04 November 2014

Singapore's Failure At Arbitral Tribunal

In 2012, the Singapore and Malaysian governments referred to arbitration an issue that arose from the 27 November 1990 Points of Agreement on Malayan Railway Land in Singapore ("POA") between the two governments.

Under the POA, Malaysia agreed to return to Singapore land that, for the most part, restricted the use for the operation of a railway through Singapore.

In exchange, the POA conferred options on Malaysia.

One option would vest three parcels of railway land in Tanjong Pagar, Kranji and Woodlands ("three POA parcels") in M+S Pte Ltd ("M+S"), a company to be jointly owned by the two governments for the purpose of commercial development. Malaysia did not exercise that option.

Malaysia opted for M+S to receive some parcels of land in Marina South and Ophir-Rochor for development.

The tribunal was asked to rule whether, had Malaysia exercised the option for M+S to receive the three POA parcels and had M+S proceeded to develop the land, M+S would have to pay a development charge.

Singapore's position was that under the terms of the POA, M+S had to pay a development charge of $1.47 billion; Malaysia's position was that M+S need not pay any development charge.

Although Malaysia had decided not to receive the three POA parcels, the development charge issue remained relevant because the parcels of land in Marina South and Ophir-Rochor that Malaysia received eventually were supposed to be of equivalent value to the three POA parcels (together with three lots in Bukit Timah), which value the Singapore government believes takes into account the payment of development charge.

The Decision[1]
The POA did not state explicitly that a development charge would be levied in respect of the three POA parcels. Instead, under the terms of the POA, M+S had to bear the development costs of the three POA parcels, and the Singapore government had relied on the words "development costs" to include development charge or to imply that development charge was payable.

Singapore's case that the Singapore government would have vested the three POA parcels in M+S for the specified developments but on terms that they could only be used for railway purposes unless and until M+S obtained the Singapore government’s permission to carry out the specified developments made no sense, according to the tribunal.

It seems that the tribunal was persuaded by Malaysia's argument that when the Singapore government sells land for a specified development, no development charge is levied because the sale price reflects the full development potential of the land having regard to the specified use and planning approval follows the sale automatically.

Furthermore, as a party to the POA, Singapore could negotiate terms that balanced the benefit that it would obtain from the return of the railway land against the benefit that Malaysia would receive from the specified developments in the three POA parcels that were to be vested in M+S. This could be done by adjusting the size or numbers of the parcels, or by adjusting the relative shareholdings of the two governments in M+S.

Ultimately the nature of the transaction was viewed as an exchange of land in which the release of the railway lands by Malaysia was full consideration for the right of M+S to receive and develop the three POA parcels.
 
The tribunal in favour of Malaysia on 30 October 2014.

My Assessment
It appears that the Singapore government had a weak case.

Was it an oversight on the part of the Singapore government in 1990? If not, then what could explain the Singapore government's logic at that time and subsequently?

Welcoming the Decision?
Channel News Asia reported that Primer Minister Lee Hsien Loong welcomed the decision[2].

I thought he would have been disappointed. I certainly was.

Perhaps, Channel News Asia erred.

Accepting the Decision
Mr Lee said that he "fully accepts" the tribunal's decision[2].

Minister for Foreign Affairs K Shanmugam said that Singapore accepts the decision[3].

They were saying the obvious because in September 2010 both governments had committed to accept the arbitration award as final and binding.

Loss of Revenue
The development charge, had it been imposed, would have been $1.47 billion. (Had the tribunal ruled in favour of Singapore, M+S would have also to pay interest from 1 April 2013.)

As M+S is owned by Khazanah Nasional and Temasek Holdings in the ratio of 60:40, the tribunal's ruling means that Singapore will forgo $882 million revenue (Khazanah Nasional's 60 per cent share of the development charge) plus interest.

Temasek
Singapore also will forgo $588 million (Temasek's 40 per cent share of the development charge) plus interest.

Temasek's share of the future profit from M+S will be higher by $588 million than if M+S had to pay the development charge.

Additionally, Malaysia received a 60 per cent stake in the Marina South and Ophir-Rochor land parcels without having to make any payment. What did Temasek pay for its 40 per cent stake?

M+S will likely be a hugely profitable investment for Temasek — though much of the profit cannot be attributable to its efforts — and much more profitable than the whole episode will be for Singapore.

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Notes

1. PERMANENT COURT OF ARBITRATION PCA Case No. 2012-01 In The Matter Of The Railway Land Arbitration Before A Tribunal Constituted In Accordance With A Submission Agreement Between Singapore And Malaysia Dated 9 January 2012 Between Malaysia And The Republic Of Singapore 30 Oct 2014.

2. Rail Land Dispute Settled By Tribunal; PM Lee Welcomes 'Impartial, Amicable' Resolution Channel News Asia 31 Oct 2014.

3. Arbitration The ‘Sensible Way To Move Ahead’ TODAY 3 Nov 2014.


This article was last updated on 4 November 2014 10:00 pm

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