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Was the termination clause with AIM justifiable?

By Terry Xu

In the Monday's debate on Ministry of National Development (MND) review of the AIM transaction in parliament, Workers' Party Chairman Ms Sylvia Lim spoke on the termination clause in the contact with Action Information Management Pte Ltd (AIM) on the management of the Town Council Management Software (TCMS),

"...the terms of the sale of the most critical town management IT system had unnecessarily endangered public welfare, particularly the relinquishing of ownership to AIM with the one-month termination clause.  MND fell short in not admonishing the PAP TCs for risking disruption to the public in the name of politics."

The termination clause as read out by MP Png Eng Huat (link),

“The Contractor may in its absolute discretion terminate his services during the contract by giving three (3) months prior notice in writing to the Town Council.  However, in the event that there are material changes to the membership of the Town Council or there are material changes to the scope and duties of the Town Council, including but not limited to changes to its present boundaries the Contractor may give a month’s notice in writing, if he wishes to terminate the services during the contract period.”

Mr Png gave three points to explain why he feels the provision of the Termination Clause is ill-conceived and makes no sense at all.

  • There will always be changes in the size and population of a town due to various reasons. Is it prudent to allow AIM to walk away from the critical contract citing ‘material changes’?
  • AIM proposed a Lease-Back payment schedule that did not take into consideration the size and population of a town council. So was AIM concerned about the size and population of a town when pricing the TCMS subscription fee? (Reply to this point was that the contract was on a lump sum basis)
  • There is a clause in the same contract that allows for variation and AIM would be paid in accordance to a method of calculation based on industry practice.  So why was there a need to give AIM the absolute discretion to cite ‘material changes’ to terminate its services to a town council when ‘material changes’ were already covered under the Variation Clause?

and said,

The provision of this one-sided Termination Clause in the AIM transaction makes no sense because the interests of the residents were not protected at all.  Our towns are always in a constant flux of change due to the dynamics of our public and private housing schemes and the redrawing of our electoral boundaries.  Residents should not be made to suffer unnecessarily as a result of such ‘material changes’.

MP Pritam Singh explained what would happen if a town council does not have a functional TCMS (link),

“Many Singaporeans wonder what would happen to a TC in the absence of a working and functional TCMS. Beyond managing maintenance records, feedback management amongst other critical day-to-day operational functions, the TC would not be able to efficiently manage the collection of S&CC fees from residents. Collection would have been a cumbersome exercise, part-manual, part-electronic, and the TC would have been overwhelmed by S&CC collection, leaving little time for other tasks. Until a new TCMS was established, there would have been numerous disputes pertaining to the accurate collection of S&CC fees and potentially, a whole list of unfulfilled contractual obligations with the TC’s contractors. While the standing of the elected MP would be compromised, the real losers would be the residents who would be faced with delays with rubbish collection, dysfunctional amenities, and a very unpleasant state of affairs immediately outside their own homes, all unconnected to the competence of the incumbent MPs. The prospects of this reality would explain why the AHTC team worked in the months after May 2011 to stabilise TC operations and upscale the former Hougang Town Council’s IT management system, instead of allowing the residents of Aljunied GRC to be potentially held at ransom by a one-month termination clause in the hands of fully-owned PAP company.”

It is said that Workers’ Party was fortunate that they have Hougang’s existing TCMS as a basis for the new TCMS to be build on.

But what if another opposition party or independent candidate won a SMC or GRC instead? Would that party or independent be able to develop a new TCMS within a month, should the termination clause be invoked?

Mr Khaw speaking on this, said that any such town councils could have ask for extension from AIM which was proven to be possible from AHTC’s two extensions.

But wouldn’t the town council be held literally under ransom like what Mr Pritnam said by AIM under the constant need to ask for extensions?

Minister of National Development, Mr Khaw Boon Wan defends the termination clause in his round up statement by saying,

"Ms Sylvia Lim further argued that the residents’ interests were placed at risk by AIM’s one-sided termination clause. All commercial contracts come with a termination clause. And termination can be initiated by both sides after observing a period of notice. Question is - is it one-sided? The Review Team has studied the specific termination clause in question and noted in its report that the TCs had valid reasons to insert it. The AIM contract is a lump-sum contract and a termination clause to address material changes to the scope and duties of the TC will help reduce the vendor’s business risk and hopefully fetch a better price."

Yet somewhere down his statement, he says,

I think some MPs talked about AIM not making any profit. Actually, there is nothing odd about this. As I’ve said, AIM was set up by PAP to help its MPs run their TCs. If the TCs do not perform, it will reflect on the MPs and affect their future election prospects. PAP has every interest to ensure its MPs succeed. That is why AIM did not seek to make a profit out of the 2010 transaction.

Therefore, a few questions is posed about the stance taken by Mr Khaw and a few other PAP MPs.

1) Why should Town Councils (TCs) be proactively reducing the vendor's risk if it is an arms length transaction? (AIM is a PAP company)

In the commercial world, you ask for what you want and then let the other side negotiate instead of negotiating against yourself on their behalf. In this case, it’s akin to negotiating with yourself on your behalf.

2) In any contract, there will be a given amount of risk. The process of negotiation is intended to re-allocate the risk for either party.

If the TCs decided to reduce AIM's risk by including the termination clause, they would inevitably be assuming increased risk. Since it is a zero-sum game for the risk involved in the transaction.

Was the increased risk assumed by the TCs worth the “better price” given by AIM in the tender?

Given that PAP wards would see no risk in dealing with a PAP owned company. But the scales will tip if the ward was to be won by an opposition or independent.

3) If AIM is a company set up by PAP which has no appetite for profit as stated by Mr Khaw. Could AIM have offered the same terms and condition of service for the same pricing even without the termination clause?

If AIM could have offered the same price even without the termination clause, how would the termination clause be justifiable?

After a lengthy debate in parliament on Monday, there seems to be more questions raised on the puzzling termination clause rather than answers given on it.