This article first appeared in Forum, The Edge Malaysia Weekly on November 15, 2021 - November 21, 2021

There was no announcement on the Mass Rapid Transit circle line (MRT3) in the recent Budget 2022 and 12th Malaysia Plan. The reason is obvious — the government does not have the finances to undertake the project, which is not commercially viable.

But should there be no roll-out of public infrastructure because the government is facing financial constraints?

No, it should certainly not be the case as public infrastructure can be implemented as long as there is a commitment from those in power at Putrajaya.

We are already witnessing how it can be done from the 5G deployment by the Ministry of Finance-owned Digital Nasional Bhd (DNB). The main telecommunications players are not happy with this, but what is most important is that the roll-out of infrastructure is ongoing.

The circle line is a public transport infrastructure that is required to complete the entire network of MRT lines that the government has built at a cost of billions of ringgit. The construction cost of the MRT1 line alone was RM21 billion, not including other associated costs, which are said to have amounted to an additional RM7 billion.

MRT2 was originally slated to be built at a cost of almost RM39 billion, but its budget was slashed under the Pakatan Harapan rule to RM30.5 billion.

The cost of MRT3 is estimated to be as high as RM40 billion. However, it can be brought down significantly if there is less tunnelling work and more overhead structures. As such, the cost depends largely on the design of the project.

A joint venture between MMC Corp Bhd and Gamuda Bhd was appointed to manage and complete both MRT1 and MRT2. Initially, the mandate was for the JV to be the project delivery partner (PDP), where it earned fees and also undertook the tunnelling works.

However, after the change in government in 2018, the terms of the contract for MRT2 were changed from MMC-Gamuda being the PDP to being joint turnkey contractors.

The main difference between a PDP and turnkey contractor is that the latter requires the main contractor to undertake financing arrangements as well as to complete the job within the time stipulated and within cost. And they earn a profit on the jobs and not a fixed fee.

Hence, being a turnkey contractor is risky and more challenging for the contractor.

Without MRT3, the network of MRT lines will not be connected and the full benefits of the MRT infrastructure would not be realised.

What the big boys in the construction industry would like is a sweetheart deal where the job is financed entirely by the government, just like with MRT1 and MRT2. They would then be left to manage the construction to ensure it is completed within the time stipulated and within cost.

And if there are any cost savings, it is to be shared with the government. But most of the time, there is no cost savings or the amount is insignificant in relation to the total cost.

Considering the government’s weak finances, there are more reasons than ever to not follow the conventional methods of financing public infrastructure, especially for public transport systems where profits cannot be made.

There are ways to arrange for parts of the project to be financed by the private sector.

Towards this end, MRT Corp is looking at a combination of financing options for the project. They include a private financing initiative (PFI), where the private sector finances up to 30% of the project. Its request for information (RFI) exercise carried out in April elicited responses from more than 40 companies.

As with any other rail infrastructure, the cost boils down to three components — land acquisition, systems including rolling stock such as the train sets, and civil works.

Land acquisition is generally the domain of the government. After the alignment has been finalised, the government invokes laws to ensure that the land along the alignment is cleared.

According to consultants, the work for the system could potentially be undertaken on a PFI basis whereby the contractor is paid over time based on the performance of the train services. There are projects in Australia where the system cost is borne by the private sector, and they are paid over time.

That leaves the construction of the infrastructure, which local contractors can undertake. However, most of them want the government to pay for the construction costs.

That would mean that the government should award the job to the company that is able to do it at the lowest cost. It also means choosing the most cost-efficient design without frills being added on just to bump up the cost.

And an open tender, free from political interference, is paramount for an efficient price discovery method. Lastly, to integrate the civil and systems work, a large company that has experience in big construction jobs is required.

MRT Corp, which is the owner of the asset, should be given a free hand to determine how it wants to undertake the job, with the least financing burden on the government’s balance sheet. Being the asset owner, it is ultimately responsible for the MRT operating smoothly.

The conventional method where the government, through its agency such as MRT Corp, leaves the entire job to the private sector is not the best solution.

Firstly, its finances are constrained, which means it needs to look at the most cost-optimised model. As such, it has to consider other options.

Secondly, the private construction company will ultimately hand over the asset to MRT Corp, which is responsible for the quality of the asset and the finances required to operate the system. Since ownership is under MRT Corp, the agency should be responsible for its construction.

Moreover, after having completed MRT1 and MRT2, government agencies and the local construction industry are experienced enough to handle the challenges posed by such a project, which takes a few years to complete.

Infrastructure projects can be undertaken without eating too much into government finances. The 5G roll-out is an example. The PDP model, or anything similar, is certainly not the most cost-efficient way to roll out public infrastructure.

For the MRT3 to be done differently, the main consideration is that the agency mandated to handle the job must be given a completely free hand. It has to be free from political interference, especially with regards to the award of contracts.

And most importantly, reputable individuals who are authorities in the industry should be hired to drive the job.

M Shanmugam is a contributing editor at The Edge

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