Putrajaya pulls back govt guarantee for Penang's US$500m loan to finance LRT project

Putrajaya pulls back govt guarantee for Penang's US$500m loan to finance LRT project
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KUALA LUMPUR (Nov 27): Putrajaya has decided not to proceed to grant a government guarantee for a US$500 million (RM2.04 billion) loan application by Penang to partly finance its RM9.5 billion light rail transit (LRT) project. 

Finance Minister Tengku Datuk Seri Zafrul Tengku Abdul Aziz said the decision was in line with the revised revenue and income projections for the country, as well as the government's focus to restore the economy, following the Covid-19 pandemic.  

Should the loan go through, Tengku Zafrul said it will increase the federal government's commitment on operational and development expenditure, as well as other off-budget projects borne by the government such as the MRT Line 1 and 2 (RM71 billion), LRT3 (RM17.7 billion), the Pan Borneo Sarawak Highway (RM13 billion) and the East Coast Rail Link or ECRL (RM48.85 billion).

"Any new loan with a government guarantee should be scrutinised as much as possible, as it will increase the government's contingent liability. Unchecked increases in the government's contingent liability could increase fiscal risks and affect Malaysia's credit rating given by international rating agencies.  

"Therefore, it is prudent for the government to limit the exposure of government guarantees by reorganising the projects according to the priority and repayment capacity of the debt," Tengku Zafrul said in a parliament written reply dated Nov 25.  

As of Sept 30, the total value of government guarantees stood at RM289.8 billion or 20.1% of the country’s GDP, he said. 

Tengku Zafrul was responding to a question by Tanjong MP Chow Kon Yeow, who is also the chief minister of Penang, on whether the federal government will provide a government guarantee to Penang for the loan applications to finance the state's LRT project.  

In November last year, Chow said the state government will form a special purpose vehicle (SPV) to issue bonds to raise funds to pay for the project.  

At the time, he said then prime minister Tun Dr Mahathir Mohamad had assured that Putrajaya will provide a sovereign guarantee for bonds issued through the state’s SPV, to raise money for the LRT project under the RM46 billion Penang Transport Master Plan (PTMP).  

Chow added that Penang would not have been able to raise enough in the bonds market, without Putrajaya’s guarantee. 

Tengku Zafrul, in the written reply, said the finance ministry received a letter from the Asian Development Bank (ADB) dated Jan 25, 2019, with regards to the application by the Penang government to obtain a loan from ADB to finance the LRT project.  

He said that according to ADB’s financing terms, the loan will be charged at a higher repayment rate and cost of financing, as the bank places Malaysia as an upper middle income country, which has a higher maturity premium, with a spread of 0-50 bps, compared with 0-20 bps previously. 

The minister said if the government agrees to the loan from ADB, the allocation should be provided for, in the annual budget and the rolling plan of the Malaysia Plan.

“The Penang state government needs to re-examine the projects based on priority.

"The prioritised projects should then be submitted for further study by the Economic Planning Unit, Prime Minister's Department to be considered under the upcoming rolling plan of the Malaysia Plan," Tengku Zafrul said.  

The LRT project, the first of its kind in the state, spans 19 stations across a 22km line linking the city centre of George Town to Bayan Lepas down south. The Bayan Lepas LRT line is said to be one of the priority projects to be delivered under PTMP. 

S Kanagaraju