The PORR Bosses - Obscured and Powerful Individuals, But Weak Corporates

I. Introduction

Peninsular Metro-Works Sdn Bhd (PMWSB) - the designated concessionaire for the Penang Outer Ring Road (PORR) - is 54.5% owned by individuals obscured by several shell companies, and 45.5% owned by two financially weakened corporations. The corporate partners' financial frailty places extra importance on the financial and technical credibility of the individuals ultimately behind the Nadi Senandung Sdn Bhd group of inactive companies. The only high-profile individual is the ruling political party's local division chairman, who would single-handedly and indirectly own 13.9% of the RM1.02-billion PORR concessionary rights. But his grip is much greater than this percentage implies because of a leveraged holding company structure. If awarded to the PMWSB consortium, the PORR will share a same corporate shareholder as the delayed Jelutong Expressway: Kumpulan Pinang Holdings Sdn Bhd (KPHSB) would hold 20% of both projects. However, KPHSB appears highly indebted and there is a question if it had paid up the capital even for the earlier Jelutong project. Setegap holds the remaining 25.5% of the consortium, and is a small-capitalization, KLSE Second-board-listed construction company. Setegap completed a debt restructuring scheme in March 2001, remains highly indebted, abandoned a Rights issue in 2001, and its controlling shareholders proposed but failed to sell out their controlling interest. This analysis is based on publicly available data from the Company Registrar, annual reports, announcements to the KLSE, and exhibitions in May and June of 2002 by the opposition party Democratic Action Party (DAP).

The burden is on the State and Federal governments, the Malaysian Highway Authority, the Works Ministry, the PM's Department's Economic Planning Unit, and the Penang State Executive Council (together "the approving agencies") to answer the questions raised, disclose more facts and the financial and industrial qualifications of the 54.5% ultimate owners of PMWSB through Nadi Senandung Sdn Bhd. The PORR project is officially worth RM1.02 billion, and may be worth as much as RM5 billion if transferred land is included according to the DAP. Even at RM1.02 billion, it is three times as large and much more complicated than the long-delayed Jelutong Expressway project. The approving agencies should explain the rationale for trying to assign a major concession concerning Penang's economic well-being to a company of weak finances and obscured ownership, hence questionable capability to execute smoothly at low operational and financial costs. The officials for every approving agency must bear the responsibility for any refusal to answer the questions, and to reopen the PORR project for more transparent planning and competitive bidding.

Outline for this report:

I. Introduction
II. Peninsular Metro-Works Ownership - Overview Chart
III. Peninsular Metro-Works - Further Details
IV. Obscured But Powerful Individuals - The Nadi Group of Owners
V. Weak Corporate - Setegap
VI. Weak Coporate - Kumpulan Pinang Holdings Sdn Bhd
VII. Conclusion and Questions: PORRly Planned?
Appendix A: Attributable Owners Grouped By Individuals

 

II. Peninsular Metro-Works Ownership - Overview Chart

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The "POOR" in the chart, or the "PPooooooorr", stand for "Penangites and all people ought to organise to object to and ought to be Outraged by the Obfuscation and the obscured ownership, financing and land transfers around the Ring road". Or download a zipped MS Word version here for clearer printing.

III. Peninsular Metro-Works: Further Details

A company search at the Company Registrar by the SOS of Penang revealed the following ownership information for Peninsular Metro-Works Sdn Bhd:

Table: Peninsular Metro-Works Sdn Bhd Shareholders

Shareholder	Percentage
Nadi Senandung	54.5%
Setegap Bhd	25.50%
Kumpulan Pinang Holdings Sdn Bhd	20.00%
Total	100.00%

Source: Company Registrar 30/7/02

 

Four Levels of Ownership: However, looking at just one level of ownership above Peninsular Metro-Works is inadequate for understanding whether the consortium is likely to be able to carry out the PORR smoothly, at low operational cost and - equally important - low financial cost. More than half of PMWSB (54.5%) is owned by a single, obscure, company named Nadi Senandung Sdn Bhd with RM100 paid up capital. Company searches on 4/6/02, 30/7/02 by the SOS of Penang, and exhibitions by the DAP in May and on 26/6/02 provided the data for the overview chart "The PORR - Who Are The Bosses?" in Section II above. It appears 54.5% of the consortium's ownership is spread across a three-headed chain of five companies which financial results have not been audited for years. These five companies, which we shall call the "Nadi Group of companies", include Nadi Senandung Sdn Bhd (Nadi, for short name), Cedar Heights Sdn Bhd (Cedar), City Achievement Sdn Bhd (City), Nagasari Gerhana Sdn Bhd (Nagasari), and Rela Perkasa Sdn Bhd (Rela). Nadi is one level above PMWSB, Cedar is two levels above PMWSB, while City, Nagasari, and Rela are three levels above. In short, the Nadi Group comprises four levels of companies when PMWSB is included. Other than the Nadi Group, the owners who invest through Setegap together control 25.5% of PMWSB, and the identities of the substantial shareholders can be updated through the KLSE website. The KPHSB Group structure is relatively simple, being 100% owned by Yayasan Bumiputra Pulau Pinang Bhd, although further details are not known.

Chart: The Nadi Group of Companies & Individuals

PMWSB has two Institutional Investors, and another two sets of individuals who own through multiple investment vehicles. One useful goal is to ferret out the ultimate owners, whether they are individuals, investment holding institutions, or operating construction companies, so that the approving agencies and the people of Penang can gauge their financial and technical soundness before entrusting them with the execution of the PORR concession. To jump ahead in the story, the next table summarizes the ultimate shareholders in PMWSB. Some underlying patterns are that:

• The ultimate shareholders include only two investment holding institutions, ie, the EPF (which indirectly owns 1.7% of PMWSB through its 6.5% share in Setegap), and Yayasan Bumiputra P. Pinang Bhd (which indirectly owns 20% of PMWSB through its 100% stake in Kumpulan Pinang Holdings Sdn Bhd).
• Most owners own PMWSB through a single line of investment vehicles. For example, Dato Haji Ahmad Bin Ismail owns 30% of Cedar, which in turn owns 85% of Nadi, which in turn owns 54.5% of PMWSB. As a result, he indirectly owns 13.9% (ie, 30%x85%x54.5%) of PMWSB, hence 13.9% of the RM1.02-billion-plus, PORR concessionary rights if awarded to PMWSB.
• 13.9% is an attributable RM140million worth of contract value, for a Rm0.45million investment in Cedar Heights (30% x RM1.5mil paid-up capital of Cedar). Whether this and other individuals can financially support the full PORR project without incurring high debts, high interest rates, eventually leading to high cost, high toll fees, as well as high risk of financial failure - is a critical matter that must be examined by the approving agencies, and any concession award must be publicly justified.
• Two sets of owners make use of multiple investment vehicles: Goh Choon Aun & Foo Quin Yar (the two persons share the same address, and are treated as one set of investor here), and Abdul Rahman Bin Ahmad.
• Goh Choon Aun owns 13% of Nadi, as well as 0.7% of Cedar, 5% of City, and 5% of Nagasari. Therefore, his attributable stake in PMWSB is 8.5% (ie, 13%x54.5% +0.7%x85%x54.5% +5%x29.3%x85%x54.5% +5%x20%x85%x54.5%).
• Foo Quin Yar owns 93% of City, which owns 29.3% of Cedar, thus owning 12.6% (ie, 93%x29.3%x85%x54.5%) of PMWSB .
• Abdul Rahman Bin Ahmad owns 13.3% of Cedar, 2.0% of City and 100% of Rela. As a result, he owns an attributable 8.3% (ie, 13.3%x85%x54.5% + 2%x29.3%x85%x54.5% + 100%x4%x85%x54.5%) of PMWSB. Of Rela's RM240,002 of paid-up capital, only RM2 has been paid up by cash.
• For full details, see the table in Appendix A, which tracks and groups the indirect ownerships in PMSWB by individuals. This table and pie chart below is only a summary of the top-level owners. The table in Section IV is related, but the information there is arranged by investment vehicles to show the control hierarchy.

Table and Pie Chart: Ultimate Individual and Institutional Owners of PMWSB
Investing Through Nadi, Setegap, KPHSB, Cedar, City, Nagasari, and Rela

Ultimate Owner	Through Setegap, KPHSB or Nadi Group	Attributable Indirect Ownership
Goh Choon Aun (8.5%) and Foo Quin Yar (12.6%) (of the same address)	Nadi	21.2%
Yayasan Bumiputra P.Pinang Bhd	KPHSB	20.0%
Setegap minority shareholders	Setegap	18.6%
Ahmad Bin Ismail, Dato Haji	Nadi	13.9%
Abdul Rahman Bin Ahmad	Nadi	8.3%
Chong Chee Huat	Setegap	4.4%
Loo Soon Thye	Nadi	4.4%
Chua Ah Juan	Nadi	4.4%
EPF Fund Board	Setegap	1.7%
Marzukhi Bin Ibrahim	Nadi	1.2%
Wan Haron Bin Wan Hassan	Setegap	0.8%
Zainuddin Bin Md Nor	Nadi	0.5%
Rosnah Binti Amir Nordin	Nadi	0.5%
Ng Siew Kian (proxy)	Nadi	0.0000093%
Ng Heng Hooi (proxy)	Nadi	0.0000093%
Teng Choon Fatt (proxy)	Nadi	0.0000077%
Teng Mee Ling (proxy)	Nadi	0.0000077%
Total		100.0%

Sources: Compiled and calculated from Company Registrar searches, DAP exhibitions

This profiling only raises further questions why the Malaysian Highway Authority, and the Work Ministry appear so intent on signing such a large contract with a consortium (PMWSB) in which:

• 54.5% of the owners are individuals or nominees with unknown industry experience.
• 52.2% (ie, 13.9%, 12.6%, 8.5%, 8.3%, 4.4%, and 4.4%) is owned by six individuals.
• 13.9% is owned by a political personality, whose control over the project is much greater due to a leveraged holding company structure.
• A 20% shareholder have been involved in another delayed major infrastructure project in Penang (ie, KPHSB and Jelutong Expressway)
• All shareholders can be shown to be financially weak, or cannot be assumed to have the financial strength necessary to carry out the PORR smoothly. That is:
  • none of the 45.5% company shareholders, ie Setegap and KPHSB, have the capital of the scale comparable to the PORR project, or their capacity to raise funds have been impaired by historical debt burden (see Sections V and VI),
  • while 54.5% of the shareholders are small, inactive companies, ultimately owned by individuals with possibly only their personal guarantees as collateral to secure high-cost bank loans. If they do have corporate or institutional backings, they are either unable or unwilling to show them.
• 74.5% of the owners (including KPHSB) have apparently no major infrastructure experience, or - if they do - are unable or unwilling to publicly announce their affiliation with any construction companies, as indicated by their investment in a personal capacity through the Nadi Group.
• The only construction company (Setagap) in the consortium is not in control, owning only 25.5% of PMWSB, relative to Nadi's 54.5%. Further, Setagap's major shareholders have been known (by Setegap's own company announcement to KLSE) to attempt to sell off their control of Setagap as recently as year 2000 (see Section V).
• Only two parties controlling Cedar Heights Sdn Bhd will be able to control the whole PORR project for the next generation, if the PORR concession is awarded to PMWSB, because Cedar owns 85% of Nadi, which owns 54.5% of PMWSB.

Value persists despite land exchange: Civil servants rejected DAP's estimation of PORR value of RM5bil when including land transfer from the Penang government, on the ground that land plots are to be exchanged. However, the nature of "exchange" is such that there is a value to begin with, and a value to end up with after the exchange. Or there might as well be no exchange. Value does not vanish simply because it is exchanged. DAP's estimation might not be accurate, but the project value is clearly much larger than RM1.02bil. The Penang state government has got to be more responsible in disclosing and more convincing in explaining the land exchange deals.

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IV. Obscured But Powerful Individuals - The Nadi Group of Owners

Nadi Senandung Sdn Bhd owns 54.5% of PMWSB, hence will control PMWSB's Board of Director and corporate decisions - even when opposed by Kumpulan Pinang Holdings Sdn Bhd and Setegap Sdn Bhd. Nadi Senandung Sdn Bhd (Nadi for short) itself is owned by a three-headed chain of companies and individuals (See Organization Charts in Sections II and III), including Cedar Heights Sdn Bhd (Cedar), City Achievement Sdn Bhd (City), Nagasari Gerhana Sdn Bhd (Nagasari), and Rela Perkasa Sdn Bhd (Rela).

Nadi Group of Companies: A Lack of Construction Experience and Financial History

None of the Nadi Group of companies has ever been active since registration, with the exception of Cedar which was last audited in 1994 reporting a cumulative loss of RM7,855, according to company searches. Of Rela's RM240,002 paid-up capital, only RM2 was paid with cash. The shell company situations and Cedar's eight-year latency means there is not likely to be any management in place with the necessary experience to carry out the PORR infrastructure project. The fact that these are inactive companies places extra importance on the financial and operational credibility of the persons ultimately owning the Nadi group of companies. It would be a betrayal to Penang's residents and would make a joke of the policy of good governance if the Federal and State agencies have not critically examined the background of the ultimate beneficiaries, or refuse to inform the public about the background of those who will benefit from more than half of the PORR rights for the next 30 years, to charge toll on Penang residents, and to collect other royalties (perhaps billboard advertising revenues).

The table below traces the ultimate individual owners of the Nadi group of companies. The individuals are grouped according to their investment vehicles. For a different perspective, see Appendix A which presents similar information arranged by individual owners. This section focuses on the Nadi Group of companies; Setegap and KPHSB investors are shown in the table below only to put the relative ownerships in perspective. Setegap and KPHSB investors will be discussed later in Section V and VI.

Table : Ultimate Owners of PMWSB, Arranged By Investment Vehicles.
And How Each Invests Through City, Nagasari, Rela, Cedar, Nadi, Setegap, and KPHSB

Sources: Compiled and calculated from Company Registrar searches, DAP exhibitions

Obscured Individuals: Whether any of the Nadi group of ultimate individual owners have any qualifying infrastructural construction experience is not certain. What is certain is that the complex chain structure of the Nadi group has helped obscure their identities, background and capability to execute such an important public project as the PORR, giving more of an atmosphere of a private club. If any of them has any relevant industry experience, or is affiliated with any successful construction corporation, none of that is showing through the Nadi group structure (see the above and below tables).

Dato Haji Ahmad Bin Ismail, 47 year-old according to his national IC number, is the Chairman of Bukit Bendera Division, Penang, of the UMNO party of the ruling political coalition according to the DAP. He indirectly holds 13.9% of PMWSB. He is a Director at PMWSB, Nadi, and Cedar.

Ong Eng Choon, 50 according to IC number, is the company secretary for five companies in the Nadi group (Nadi, Cedar, City, Nagasari, and Rela, see table below) but not a shareholder in any of the Nadi group of companies. He had also been an independent director at Penang-based Penas, a KLSE second-board-listed construction company. He resigned the position from Penas in 5/2001 (Penas annual report 2001 pg 5). Penas was still undergoing debt restructuring as of May 2002.

Goh Choon Aun, 36 now according to his IC number and 26-year-old when City was registered in 1992 with him as a director. Goh Choon Aun is a director in all six Nadi group of companies (PMWSB, Nadi, Cedar, City, Nagasari and Rela, see table below) and owns shares in four of them (except PMWSB and Rela). He has not been reported to hold any officer or director position at Penas. Penas annual report only reported a Goh Choon Lye as the Executive Chairman (annual report 1999) who resigned from the board in 4/2002 (annual report 2001 pg 5), and his brothers Goh Choon Chiew and Goh Chun Hock (note variations in spelling) as directors of Penas' subsidiary companies (2001 annual report page 38). But all three Goh Choon Lye, Goh Choon Chiew and Goh Chun Hock, and Penas, do not appear as shareholders of any of the Nadi group of companies. Penas was still undergoing debt restructuring as of May 2002. Goh Choon Aun indirectly owns a total of 8.5% of PMWSB through four investment vehicles.

Foo Quin Yar, 34 now according to IC number and 24-year-old when City was registered in 1992, owns shares only in City, but is a director in both City and Cedar. Foo has the same address as Goh Choon Aun in a tourist/residential area. On this basis, both are assumed in this analysis to be shareholders who are related, or will act in concert in voting decision. Foo Quin Yar indirectly owns 12.6% of PMWSB, via a 93% ownership of City.

In general and hypothetical terms, to arrange for a relative or close associate to hold the majority shareholding in family assets often represents a financial tactic to keep creditors at bay. Whether there is any such reasons in the case for Goh Choon Aun, or perhaps Foo Quin Yar is indeed a highly-qualified expert in large-scale infrastructure such that the 12.6% shareholding is a sign of technical expertise to assure future creditors in order to secure better financing terms for PORR, should be examined and publicly reported by the approving agencies, to assure the public that the PORR project would sustain long-term technical and financial support from a set of investors who together own more than one-fifth of the potential concessionaire.

Marzukhi Bin Ibrahim, according to the DAP, is the brother of a former Deputy Prime Minister. He also owns 7.04% of Penas (Penas annual report 2001, page 44). He indirectly owns 1.2% of PMWSB.

Other than the above, little is known about the other eight investors. Loo Soon Thye indirectly owns 4.4% and Chua Ah Juan indirectly 4.4%, together owning an attributable 8.8% of PMWSB through Nadi. The other six (Zainuddin Bin Md Nor, Rosnah Binti Amir Nordin, Ng Siew Kian, Ng Heng Hooi, Teng Choon Fatt, Teng Mee Ling) own 1 share each in either Nadi, Nagasari or Rela, and may be nominees for further unidentified individuals. Their background should be examined by the approving agencies to ensure that there is no basis for the persistent rumours about close relations with politicians and civil servants in Penang.

Leveraged Holding Company Structure: Because for private companies most important corporate decisions can be made by a simple majority at the shareholder's or Board of Directors' levels, a few individuals can often wield disproportionately large influence, or even control, at a large corporation from the top of a chain of smaller entities. For a simple hypothetical example, a person who owns 51% of company A, which own 51% of company B, which in turn owns 51% of company C, which in turn owns 51% of company D, effectively owns only 6.8% (ie, 51% x51% x51% x51%) of the future profit of company D. Yet, he determines the balance of power in Company A, which determines the balance of power in Company B, and so on, such that he alone controls Company D. And if company D is a RM 1 billion project that borrows for 95% of its capital, then phases the project equally over five years, this person only has to pay up RM680,000 (ie, RM1 billion x 5% equity x 6.8% x 1/5) to single-handedly control the entire RM1 billion project.

Although this leveraged holding company structure sounds like the most ingenious invention since roti canai, the arrangement is fraught with extreme financial risk, and risk of irresponsible corporate governance. A few of the flaws are the:

• high risk of project failure due to high debt
• high risk of project failure because the few with concentrated power to make decision at one end of the long chain of command cannot understand and solve the complex problems at the other end of the chain of command, involving large-scale project
• lack of transparency for all parties, including regulators, shareholders, employees, customers and suppliers
• need to assuage a large number of non-controlling shareholders at all levels over a few years as the above problems arise, and the distraction will likely confuse corporate decisions, diffuse responsibilities, and demoralize management

Although not as simplistic as in the above example, the Nadi group of companies exhibit a leveraged holding company structure that ensures just two or three individuals could control the entire PORR project for the next thirty years and more, through a chain down to PMWSB's Board of Director, management, operational and financing decisions, eventually to purchasing, hiring, and subcontracting decisions, hence cost effectiveness of the PORR project. Setegap and KPHSB, despite their front-line appearance, will have only as much influence as these individuals from the Nadi Group decide to give away. Please refer to Section III's organizational chart for "the Nadi Group of Companies & Individuals".

Nadi group's power structure: Dato Haji Ahmad Bin Ismail > Goh & Foo >> Loo or Chua. If the PORR concession is awarded to PMWSB, Nadi which controls 54.5% of PMWSB will effectively control the Board and the PORR project. But Cedar's Board will make the decisions, because Cedar controls 85% of Nadi. Cedar, in turn, is controlled by Dato Haji Ahmad Bin Ismail (30%), City (29.3%), and Nagasari (20%). Among these three Cedar shareholders, Dato Haji Ahmad Bin Ismail holds the largest power because, if disagreement arises, he only has to forge an alliance or agreement with either one of City or Nagasari to exceed 50% voting rights (To be precise, In the case of an alliance with Nagasari he will need another two shares). In contrast, if either of City or Nagasari disagrees with him, each will need two other alliances, including one major shareholder, to reach 50% voting rights. Between the last two, City is far more powerful than Nagasari, because of its 29.3% vs Nagasari's 20%, but also because the latter's shareholders are split into two equal-weight of 47.5% (Loo and Chua), while City is owned by Goh and Foo of the same address, which is assumed to mean close relations or associates who would be expected to vote together. City's two major shareholders are also directors at Cedar.

It doesn't matter that the total attributable stake to Dato Haji Ahmad Bin Ismail (13.9%) is smaller than to Goh Choon Aun and Foo Quin Yar (together 21.2%), or Setegap's 25.5%, or KPHSB's 20%. Simply because Cedar will dominate the Board of Nadi, which will dominate the Board of PMWSB, those who dominate Cedar will hold sway.

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V. Weak Corporate - Setegap

Setegap Bhd directly owns 25.5% of Peninsular Metro-Works Sdn Bhd, and is the only shareholder that is known to have industry experience in infrastructure construction.

Construction Industry Experience

Setegap's KLSE company profile can be found at http://www.klse.com.my/website/listing/lc/setegap.htm. The update in October 2001 read:

"The Company (SB) is a registered Class 'A'contractor with Pusat Perkhidmatan Kontraktor Malaysia, signifying that there is no upper limit as to the size of the projects for which it can tender from the public sector. Principally involved in civil works, SB specialises mainly in road construction and maintenance
....
Significant projects undertaken by the Company include certain packages of the North-South Expressway (NSE), the runway extension project of Subang International Airport, construction of 20 km of the NSE Central Link, KL Karak Highway and the Second Airport Runway of the KLIA. Recently completed are major projects like a portion of the South Klang Valley Expressway and the access bridges to the KL Sentral project. In 2000, the Group secured building works in Johor Bahru worth approx. RM70m. As at 28.8.2001, gross contracts in hand stand at approx. RM122.09m."

Annual Report 2001, page 4, in the Chairman's statement, reported the following works done:

Major contracts completed during the year includes the Jalan Ampang/Jalan Tun Razak road underpass which has helped to ease the congestion in that intersection, the completion of 163 units of terrace houses and 32 units of 4 storey shops for a development project in Johore Bahru and 155 units of low-medium cost apartments in Bukit Beruntung.

Annual Report 2000, page 7, reported:

Despite these difficult times, the construction division has managed to complete certain major projects like a portion of the South Klang Valley Expressway, valued at RM72 million. During the year, certain access bridges to the KL Sentral project costing over RM15 million was also successfully completed. A major contribution to turnover for the year was from the ongoing Underpass project at the junction of Jalan Ampang/Jalan Tun Razak. Construction there was in full swing after the interfacing problems with the LRT tunnel were finally resolved.

Annual Report 1999, page 4, reported:

During the year, the Group has completed the road underpass project at the junction of Jalan Tun Razak and Jalan Bukit Bintang which has contributed to smoother flow of traffic along the busy Jalan Tun Razak and Jalan Bukit Bintang intersection. The other projects completed include certain main roads and access roads to the Prime Minister’s residence at Putrajaya, a Government inspired project. Certain smaller road projects at Cyberjaya was also completed during the year.

Corporate Size in Perspective

Petaling Jaya-based Setegap was established in 1983, and is a small-capital stock listed in KLSE Second Board's construction sector. It has RM49.7 million paid-up capital and RM103 million of restructured debt as of 12/2001. A copy of the annual report (1.3MB) can be downloaded from here. (or browse through KLSE Announcement section.) As of mid-Day June 24, the shares were trading at RM0.88 each, which means the total market value of its shares are Rm43.7million (49.702mil shares x RM0.88), about 0.2% of the Second Board and 0.008% of the KLSE. For share price see http://www.klse-ris.com.my/delaystk-html/ctrsort.html, and search for "Setegap".

Setegap's contracts in hand as of 8/2001 was RM122m (see above quote), and total revenues in 2001 was RM151m. In contrast, the PORR project size is officially RM1.02billion (and perhaps RM5bil if reclaimed/transferred land and works are involved). While its Class "A" contractor status does not limit the size of its project, its capability to carry out PORR will depend on its financial health. A later section will examine Setegap's RM103m debt, 9.5% fixed interest payments, and sizable and risky trade receivable (RM125m) owed by Setegap's customers.

Directors and Officers

The founding and non-independent directors are of engineering, legal and accounting background, while the current and former independent directors are retired government officers.

Three of Setegap's directors, according to the 2001 Annual Report pages 7-8, are:

Dato’ Mohd. Hussaini Bin Haji Abdul Jamil, Chairman
Y. Bhg. Dato’ Mohd. Hussaini Bin Haji Abdul Jamil, aged 66, a Malaysian, is an Independent Non-Executive Director and Chairman of Setegap Berhad. He also serves as the Chairman of the Audit, Nomination, Remuneration and Employees’ Share Option Scheme Committees of the Company. He is presently a director of Johan Ceramic Bhd and Pelaburan Hartatanah National Bhd. Y. Bhg. Dato’ Mohd. Hussaini holds a Bachelor of Arts (Hons) from University of Malaya. He started his career in the Government service and had an illustrious and wide-ranging career having served in several government agencies from an Assistant Secretary in the Prime Minister’s Department to the Deputy Secretary General in the Treasury of Malaysia. His last appointment prior to his retirement in 1991 was Secretary General of the Ministry of Health. He joined Setegap Berhad as Chairman of the Board of Directors on 28th May 1992. ... He has a direct shareholding of 20,000 ordinary shares of RM1.00 in Setegap Berhad.

Mr. Chong Chee Huat, Managing Director
Mr. Chong Chee Huat, aged 49, a Malaysian, is a Non-Independent Executive Director and Managing Director of Setegap Berhad. He was appointed to the Board of the Company on 14th September 1983. He is currently not involved in any Board Committee of the Company and does not hold any directorship in any other public company. Mr. Chong holds a Bachelor of Engineering (Civil) from University of Malaya. He started his career as a Road Engineer with Jabatan Kerja Raya in Negeri Sembilan from 1978 until his appointment as a Civil Engineer with Dolomite Industries Sdn. Bhd. in 1980. He is a founder member of the Company in 1983 and is chiefly responsible for its enviable growth. ... He has a direct shareholding of 8,628,998 ordinary shares of RM1.00 in Setegap Berhad.

Dato’ Mohd Said Bin Ismail, Director
Y. Bhg. Dato’ Mohd. Said Bin Ismail, aged 65, a Malaysian, is an Independent Non-Executive Director of Setegap Berhad. He was appointed to the Board of the Company on 8th February 2001. He is presently a member of the Audit, Nomination, Remuneration and Employees’ Share Option Scheme Committees of the Company. He does not hold any directorship in any other public company. Yg. Bhg. Dato’ Mohd Said served a total of 42 years as a Government Officer in various government offices and was appointed Private Secretary to the Deputy Prime Minister since his appointment as a Parliamentary Secretary on 17th October 1978 until 6th November 2000. ... He has no shareholding in Setegap Berhad.

Shareholder Changes, Contemplated Change in Control

Current Control: Setegap is controlled by Mr. Chong Chee Huat, founder and engineer, who owns 17.4% of Setegap. The Employee Provident Fund (EPF) is the next largest shareholder, and has long held 6.5%. The next largest group historically are Netson and Netsen, the holding companies for the New family, but they no longer appear as significant shareholders by Jan 2002. Nevertheless, one of New family company's director, Lai Siew Moi, retains 2.1% stake through HSBC Nominees. Other significant shareholders in Setegap are Wan Haron Bin Wan Hassan and Amanah Saham Sarawak, who respectively hold 3.0% and 1.6%. A recent significant shareholder is Kong Ricky Kok Choong who holds 2.0%.

Failed Rights Issue: Setegap announced a Rights share issue on 20/10/2000 but admitted in 11/2001 it had failed to complete the plan (announcements to KLSE 20/10/2000 and Annual Report 2001, page 4). Setegap stated it would continue to look for ways to raise fund, which may mean reviving the proposals in a different form. The need for a Rights issue is clear from the RM104mil restructured debt and the efforts that went into the rights preparation. The Rights issue was announced to raise new funds from the shareholders to support the debt restructuring announcement thee days earlier on 17/10/2000 (debt restructuring was subsequently completed in 3/2001). This failure to raise further equity from existing shareholders indicates either a lack of resources or commitment from a large enough portion of the shareholders, and does not bode well for Setegap's capability to take up the RM1.02-billion PORR, which may require 10 times as much loan as Setegap has already restructured.

Contemplated Change of Control by Special Issue: In the same announcement as the Rights issue, Setegap also proposed a Special Issue and a Private Placement of new shares intended to increase Bumiputra shareholding to over 51% (20/10/2000 announcement). These Special Issues and Private Placements have also been abandoned along with the Rights Issue. However, it would not be unreasonable to expect they may be revived in a different form later, judging from the clearly articulated strategy to restructure shareholder composition (see Rationale quote below), from that strategy's fit with PORR as a Federal government project, and from the failure to raise fund from the existing shareholders.

To recap history, this abandoned Special Issue and Private Placement

• would see the issuance of 49.9 mil new shares including Rights shares, compared to today's 49.7 mil shares, doubling Setegap's shares,
• would have diluted existing shareholders to 0.6 times their current percentage of ownership, even if they put up new cash for the Rights
• would see 35 mil of the new shares issued to three parties: An independent director, a former independent director, and Lembaga Tabung Angkatan Tentera
• One of the independent directors, Dato' Mohd. Hussaini Bin Haji Abdul Jamil whose background has been described above, would have become the largest shareholder controlling 18.1%, compared to Chong Chee Huat's diluted 10.4%.
• In terms of PORR, this new controlling shareholder of Setegap would have indirectly owned 4.6% of PORR, followed by Chong Chee Huat with 2.7% in PORR and Lembaga Tabung Angkatan Tentera with 2.6%.
• Tan Sri Dato' (Dr) Abdullah Bin Abdul Rahman, a former independent director who resigned in 9/2001, would have become a 7% shareholder of Setegap had the share issues gone through

Annual report 2000 (page 5) reported on the background of Tan Sri Dato' (Dr) Abdullah Bin Abdul Rahman, the former independent director:

Separately, a former director, Dato’ Mohamed Ariffin Bin Abdul Rahman, resigned from the board in 4/2001.

The rationale announced publicly with the proposed and abandoned Special Issue and Private Placement (announcement 20/10/2000) - essentially an intended change in control - read partially:

The Proposed Special Issue is undertaken to achieve a level of Bumiputra equity participation in the Company that is more in line with the National Development Policy ("NDP"). Notwithstanding that the minimum Bumiputra requirement for a public listed company is 30%, it is the Company's intention to obtain the status of a Bumiputra majority-owned company. In this respect, Setegap proposes a large special issue to increase its bumiputra equity holding to approximately 51%. Accordingly, the Company's chances of securing additional contracts offered by the Government and certain private sector companies should be enhanced given the status of a Bumiputra majority-owned company.

The management envisages that the presence of LTAT [Lembaga Tabung Angkatan Tentera] as a long-term investor in Setegap should augur well for the Company. As LTAT, an institution with diversified interests, does not have a construction arm, the Company may draw on the resources and influences of LTAT and derive synergistic benefits vide the latter's investment in Setegap.

Dato' Mohd. Hussaini Bin Haji Abdul Jamil and Tan Sri Dato' (Dr) Abdullah Bin Abdul Rahman is the Chairman and a director of Setegap respectively. Both of them have made invaluable contributions not only in serving as members of the Board and in various committees of the Board but also in representing the Company in public relations and negotiations. They have vast experience in the management of various Government departments. Their equity participation in the Company will also serve as an incentive for them to strategise and draw on their vast experiences to negotiate for further contracts and projects for the Group.

The Proposed Private Placement will allow the Company the time to secure potential placees for its shares and to mitigate the concerns of the Company in respect of undersubscription through a larger right issue and the higher costs of underwriting these shares. As Setegap may be able to determine the placees for the placement, the Proposed Private Placement may also allow the Company to establish a tie-up with potential strategic partners which may benefit the Group in the long term.

The entrepreneur's dilemma, and the PORR's tragedy: Setegap's existing owners appear to be in a strategic bind: Don't sell out, and there will be few projects to generate revenues in the prolonged economic weakness (this outlook was real enough to prompt the public articulation of the above rationale). But to get more contracts - mostly government approved projects - Setegap's control must be sold to the better-connected. This means great disincentive for existing shareholders to further commit themselves or to take carefully calculated risks, because they will be stuck with any downside while any upside will be creamed off by others. We are already seeing some logical outcome of this dilemma - an exodus of historical, non-active, substantial shareholders, and the failed Rights issue. The dilemma may also lead to confusion of management objectives, and a lack of strategic direction at Setegap. Hardly a reassuring - if not an outright dangerous - prospect for PORR, a Federal project that will be "self-financed" - by toll fees from the pockets of the Penang residents, despite their having to pay Federal taxes.

Why mustn't the approving agencies examine Setagap management's commitment and make the results known publicly, before awarding the concession to the PMWSB consortium?

Setegap Financials: Weak from Debts, Further Risk from Trade Receivable

High debts, interest payments, and pending principal repayments, even as Rights issue failed:

• Setegap appears financially weak from being a small-capitalization to begin with. Issued share capital is just below RM49.7mil. When retained earnings and minority interest in subsidiary equity is included, the group equity base total RM70 mil. (AR2001, pg 22)
• In contrast, short-term and long-term debts totalled RM104 mil as of 12/2001. (AR2001, pg 22)
• The stress of the loans and interest payments were apparent in 1998-2001 financial statements, when there was a discrepancy between the interest expenses and interest payment made - apparently delayed payments. Interest expenses were reported to be RM13.3mil, RM6.2mil, RM9.4mil, and RM9.3mil, but interest payments were only RM6mil, RM2.5mil, RM4.6mil for 1998, 1999, 2000, and finally, after debt restructuring, Setegap paid RM12.6mil in 2001.
• From 1998, almost all the company loans were in short-term bank borrowing (95.6/96.1), which made the company highly vulnerable to any downturn in customer payments. The stress of relying on short-term loans continued until debts were restructured in 2001 through the assistance of the Corporate Debt Restructuring Committee.
• In Mar 2001, RM95mil of the debt was restructured to 5-year term loans, at 9.5% fixed rate (Annual Report 2001, page 19 and 46, 17/10/2000 debt restructuring scheme announcement).
• This means initially interest payment will continue to drain about RM10mil a year, when restructured and other debts are included
• Although the debt restructuring scheme converted short-term loans to longer term, giving a brief respite to Setegap, about half of the debts will come due by the end of 2003.
• The 5-year term loans were scheduled for principal repayments of (2001 annual report pgs 45-46, note 20):
  • RM11mil by 2002
  • RM40mil by 2003
  • RM52mil by 2004-2006

• To be sure, this analysis does not question Setegap's financial viability if it remains around its present scale. In fact, Setegap stands a fair chance of ploughing along at a moderate speed, concentrating on its customer collections, untying its historical financial knots, and emerge stronger after it has repaid most of its creditors by 2006. This analysis is also not intended to infer any opinion about buying or selling the shares, because no attempt is made to estimate any profit or valuation.

Future financial health depends on risky trade debtor collection (See the next table):

• What gave rise to Setegap's financial woes appears to be its bad debt from Trade Debtor (often called trade accounts receivable, amounts already booked as sales, but still owed and unpaid for by customers)
• Trade Debtor amounts were large historically, eg, netting RM111mil, RM110mil, RM136mil, and RM124mil respectively in 1998, 1999, 2000 and 2001. Apparently Setegap finances its customers more than the suppliers are financing it. Either Setegap books sales too fast then finds it difficult to collect, or suppliers are not comfortable enough to extend much credit, or both. Trade payable, eg, were only RM47m and RM38m in 2000 and 2001.
• In 1998 and 1999, Setegap recognized RM13mil and RM20mil from Trade Debtors as bad customer debts, hurting its profit deeply.
• These customers not paying appeard to have led to its cash flow problems starting 1998.
• However, during 2000 and 2001, Setegap hardly recognized any new bad debts (RM0.5mil and RM1.2mil only). Either customer credit quality had suddenly improved to deserve the optimism, or Setegap's existing RM125mil Trade Debtors contain low quality receivable that could yield surprises for cash flow later
• All these mean significant financial risks, because Trade debtor is large relative to profit (RM4 mil and RM1mil in 2000 and 2001) and relative to the cash needed to pay interest (RM10mil).
• There is also a slowing trend in customer payments. Trade Debtor / Revenues, when measured in months of revenue, has crept up again, from 8.8 months of sales in 2000 to 9.9 months in 2001, related to the fact that Setegap had not made any substantial new allowance for bad debt since 1999.
  
• Contingent liability: There is also a civil lawsuit to claim RM41mil of compensation from Setegap, although Setegap's legal counsel believes Setegap should win the case (Annual report 2001, pg 55)

Prognosis:

• Essentially, Setegap's future financial health is highly sensitive to the collectability of Trade Debtors (accounts receivable)
• Meanwhile profitability is low due to high interest expenses
• From time to time, Trade Debts could spring surprises and bite a large chunk out of profit
• Any rising interest rate environment would be detrimental to Setegap's health, squeeze Setegap between higher interest outflow and deteriorating customer payments. Although interest rates on Term loans are fixed, half of it is due by 2003, any rollover could mean costlier rates in that rising interest rate environment
• Given the high debt, demanding interest cash flow, failed Rights issue, risky and large Trade Debts, Setegap will probably find it difficult to convince bankers to raise large loans to finance expansion of revenues, in projects such as PORR, unless controlling shareholders change substantially, with a big boost to equity.
• But if Setegap's controlling shareholders change, it will again be the duty of the Federal and State agencies which intend to approve PMWSB as the PORR concessionaire to ensure, explain and assure that they are up to the PORR task, before signing any contract with PMWSB. This is crucial because Setegap is the only one with sound construction industry experience among PMWSB's shareholders - unless new bidders are called for for the PORR project.

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VI. Weak Corporate - Kumpulan Pinang Holdings Sdn Bhd

Kumpulan Pinang Holdings Sdn Bhd (KPHSB) directly owns 20.0% of Peninsular Metro-Works Sdn Bhd. It is an investment holding company with RM50mil paid-up capital, 100% owned by Yayasan Bumiputra Pulau Pinang Bhd. However, it is not known how and which sub-groups of bumiputra investors invest in this KL-based company, how it is governed, and how it reports to its ultimate beneficiaries regarding its financial and operational performance. KPHSB is not listed in the stock market and has little public information available. Main sources of information are the Company Registrar, and other companies' reference to KPHSB. KPHSB also appears to be highly geared with debt, according to information registered at the Company Registrar.

Construction Industry "Experience"

If KPHSB's involvement in the long-delayed Jelutong Expressway is counted, KPHSB's construction industry experience may be said to be negative. KPHSB in 1999 agreed to own 20% of Jelutong Development Sdn Bhd (JDSB), which was awarded the Jelutong Expressway concession in 1997. According to the public announcement on 13/01/1999 (www.ijm.com/arc_announ_990113.htm) of IJM, a large KLSE-listed construction company:

"[IJM] has signed Subscription Agreements and Shareholders Agreements with Hume Industries (Malaysia) Berhad ("HIMB") and Kumpulan Pinang Holdings Sdn Bhd to invest in Jelutong Development Sdn Bhd ("JDSB") on a 40:40:20 basis respectively, and with HIMB to invest on a 50:50 basis in Kami Builders Sdn Bhd ("KBSB").

JDSB was awarded the Jelutong Expressway Privatization Project by the Penang State Government in April 1997 and, pursuant to the Shareholders Agreement, will be appointing KBSB, presently a dormant company, as main contractor to undertake the design & construction of the 4.7km Jelutong Expressway, linking the existing Udini Interchange to Jalan Prangin/Pengkalan Weld Junction in Penang.

The capital of JDSB will be raised to RM20,000,000 from the present RM4 of ordinary shares of RM1 each, and the capital of KBSB, presently at RM2, will also be raised to RM1,030,000 (through issuance of 1,000,000 new ordinary shares of RM1 each at par and 30,000 redeemable preference shares of RM1 each at a premium of RM99 per share) to fund the working capital to undertake the Project. The Economic Planning Unit of the Prime Minister's Department has given approval for the investment in JDSB. "

Jelutong Expressway today remains unfinished, although it is only 1/4 the length of the PORR. Information culled from annual reports of IJM and Hume Industries indicated that

1. KPHSB had apparently not taken up its agreed 20% in JDSB - whether for the lack of will or lack of financial resources is unknown, something that the Penang State government is duty-bound to report and explain to the people of Penang suffering from traffic jam at Jalan Masjid Negeri (Green Lane area). IJM's annual reports (1999 pg 66 and 2001 pg 121) indicated that IJM held 100%, 50%, 50%, 50% of JDSB at the end of 1998, 1999, 2000, 2001. While Hume Industries' annual report (2001 pg 77) indicated Hume held the remaining 50% for 2000 and 2001. We can only conclude that KPHSB has not paid up to own any percentage of JDSB 5 years after the concession was awarded, and 3 years after signing the Subscription Agreements and Shareholders Agreements described above.
2. JDSB may not have received the proper capital or financial resources, such that IJM has extended RM41mil of advance to JDSB for works done. IJM's annual report 2001 (pg 115) showed that JDSB owed parent IJM RM41mil in 2001 (still small relative to the Jelutong Expressway project's RM200-300mil reported value, and a bit late). The implications are that JDSB has not been properly supported financially.

The State and Federal civil servants will have to answer the questions: How do you expect 20%-shareholder KPHSB to play a more useful role in the financially much more demanding PORR project and Peninsular Metro-Works Sdn Bhd, considering KPHSB's apparent inability to contribute to Jelutong Expressway? And if there is a high risk that Peninsular Metro-Works Sdn Bhd will not be adequately supported by its financially weak shareholders, why should PMWSB be awarded the PORR concession, particularly without an open, competitive bidding process?

The Jelutong Expressway also has its own case of shareholder jittery, relating to its shareholder from the construction industry. IJM which has agreed to own 40% (but in effect still owns 50%) of Jelutong Development Sdn Bhd may be changing hand. Parent company IGB and shareholders are reported by the Edge (11/3/2002 and 3/6/2002) and Business Times (24/4/2002) to be considering the sale of their 20% stake in IJM to Tan Sri Syed Mokhtar Al-Bukhary, a low profile businessman reported by Asian Wall Street Journal on 8/4/2002 to be a "new star" in Malaysian business. Whatever economic and strategic forces leading up to IGB's consideration to divest of IJM may or may not have led to slow progress at Jelutong Expressway. But Jelutong Expressway's shareholder jittery may contain another potential lesson for the approving agencies before awarding the PORR concession to a consortium that includes Setegap.

Directors, Officers and Registration

Public information is limited on KPHSB. A company search conducted on 4/6/2002 at the Company Registrar provided these data:

Source: Company Registrar

RNA, a Hong Kong-listed precious metal and jewelry manufacturer lists KPHSB as one of its shareholders, owning 7.5% of RNA according to a 4/2000 report by an online debt trader. RNA reported on its Website (http://www.rna.com.hk/intresults.htm, which pages were taken offline after June 2002) it was involved in a Gold and Jewellery Exchange Centre construction in Penang. RNA's corporate information page (http://www.rna.com.hk/mainci.htm, also offline after June 2002) lists Dato Ahmad Fuad Bin Haji Mohd Ali as one of RNA's two Malaysian directors, and described his background as (circa 1998):

DATO' AHMAD FUAD ALI, born in 1949, is the Chairman of Kumpulan Pinang Holdings Sdn Bhd, the investment arm of Yayasan Bumiputra Pulau Pinang Berhad ("YBPP"). He is also a Trustee of YBPP and the Executive Chairman of Malaysian Plantations Berhad. He is a Fellow Member of the Chartered Association of Certified Accountants (UK) and a Member of the Malaysian Association of Certified Public Accountants and has more than 16 years of extensive experience in the fields of financial, accounting, auditing and consultancy.

High Debt

Although limited companies are required to make yearly financial reports to the Company Registrar, the 4/6/2002 company search only yield a 1996 financial statement for KPHSB, plus records up to 1998 of company charges held by banks relating to KPHSB's borrowing. Details were scant, but the company charges imply KPHSB's borrowing at up to RM129 mil by 12/98. If true, such borrowing would be almost twice the shareholders' equity of RM69mil as of 12/1996. For a lack of details, "Company Charges" are assumed to be equivalent to the amount that KPHSB borrows from each bank. Information of company charges, available until 12/1998, are listed by date in the table below, and regrouped by banks in the pie chart:

Kumpulan Pinanag Holdings Sdn Bhd: Company Charges Grouped By Banks

With the level of debts implied by the company charges, the Federal and State agencies must verify the initial findings here, and explain how KPHSB can be expected to contribute financially to PORR to ensure smooth implementation and low financing costs - ultimately low costs to road users and low economic risk to Penang. How do the Federal and State approving agencies justify that Peninsular Metro-Works as a concessionaire will benefit the PORR project and Penang residents if 20% shareholder KPHSB has the weak finances described above?

Other tentative observations from KPHSB's 1996 financial statement (without detailed notes) are:

• paid up capital by 12/96 was RM50mil, apparently unchanged until now
• when capital is combined with retained earnings and minority interest in subsidiaries' equity, the resulting shareholder's equity total RM69mil.
• Although long-term loans were only RM24mil in 1996, there were large Current Liabilities (no details) which could hide further loans
• Company charges by banks up to 12/96 totalled RM39mil, implying that much total debt or credit line by 12/96
• The unusually large Current Asset of RM330mil and Current Liabilities of RM323mil were unexplained, but appear to be matching, and could be transitory and offsetting amounts related to - only a guess - asset dealings.
• KPHSB was only five years old by 12/96, and can be expected to still suffer from start-up losses in newer ventures.
• Cumulated loss were RM2mil up to 12/95
• But then an unexplained extraordinary transaction took place in 1996, yielding an extraordinary gain of RM26mil (again a guess would say this may be some sort of asset buying and selling, since Turnover had been small at less than RM1mil for 1996)
• The extraordinary item boosted 1996 profit to RM18mil, as well as boosted the equity sharply to RM69mil, from the 1995 level of around RM50mil

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VII. Conclusion and Questions: PORRly Planned?

The Chief Minister of Penang has rationalized that the delay in Jelutong Expressway is due to complications from the 1997-1998 financial crisis, reclamation, and relocation problems. While the first excuse is now a cliche shaken off by the booming Korean economy and Thailand's property market, the later two excuses were known long beforehand. The concessionaires or contractors were hopefully not blind or born yesterday. A more plausible explanation for the Jelutong delay and traffic mess - which will equally likely infect the PORR - is simply bad planning stemming from secrecy, lack of public consultation, and the lack of open bidding to ensure best implementation. Precisely because these projects are so complex there need to be more transparency for critical review and competitive bidding to ensure problems are solved by those with the most creativity and resources. That some concessionaires dug themselves into the dumps under a system of hush-and-rush planning must not be rationalized away. The obvious solution is to plan better, plan more openly, and re-open the bid. The PMWSB consortium can still win fairly and squarely in the delayed but better planned PORR. A more competitive bid will also likely ensure that more businesses at every level of the supply chain could participate, spreading the economic benefits.

A Line of General Questions To Be Clarified By The Approving Agencies:

• If PMWSB's shareholders are all financially weak corporations and individuals, how could they financially support the PORR?
• Is that why large amount of loans may be required at high interest rates?
• Is that why there must be toll charges, and expensive toll charges?
• Wouldn't all these unnecessarily increase Penang's business costs, reduce Penang's international competitiveness, reduce the welfare of Penang residents, and also decrease the usage of the PORR?
• Wouldn't the high cost and low usage increase the likelihood the PORR will become paralysed during construction, or need to be rescued after operation has started, using tax money?
• On these significant doubts, why shouldn't the planning and bidding for the PORR concession be re-opened, for more transparent consultation and competitive bidding?

Conversely,

• Considering the weak and obscured nature of the current consortium, wouldn't opening the PORR for competitive bidding significantly increases the chance of finding a concessionaire with a clearer control structure and sound financial backing?
• Wouldn't clearer structure and sound finance drastically reduce PORR's operational and financial costs, resulting in lower toll charges, cheaper living and business costs in Penang, and higher competitiveness and well being for Penang for the next generation?
• Wouldn't a concessionaire with fewer financial constraints be in a better position to focus on minimizing environmental, social and relocation impacts?

Cheah Kah Seng 1/8/2002

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Appendix A: Attributable Owners Grouped By Individuals

This table is similar to the long table in Section IV, except that this one is sorted by the ultimate owners and their percentages of ownership, ie, focusing on the two columns on the right.

Table : Ultimate Owners of PMWSB, Arranged By Attributable of Percentage Ownership (Right-most Column).
Showing How Each Invests Through City, Nagasari, Rela, Cedar, Nadi, Setegap, and KPHSB

Sources: Compiled and calculated from Company Registrar searches, DAP exhibitions

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