Wednesday, November 08, 2017

Is a switch from “Project Delivery Partner” to “Turnkey” model really to save on financing cost, or is there more than it meets the eye?

MRT Corp has recently announced its tender for the third phase of MRT project. The big changes to the tender conditions compared to the MRT 1 and 2 projects come as a big surprise to the infrastructure players and investment community.

The biggest change comes in the project delivery structure which has gone from a project delivery partner (PDP) model to a turnkey model. The PDP model used in the MRT 1 and 2 projects saw the participation of local companies who were to ensure the on-time delivery the project.

Under the turnkey model, however, a single contract is awarded for the entirety of the project, which is estimated to worth between RM40-50 billion. This model has similarly been used for the ECRL which has the China Communications Construction Company Ltd. (CCCC) as its turnkey developer. The CCCC is now responsible for building and financing of the entire project, which includes the hiring of subcontracts for different packages of the development.

The first question that needs to be asked is why the sudden switch to a turnkey model over the existing PDP model? The government has previously praised the delivery of MRT for being done ahead of schedule and purportedly under budget.

Under the revised scheme, MRT3 requires the winning bidder to provide at least 90% financing with an 8-year moratorium whereby no repayments on the principal and interest of the financing will be paid to the government. On top of that, it requires the repayment period to be no less than 30 years.

MRT Corp has said that the turnkey financing model is aimed at attracting foreign companies who may provide better financing options for the line. Dato’ Seri Shahril Mokhtar claimed that “if we utilise funds from say, DanaInfra… with an interest rate of about 5.1%... the borrowing cost will kill us… if foreign parties can give us 3% then why not, its good for us”.

Perhaps MRT Corp is trying to be disingenuous with their arguments.  How come the financing cost of DanaInfra didn't "kill" MRT1, MRT2 and LRT3?  While financing costs is indeed important, what is more important is the actual project cost.  If the actual project cost is say, 20% higher, then a 2% lower financing cost will still cost MRT Corp more in the end.

It is the same point we have raised for the ECRL project – what is the point of awarding the RM55 billion contract directly to CCCC without any open tender merely for 1% lower in financing cost, when the Government’s own consultants estimated the project to cost less than RM30 billion?

What’s more, the unprecedented stringent financing requirements seem intentionally designed to disqualify locally experience major infrastructure builders like Gamuda Bhd or MRCB.  Analysts interviewed by The Edge Financial Daily have cited the heavy financing burden as a huge barrier preventing the participation of Malaysian firms in the tender.

Unlike the MRT 1 and 2 projects that saw the participation of Malaysian at all levels of the project, it now seems much less likely for local firms to participate in MRT3, unless they form consortiums or are hired as subcontractors by the turnkey developer. Why is the Government so intent on hiring foreign contractors when we already have all the expertise locally?

What is even more suspicious is the fact that MRT2 is only due for completion in 2022, and yet the Prime Minister has brought forward the completion date for MRT3 to 2025 from 2027. Why the sudden rush to award these contracts?

All the above questions only go to prove that there’s more than it meets the eye with the latest ‘mysterious’ decision to switch the project model from the much ‘praised’ PDP to the turnkey cum financing model.  The cost of the switch might just end up a whole lot more for the Malaysian tax-payers at the end of the day – what is the purpose and who are the real beneficiaries?

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