Tuesday, February 14, 2012

MRT: Structured for Higher Cost

Gamuda Bhd has announced to Bursa Malaysia on Friday last week that its jointly-controlled entity, MMC Gamuda KVMRT (PDP) Sdn Bhd, has executed the PDP Agreement with Mass Rapid Transit Corporation Sdn Bhd in respect of the implementation of the project known as the Klang Valley Mass Rapid Transit Project-Sungai Buloh-Kajang line (KVMRT-SBK).

Assuming the “successful” delivery of the KVMRT within the agreed target cost, it shall be paid a fee which is equivalent to 6% fee of the aggregate of all the awarded works contracts.

First of all, a 6% project fee is almost unheard of in a project of this scale.  Based on an estimate that the KVMRT-SBK is expected to cost RM18 billion, the fees to the PDP alone will be RM1.08 billion.  This fee will only be reduced if the PDP wins the tender for the underground tunnelling works – in which case the value of the tunnelling works will be excluded from the calculation of the fee.

The reason why the fee is so high is simple – not only was there no competitive tenders, which would surely have brought the fees down, the Government has chosen to award the contract and commenced work on the KVMRT a year ago before the fee was even agreed upon.  Such recklessness on the part of the Government has resulted in it being beholden to the PDP with little room to manoeuvre or negotiate.

Any ordinary man on the street will know that it is ridiculous to ask a contractor to start the kitchen renovation without first agreeing to the cost.

On top of the fees, the PDP will also be separately reimbursed for “overheads, fees for engineering consultancy, quantity surveyors and system integration works and fees for site investigations and topographical survey” amounting to RM2.85 billion.  Adding the reimbursables to the estimated PDP fee of RM1.08 billion, the PDP will effectively collect RM3.93 billion for playing the role of a project manager.

What’s worse, despite the supposed role of the PDP having to bear any cost-overrun for the KVMRT, the PDP has managed to negotiate into its contract a 15% “allowed contingency”.  This means that if the cost of the overall project were to increase by up to 15%, the PDP will still collect every sen of its fee including a 6% of the 15% “allowed contingency”.  A 15% variation based on a RM18 billion project value for the SBK line would be a possible cost increase of up to a massive RM2.7 billion without penalty to the MMC-Gamuda joint-venture.

Secondly, and perhaps more critically, not only has the PDP contract been awarded with no open or competitive tender, the structure of the agreement is such that the overall cost of the project is incentivised to be inflated.

Given that the PDP is being paid on a percentage of contract cost and has to bear any cost-overrun beyond the 15% “allowed contingency”, the PDP which has to help the Government evaluate the various tender proposals will be incentivised to pick the bids with higher prices than the lower ones.

For example, if there are 5 bids to construct the MRT terminal at Taman Tun Dr Ismail (TTDI), there is greater incentive for the PDP to recommend the bid with the highest or higher prices, instead of the lower priced ones.  The simple reason is that the higher priced ones will translate into a higher fee for the PDP given the fixed 6% structure.

The entire MRT project has been awarded and structured in such a reckless manner that the consequences in a few years’ time may have a devastating impact on the KVMRT’s viability.  The higher than necessary cost for the project would necessitate the imposition of higher MRT fares on the Klang Valley commuters, which will in-turn negate the intention of shifting the population to public transport.  Finally, given the size of the project, a drastic increase in cost will have an over-bearing impact on Malaysia’s financial position as the KVMRT is expected to be financed entirely by debt.  As it stands, we are already weighed down with a RM462 billion federal government debt.

The Government must explain with full details and transparency, how these issues will be addressed to ensure that Malaysians and our children will not be burdened by its reckless implementation.


Anonymous said...

If you are a Malaysian and you do not know the link between mega projects and elections, you must really be a "katak di bawah tempurung!"
Malaysia is in the "stone ages" as far as human rights, freedom of speech, equality of races and sexes,freedom to practice any religion without fear or restrictions and a whole raft of other well established principles that guarantees the rights for all Malaysians to be respected as equal human beings.

Look at the tenders and see the Preliminaries Item - there lies the secret of why tenders are high and use your imagination why it has to be awarded without an open tender system. Why should a simple 4 storey block of office space cost billions?

The modus operandi has been the same since the 1980's during the North South Expressway and besides getting bolder,nothing has been done to question these gross looting of the country's coffers. I do not see a single Malaysian with the balls to expose the decades of corrupt practice and that is why BN would rather have all those who oppose them killed (as promised by the former PM in no uncertain terms) rather than be caught with their pants down and their corrupt practice exposed. The people have legitimised corruption by continuously electing the very people wanting to rob them of their rights, dignity and money - can you think of a bigger bunch of fools! So long as the BN is ruling the country, every Malaysian should feel ashamed of themselves to allow a bunch of thugs raping the country repeatedly and playing the bloody stupid racial card to legitimise the rape of the entire nation. There is not an ounce of honesty left in those running the country and when Nature takes over to bring about a balance in the system, be prepared for the worst natural calamity that Malaysia has ever seen that will jolt the people from their blindness and make them face reality.Racial politics and supression of the peoples' rights have gone on for too long that the people have become psychologically handicapped, incapable of seeing the reality and standing up for themselves. Malaysians have been blessed with a beautiful, rich country with an equally beautiful diversity of people. Instead of valuing its richness, the thugs are destroying it. As we all know, it is not sustainable for a country like Malaysia to have such high borrowings especially when the GDP has not grown substantially over the past decade. We are looking at future generations of poverty once the house of cards comes tumbling down before the end of this year. What astounds me is that this is thugery done by those in power to their own people - including the Malays , not just to other races and the Malays are supportive of it!!!! What can I say - when they take money from national institutions like the KWSP,give cash to school children, they are not robbing the Chinese and Indians, its the hard working Malays as well- when will the people wake up - the thugs don't care about race - they are just thugs, plain and simple. Wake up Malaysia or you will be too late. Even if there is a change in regime, it is going to take a decade at least to undo the evil that BN has done, and God willing, every Malaysian gets to live with pride and dignity in the beautiful land of Malaysia.

rpremkumar2u said...

Tony Pua, sir, just stay on this for whatever time it takes; when the GE results catapault you fellas into the mainstream government, kindly be on the select committee to unravel officially all the muck that this project gathered and publish it officially and bring these numskulls to book. Of course the AG has to be someone else; not an apologist for the present regime.

Anonymous said...


1)buy Gamuda & MMC - Most easiest

2) Work with Gamuda & MMC - Easy if got vacancy

3) Be the supplier of Gamuda & MMC - need network tough


People also say Perak exco's wife company got project without tender ma... but small small project la.. tailor made o...

but small is BETTER THAN BIG...

seetan said...

Tony, the NEC suite of contracts, or a bespoke form of the NEC which I am assuming is the form of contract used to deliver this project from the use of terms such as target cost and cost reimbursables. The spirit of the contract is meant to incentivise the contractor to achieve efficiency. The target cost is the contract value, but the contractor is paid actual cost + fees i.e. the defined cost. What is more important is the difference between Target Cost less defined cost e.g. $100 target cost less $50 defined cost = $50. This $50 is the gain share between the client and contractor. The proportion of the share is dependent on the formula set out in the tender documents. However, if the defined cost is more than the target cost, then a pain share is to be had. One item that can increase the gain share is compensation event (variation orders). If I had read the article correctly, then you are quite right about the 15% contingency being unused and is 'free' money for Gamuda. The NEC is now written to in such a way to have contingency sums (I may be proven wrong). Usually, new item of works are treated as compensation events which is to be paid for by the client - which increases the target cost. I would be interested to know what constitutes a compensation event under and the definition of disallowed cost under this contract.