Penang transport infrastructure cost balloons from RM27bn to RM46bn

When Halcrow first came up with its transport masterplan, the projected cost of implementing the Penang masterplan was reported to be RM27bn. This figure included the RM6bn-plus for the tunnel and three highways (under Zenith), which was the state government’s idea.

But then, enter project delivery partner, the Gamuda-led SRS Consortium, with its own proposals. The total cost has now ballooned to  RM46bn (including the RM6bn-plus for the tunnel and three highways).

The SRS proposals have deviated significantly from the Halcrow masterplan. Whereas Halcrow proposed cheaper trams and bus rapid transit, SRS proposals now include more expensive elevated LRT (cost RM6bn) and monorail as well as a new north-south highway on the island (RM6bn).

At the first meeting of the enlarged Penang Transport Council the other day, a partner from audit firm KPMG revealed how project delivery partner SRS was chosen. The selection was through a request for proposals, under which six proposals were received with all sorts of different things in each proposal.

I pointed out that this was not the same as a strict open tender with definite criteria of what was expected from all bidders – in this case the implementation of the strategy that Halcrow had proposed. After all, the Penang state government and the NCIA had paid Halcrow RM3.2m for its masterplan strategy.

I asked why none of the firms that submitted proposals under the RFP had any experience in delivering trams and a bus rapid transit system – which is what Halcrow had recommended.

I didn’t receive satisfactory answers. So it is not a surprise that SRS is proposing something different – and at higher cost.

Ballooning cost for KL MRT project

In 2011, a press report quoted sources saying the KL 150km MRT project cost had ballooned to RM50-53bn from Gamuda-MMC’s RM37bn estimate a couple of years earlier.

Now, we are told that:

• Line 1 cost around RM23bn,
• Line 2 was estimated to cost RM23bn. But last year, the estimated cost rose to RM28bn. By this year, the estimated cost has risen to RM32bn.

Total: RM55bn for just two of the three lines planned – quite different from the original RM37bn estimate.

Will Penang experience the same rising costs?

‘Recipe for inflated project cost’

One of the problems is that the project delivery partner’s fee of 6 per cent for the KL MRT project is based on the total project cost.

So the higher the project cost, the more the PDP fee that the government will have to pay the PDP (on top of the PDP’s expenses).

The same figure of 6 per cent of project cost is being used for the Penang project deliver partner. So SRS Consortium stands to earn RM2bn from PDP fees alone.

Tony Pua came up with an excellent critique of the basis of the PDP fee for the KL MRT project in 2012 (see below). The PDP fee is a recipe for inflated project cost, he said.

I couldn’t agree with him more. Much of his argument applies to the Penang PDP fee as well – but you won’t hear Penang state government leaders echoing what he said back then.

Media statement by Tony Pua Kiam Wee in Kuala Lumpur on Monday, 13th February 2012:

MRT Co 6% fee-formula for MMC-Gamuda Project Delivery Partner is a recipe for inflated project 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.