dec 11, 2018. The Ministry of Home Affairs has now called for fresh proposals to develop a new system.

In an interview, Prestariang executives say that while the government has the right to terminate its contract, the concession agreement stipulates an amount of compensation if the termination was unilateral.

But was it wise of Prestaring to sue? Has it exhausted all means to negotiate with the government?

President and group CEO Dr Abu Hasan Ismail explains that when news reports surfaced last year that the home ministry was reviewing SKIN as it felt the project was expensive, the company had repeatedly tried to set up a meeting but could not.

He says that Prestariang was more than willing to renegotiate the contract and see if there was scope to reduced or delay aspects of the contract to lower the cost.

Since the government unilaterally terminated the contract, it is no longer about negotiating a revision, but to ensure Prestariang gets due compensation.

Hasan says the board was merely exercising its fiduciary duty to protect shareholders’ interests. Hasan is the founder of Prestariang. He was the largest shareholder of the group until Dec 18, 2018, when he disposed of his stake to meet his personal margin account position after the stock price collapsed on news that the contract was to be terminated.

“We were as big as RM1.3 billion to RM1.4 billion, and now we are at RM200 million (market capitalisation). The shareholders are losing a lot. You have to think of the value that is being destroyed. To me, [it was] something that could have been easily resolved, given a chance. Now, we have no choice because we have shareholders, it is our fiduciary duty to take the government to court,” says Hasan.

 

Explaining the SKIN contract

Prestariang executives say that SKIN was proposed and designed to address various issues plaguing the current system, such as an inability to read biometrics.

“SKIN needs to be developed because the current system cannot meet the requirements of immigration,” says PSKIN CEO Raja Azmi Adam Nadarajan during the interview. The company was to undertake the development of this system.

“This initiative was started by the government, together with the Immigration Department and MAMPU (Malaysian Administrative Modernisation and Management Planning Unit), to revamp the whole system,” he says.

Prestariang alleges that there are many issues with the current immigration control system because it was built in silos and over the years different vendors had developed and maintained various aspects of the system.

In October 2016, the then deputy home minister Datuk Nur Jazlan Mohamed said the vendors’ performance was “inconsistent and disappointing”, with sub-contracting having caused more frequent failures.

Later, in April 2017, the Public Accounts Committee called on the home ministry and the Immigration Department to further develop and integrate the immigration control system to prevent the misuse, loss and under-utilisation of biometric identification equipment.

By then, the government had already suffered a loss of revenue as it had to outsource the processing of foreign workers and tourists to a vendor that supplied it with a stand-alone system, claims Baldesh Singh Manmohan Singh, chief operating officer of Prestariang.

With SKIN, the processing of foreign workers and tourists are done by the system without a third party. Any kind of payments go directly to the government, he adds.

“So just as when you do your Australian visa, for example, you go online and you fill in the information and it gets processed. You no longer need a vendor, because your system does the processing.

“If you still want to engage your vendor to do some specific manual checking, you can of course, but the scope has changed, because now everything has been brought in-house. You can do it for free, [or] you can charge and that revenue now goes to the government, rather than the vendor,” Baldesh says.

Recall that in June last year, local dailies wrote about “eNTRI”, a system where visa applications were made easy with applicants only having to fill out an online application to be granted the right to enter Malaysia.

While this could encourage tourism into the country, nobody knows how the system screens the applications as the process takes less than five minutes. If the system does not screen the applications thoroughly, it becomes a national security concern.

Although there is a need to revamp the immigration control system, did Prestariang overcharge the government for the development of SKIN?

Earlier this year, Home Minister Tan Sri Muhyiddin Yassin said that a special committee — tasked with reviewing contracts entered into by the ministry — identified several weaknesses in the terms of the SKIN concession contract and the implementation of the project.

He said the cost to implement the project was too high and that it was burdening the government, which is contending with its mounting debt.

Prestariang’s Hasan says many parties got it wrong when it comes to the project cost. The RM3.5 billion is the total cost for 15 years, including a requirement for the system to be technologically updated at the end of the concession period.

“In the 15th year, when we hand over the system to the government, it will have the latest system. Not the same one as 15 years ago. That is the risk that we are taking — technology refreshment and staying current.

“We had to predict 15 years of IT hardware and software. The risk that we are taking is huge. Imagine, after 15 years, I also don’t know how the IT space is going to look, and I have to give the government a technologically updated system for just RM1,” says Hasan.

Explaining the contract, Azmi says the financial and commercial risks are borne by Prestariang, as the government will only have to start paying once the project meets all the conditions stipulated in the service level agreement (SLA).

This is different from other public infrastructure projects that require the government to pay according to the project milestones, regardless of the outcome. If contractors fail to complete the project within a stipulated time frame, the government will be left with an abandoned project even after spending tons of money.

“There are two parts to the negotiation of the agreement. First, is the technical part of the system, which is very robust, to make sure whatever that we are proposing will address the issues plaguing the current system.

“The next part is the financial or commercial aspect, as in how can we move the burden of financing the project from the government, because big projects like these have always been funded by the government.

“So that is why we have decided to go into a PPP (public-private partnership) model, whereby the company assumes all the execution risks of the project. It means, as long as the project does not meet the SLA, the government doesn’t have to pay us a single sen,” says Azmi.

Prestariang was also to fund the development of the project itself with loans secured from banks. Since the development of the system was self-funded, the government only has to pay once the project goes online.

Hasan says the group had secured RM1 billion in financing from banks for the project.

But now it appears that all Prestariang can hope for is to get the compensation it is seeking — unless the request for proposal that the home ministry has issued fails to gain an acceptable outcome, thereby opening a window of opportunity for Prestariang to get back in.

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