CRCC and the Penang tunnel-highways deal

While much attention has focused on BUCG’s removal from Consortium Zenith BUCG Sdn Bhd, perhaps it is time to take another look at how another state-owned firm from China, China Railway Construction Corporation Ltd (CRCC), ended up as the main contractor for Zenith in the tunnel, highways and property development project.

I spotted a Malay Mail report from 5 March 2013 (reproduced below). Some points and questions below:

• Consortium Zenith BUCG’s Sdn Bhd’s shareholding structure has since changed. But back in 2013, BUCG was reportedly described by the Penang state secretary and the Penang state financial officer as “the main bidder which formed the SPV with Consortium Zenith”. BUCG is now being removed. What are the implications?
• The Malay Mail report cited documents saying that China Railway Construction Ltd had tied up with IJM during the tender. They didn’t win. (Zenith-BUCG did.)
• But then China Railway Construction Corporation (CRCC) became the engineering, procurement, construction and design consultant for Zenith-BUCG.
• CRCC, BUCG and Consortium Zenith BUCG signed a preliminary agreement with the Penang government in October 2013 to carry out a feasibility study and detailed design work.
• Are CRCL, CRCC and China Railway Construction Corp International different companies, related or one and the same?
• If this CRCC is the same China Railway that had tied up with IJM… isn’t it odd that one of the losing bidders is now so heavily involved with the winning bidding team?

I am asking because this is what a World Bank report that discussed tenders for infrastructure projects like highways has to say:

Subcontracting as a facilitator of capacity-building and collusion

Allowing less experienced local companies to subcontract with experienced international firms gives them the chance to learn new techniques and build domestic capacity. However, when losing bidders are permitted to become subcontractors to the winning firm, subcontracting can be a way colluders pay one another off for sticking together. As suggested above, where the risks of collusion are high, consideration should be given to prohibiting subcontracting with losing bidders or at least monitoring subcontracting patterns to identify collusion risks.

The World Bank also lists 10 indicators that the US government uses to reveal collusive bidding. Item no. 3 (see page 12 of this link) is “Firms that submitted a bid later became a subcontractor on that project.”

So the practice of a winning bidder selecting a losing bidder as its subcontractor is not encouraged, even frowned upon.

In November 2015, I had also blogged:

Reuters reported in October 2013 that China’s anti-graft authorities punished eight people at a state-owned rail construction firm, China Railway Construction Corp. Ltd, for spending more than $100m on ‘hospitality’ in 2012. They had spent $135m on receptions for guests. One of the officials received a suspended death sentence, meaning life imprisonment.

[The company sounds familiar. In March 2013, a company bearing the name China Railway Construction Corporation International signed an agrement with the Penang state government on behalf of the consortium that won the bid for the Penang tunnel and highways project. Is this the same company? (Firms from China were also linked to the other bidders.)

And this is the Malay Mail report mentioned earlier:

Consortium Zenith is made up largely of CRCC

By A. Sangeetha, Zalinah Noordin | Malay Mail – Tue, Mar 5, 2013

GEORGE TOWN: Despite the tie-up with Beijing Urban Construction Group (BUCG), the special purpose vehicle company led by Consortium Zenith is made up of RM4.5 billion paid up capital, largely contributed by China Railway Construction Ltd (CRCL).

According to the documents, CRCL had tied up with IJM Corporation Bhd to bid for the tender but only proposed to build the 4.2km between Gurney Drive and Lebuhraya Tun Dr Lim Chong Eu coastal bypass.

In a joint statement issued by State Secretary Datuk Farizan Darus and State Financial Officer Datuk Mokhtar Mohd Jait stated that Consortium Zenith was specially set up to bid for the RM6.3 billion integrated road projects.

“Consortium Zenith and CRCL possess 70 percent equity with paid-up capitals of RM3.5 million and RM4 billion shares.

“The main bidder BUCG which formed the SPV with Consortium Zenith has a ten percent equity with a paid-up capital of RM541 million.

“Sri Tinggi Sdn Bhd and Juteras Sdn Bhd have a ten percent equity each with paid-up capitals of RM3.7 million and RM1 million, respectively,” they said.

Both Farizan and Mokhtar were debunking Barisan Nasional (BN)’s claim that Consortium Zenith was a RM2 with a paid-up capital of RM200,000.

Evidently, from the bids submitted by four companies during the request for proposal, three companies had tied up with China construction companies including VST Cemerlang with China State Corporation (VST).

Despite CRCL’s failed attempt to secure the deal with the assistance of IJM, it is apparent that they had managed to grab a chunk of the projects with its highest equity possession.

When asked, Chief Minister Lim Guan Eng not only conceded that the CRCL had the largest equity but also pointed out that CRCL is China’s biggest construction firm.

VST, on the other hand, submitted its proposal to build all four projects but due to its higher asking price of RM6.6 billion and a land swap deal of 171.3 acres, they were rejected.

The other company WCT Berhad, a Shah Alam based construction firm, tied up with Korean builder Daewoo Engineering and Construction to build the Teluk Bahang and Tanjung Bungah paired roads, and the Gurney Drive coastal bypass.

Their asking price was RM1.4 billion and 100 acres of land as part of the land swap deal but BUCG managed to win the bid after agreeing to RM6.3 billion and settled for 110 acres of land from Tanjung Pinang.

According to a company search, the RM2 special vehicle company Consortium Zenith and BUCG was set up on July 5 last year with two directors, aged 57 and 37, based in Kuala Lumpur and a 34-year-old secretary from Petaling Jaya.

It had a paid-up capital of RM200,000 but the joint venture company is believed to have increased its paid-up capital following the coming on board of CRCL and the two local companies, and the inclusion of BUCG’s investment.

The announcement of the road projects’ winning bid by Lim on Thursday had re-ignited criticism by environmental groups and Penangites.

The projects comprise a 4.2km bypass from Gurney Drive to Lebuhraya Tun Dr Lim Chong Eu, a 4.6km bypass between Lebuhraya Tun Dr Lim Chong Eu and Bandar Baru Air Itam, a 12km paired-road from Jalan Tanjung Bungah to Teluk Bahang, and the 6.5km Penang-Butterworth sea tunnel.

Lim had said the projects would be scrapped if the Detailed Environmental Impact Assessment (EIA) study revealed negative effects.

He also said the contract will only be signed after the general elections as the terms and conditions to the projects would be amended if Pakatan Rakyat took over Putrajaya.

“Due to the importance placed on public transportation in the PR manifesto, we would need to re-study the terms. If we win Putrajaya, we will be able to implement public transportation.

“Therefore, there will be a change to the projects. However, we still see the need to make road improvements and that is where the agreement with BUCG would be amended. Perhaps the projects will be on a smaller scale,” he said.