MRT2 could cost over a third more

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This article first appeared in The Edge Malaysia Weekly, on February 22-28, 2016


MR1-Tunnel_12_TEM1098_theedgemarketsMass Rapid Transit Corp Sdn Bhd (MRT Corp) is likely to announce the result of a tender exercise soon and award as many as two elevated viaduct contract packages — each of which is valued at RM1.5 billion, and form part of the second line of the mass rapid transit (MRT2) linking Sungai Buloh to Serdang and Putrajaya, sources say.

It is understood that the two jobs have attracted the interest of many local players, such as IJM Corp Bhd, WCT Holdings Bhd, Gadang Holdings Bhd, Sunway Construction Group Bhd, Muhibbah Engineering (M) Bhd, Ahmad Zaki Resources Bhd and privately held MTD Group, with little separating the companies.

“Yes, these are the main companies vying for the MRT2 contracts. [There are] perhaps a couple more but these are the main players locally, and they are likely to bag the lion’s share of the contracts,” says a construction industry executive who works for one of the aforementioned companies.

According to an analyst, who has tracked the construction sector for a few years, these companies are the “usual suspects” when it comes to bagging local construction jobs.

What is interesting, though, is that the cost per kilometre for the elevated portion of MRT2 has increased by a quantum of 35% on average to RM190 million per kilometre, from RM140 million per kilometre for MRT Line 1 (MRT1) four years ago.

The construction of MRT1 started in August 2012. It is expected to commence operation in July 2017, while MRT2 is projected to be operational in 2021.

Nevertheless, the 35% increase in construction costs does not come as a surprise.

“It’s largely a result of the higher cost of machinery, workers … engineers, especially wages, and of course, the weaker ringgit,” a source familiar with the matter says.

It seems that with many ongoing large-scale projects, such as the RM6 billion West Coast Expressway and RM53 billion Refinery and Petrochemical Integrated Development project in Johor as well as new highways such as the proposed RM4.2 billion Damansara-Shah Alam Elevated Expressway and RM5.3 billion Sungai Besi-Ulu Kelang Elevated Expressway, the cost of machinery has been nudged upwards due to the demand.

Other than escalating machinery costs, the weak ringgit has also added to the woes of the industry. Last Friday, the ringgit was at 4.21 to the US dollar, off its low of 4.46 at end-September last year. Nevertheless, the ringgit is down some 18% from its 3.56 level in April last year.

“Over the past two years, the ringgit has fallen by about 30% against the US dollar … so the currency risk is very real,” one construction player says.

In September last year, MRT Corp CEO Datuk Shahril Mokhtar said the fall in the value of the ringgit will only have a minimal impact on the overall construction costs of the project.

He is reported to have said then that the components imported for MRT1 cost only RM600,000 more than the original cost of RM4 billion — this is compared to the overall cost of Line 1, which links Sungai Buloh to Kajang, that totals RM23 billion.

“Even with the depreciation of the local currency, it will not have a huge impact on the construction process that is ongoing now. The additional cost of RM600,000 involved the cost of importing components such as trains, the electronic system and others,” Shahril added.

The Edge understands that the Ministry of Finance late last year estimated that the cost of MRT2 would be in the region of RM28 billion — higher than the Budget 2015 allocation of RM23 billion. A 35% hike would nudge the price tag to just above RM31 billion. Whether it would swell further remains to be seen.

Adding to the cost of Line 2 could be longer tunnels.

In the first MRT line, there are some 9.5km of tunnels with seven underground stations. According to sources, MRT2 will see between 14km and 15km of tunnels and 10 underground stations.

The cost of the underground portion of MRT1 was in the region of RM8.2 billion. A 35% premium would increase the tunnelling bill to about RM11.1 billion.

MMC-Gamuda, a joint venture between MMC Corp Bhd and Gamuda Bhd, was awarded the RM8.2 billion tunnelling contract for MRT1. Both MMC Corp and Gamuda are local favourites as well as project delivery partners for MRT2.

Sources say MMC-Gamuda could face stiff competition from the likes of French outfit Vinci SA, diversified South Korean giant Hyundai Corp, Japanese construction company Taisei Corp and China-based Shanghai Tunnel Engineering Co Ltd for the MRT2 tunnelling job.

Meanwhile, in May last year, Shahril had indicated that including land acquisition costs, which was pegged at between RM4 billion and RM5 billion, the construction of MRT2 could cost in excess of RM30 billion.

Shahril could not be contacted for this article as he was abroad.