This article first appeared in Forum, The Edge Malaysia Weekly on January 16, 2023 - January 22, 2023

The RM50.2 billion Mass Rapid Transit 3 (MRT3) project was about to be awarded when the general election (GE) was called in November last year. The mega project is much awaited by the construction industry as it is the biggest infrastructure job for local players since 2014.

The award of the civil work packages was supposed to be announced at end-2022 after tenders closed last October. But the champagne had to be put on ice as the GE led to a change in leadership at Putrajaya.

Now there are fears that the project may be reviewed with the objective of reducing costs or delaying its implementation. Analysts have speculated that in the worst-case scenario, MRT3 could be delayed to the later part of the year, pending cost adjustments.

The new finance minister, Datuk Seri Anwar Ibrahim, who is also the prime minister, has dropped big hints that excesses will be cut to beef up the weak public sector finances. In his latest statement, Anwar disclosed that he had found “excessive discrepancies” when reviewing the files at the Ministry of Finance.

The last big project where local companies had a share of jobs was the RM30 billion MRT2, which was awarded to a joint venture of MMC Corp Bhd-Gamuda Bhd.

The RM75 billion East Coast Rail Link (ECRL) has been going on for a few years but it does not benefit the local players. Almost everything for ECRL is sourced from China — from toothbrushes to tools. Even precast works are done at the site by the Chinese contractors with cement being sourced locally.

Local contractors, largely small players, get minor jobs such as earth moving and land clearing. Ballast stones and other raw materials are sourced from local quarries.

The construction sector has been on a downward trend since 2018 because the government has been cutting down on infrastructure projects and the property market has been lacklustre. During the two pandemic years in 2020 and 2021, the sector contracted and it is likely to see single-digit growth of less than 5% last year and this year.

In addition to facing a dearth of jobs, construction companies also have to contend with a finance minister who was elected on a platform of reforming the country’s finances.

Anwar has vowed to stamp out corruption, weed out excesses and improve the macroeconomic finances of the country. He opted to work as prime minister without a salary and cabinet members have taken a pay cut.

When he unveils his budget for the year on Feb 24, would anybody bet against him adopting a policy of prudent spending? Certainly not.

Anwar cannot be discounted from cutting the development expenditure, which was at RM95 billion in the pre-GE budget tabled on Oct 7. Speculation is rife that he will reduce it to RM85 billion.

He is not helped by the fact that successive prime ministers in the past 22 years have spent more than what the government earned, leading to Malaysia having an undesirable debt-to-gross domestic product (GDP) ratio.

As at end-June 2022, total public sector debt, which includes the liabilities of quasi-government bodies and government guarantees, was RM1.42 trillion, or 82.9% of GDP. Federal government debt was just above RM1 trillion or estimated at 61% of GDP.

In 2020 and 2021, countries that ran up excessive debt were forgiven. But with interest rates rising, debt servicing has become more expensive for governments and it can be a point of concern for international rating agencies.

In relation to this, the World Bank in June last year had already warned of developing countries facing a debt crisis amid the rising interest rate environment.

When interest rates go higher, debt servicing becomes bigger. The biggest debtor is the government. As of now, Malaysia sets aside almost 17% of its operating expenditure for debt servicing charges, which is not healthy. The ratio should be less than 15%.

The government led by then prime minister Datuk Seri Ismail Sabri Yaakob had tabled a deficit budget in which RM95 billion was set aside for development expenditure. It included US$3 billion to pay for debt related to 1Malaysia Development Bhd (1MDB).

The budget also allocated RM3.3 billion to start the MRT3 project, which will stretch up to 2030.

The tendering preconditions for MRT3 were unique because the bidders had to prove that they had the finances to carry out the project for the first two years. This effectively meant only companies with big balance sheets could bid for the three main civil works packages, which run into billions.

It was a choice the previous government made because of constraints on the federal government’s finances.

The positive outcome of this prerequisite is that only the big boys that were able to take on such a financial risk participated in the tender exercise. It weeded out the companies and individuals that tend to use their connections to influence the outcome.

This augured well for the piranha-­infested construction sector where middle-men make huge commissions for opening doors. But the downside is, the smaller players with limited finances were left out.

Does Anwar have the option of delaying the implementation of MRT3 even though the tenders have been called and evaluated?

Yes, he does as it is his prerogative. But the consequences could be dire for the sector and the outcome may not make much of a difference to the government finances.

A contractor says that in the first year, the job is mainly to firm up the land acquisition and detailed design.

“The government’s obligations are to come up with some money for land acquisition. But work can go on as there is an option for the government to allow winning bidders to fund the detailed design.

“The contract has already been stretched to seven years. Delaying it by a year will not make a difference to government finances. Instead, it can be a dampener for the sector, which has put a lot of resources into the tender process since 2021,” says the contractor.

Nevertheless, Anwar has the option of reducing costs and involving more players in the project.

A consultant says that costs can be reduced if there are changes to the MRT3 alignment.

“Some stretches in the current alignment are risky for contractors and hence they would input a higher cost. The alignment can also be designed to run into some greenfield areas to reduce land costs for the government,” says the consultant.

On MRT3 being more inclusive by involving smaller contractors, the consultant says that the government always has the option of putting in a clause whereby the winning contractors must tender out about 40% of their jobs to other players in an exercise supervised by MRT Corp.

Among the companies tipped to land the civil work packages are Gamuda Bhd and IJM Bhd. Both companies have strong balance sheets and a good track record in completing projects on time and within budget. And both tend to have good relations with the government of the day and hence are capable of carrying out what it desires.

Anwar has several choices for the MRT3 project. He could opt to review its implementation and refine the cost. But putting off its implementation will affect the sentiment in the sector and the economy as a whole.

For the short term, delaying MRT3 will make good newspaper headlines. But in the longer term, it will not go down well with the industry and investors.

M Shanmugam is a contributing editor at The Edge

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