Felda’s land

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There was a lot of controversy regarding Felda’s land in Jalan Semarak where the land titles were transferred to a private company, Symphony Promenade (SP), who then came out with a press statement to deny any wrongdoing and explain that the transfer was necessary to secure funding for the development. In our opinion, their explanation is not strictly correct.

It was to be a joint venture between Felda and SP to develop Kuala Lumpur Vertical City. This type of JV is common where 1 party provides the land and the other develops it. The JV sources for financing for the development.

To secure financing, the land is charged to the banks. BUT, typically and crucially, the land title remains with the landowner. There is NO need to transfer the title. This is called a third party charge, done all the time. Once the title is transferred, the landowner has no control or right over the land except what has been agreed in the JV agreement which is to share in the profits of the development. If the development fails, the landowner gets nothing and loses his land. The developer mainly loses his working capital.

Our opinion is based on publicly available information only and may change if the info is incorrect.

REIT

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Dr Dzulkefly Ahmad, the Health Minister plans to set up a REIT (real estate investment trust) to raise funds of up to RM3 billion to upgrade the country’s health services. What is a REIT? Are we privatising / selling off more of the country’s healthcare assets further? Bad or good idea?

A REIT is a company that owns (and operates) income-producing real estate. Dr Dzulkefly intends to unlock the hospitals assets ‘value. Let’s see how this can be done.

The hospitals are currently not income-generating. They are owned and used by the Government.

First, the hospital assets are transferred to a new entity (Newco). The Health Ministry (MOH) then signs a lease agreement with Newco to use the hospitals. Newco becomes income-generating. With that, Newco can be listed.

If MOH sells a minority stake (say 30%) to the public, MOH will still control the hospital assets through Newco. Of course, MOH now needs to pay annual leases to Newco (which it did not have to before). However, 70% of the lease will go back to MOH as Newco’s shareholder.

In conclusion, MOH gets proceeds from selling 30% of assets but pays out 30% annual leases to third parties, while still controlling the assets.

GST refunds

 

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There has been a lot of brouhaha about the shortfall in the trust account for GST refunds.

When companies sell their goods and services, they charge GST which they collect on the Government’s behalf (let’s call A). Companies pay A to the Government.

In order to produce the goods and services, the companies bought raw materials which they paid GST on (let’s call B). B is to be refunded to the companies within 2 weeks after A is paid.

So, B is actually the companies’ money. Only the net (A-B) belongs to the Government.

As B does not belong to the Government, B is set aside in a trust account where it sits until it is paid to the companies. Strangely, many companies did not get the refund, even up to years. Of course, when it comes to tax, there will always be disputes on whether the claim for refund is allowed (just like disputes whether certain expenses are tax deductible when calculating corporate tax). Let’s set that aside.

Now it looks like only some of B was transferred to the trust account. The rest stayed in the Government’s Consolidated Account as its revenue, which was spent. Oops!

It will take the Government time to build up the funds for the GST refund. In the meantime, the companies suffer cash flow constraints and turn Government lender.