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Mega projects meet anticlimactic end as government addresses fiscal woes

Pakatan Harapan’s sweeping reforms since coming into office in May ran the full gamut from personnel changes at top government agencies, to fiscal policy.

Nowhere have these changes been more evident than in the infrastructure space as billions worth of projects have been deferred, suspended or cancelled altogether.

This is part of the current administration’s plans to cut back on spending in view of the country’s outstanding debt of over RM1 trillion — a situation expected to take at least three years to resolve.

Public infrastructure projects is one avenue the government is tackling to limit spending and this is expected to be reflected in the upcoming Budget 2019.

The cutbacks come at the expense of local construction players who have taken a beating in the market since Pakatan Harapan secured a simple majority in the 14th General Election (GE14).

An industry analyst said sentiment for the construction sector is badly damaged with no recovery in sight in the short term, while mid to long-term recovery would depend much on guidance from the government which is in a cost-cutting mode.

“Most construction players depend on government-led infrastructure projects, whereas private sector projects are mostly concentrated in property, and the consensus is that we are in an oversupply situation,” the source told The Malaysian Reserve (TMR).

The analyst added that bringing down the cost of public infrastructure projects requires addressing cost leakages in a given development.

“The tender price for these projects are high, but construction margins remain low — this suggests that leakage is high,” the source said.

Consequently, the ruling government has alternated between suspending and reducing the cost of several mooted or ongoing projects in the country.

While mega projects are considered tangible icons of prosperity, austerity measures are certainly more important as the government continues to find solutions to alleviate all its fiscal woes.

KL – Singapore HSR

The Kuala Lumpur (KL)-Singapore high-speed rail (HSR) promised quick and seamless travel between Malaysia and Singapore when it was first announced in 2015.

With a price tag that matched its ambition, the RM110 billion project sought to reduce travel time between the countries to 90 minutes (compared to four hours by car) via a 350km route from KL to Jurong East.

The decision to postpone the project was unsurprising given the strain it would put on the government’s coffers, and the large compensation to be paid, had it been cancelled altogether.

Both the respective governments agreed to suspend construction for the rail line until May 31, 2020, with commercial operations to commence on Jan 1, 2031, instead of the initial Dec 31, 2026, target.

Malaysia will pay a RM45 million abortive cost to Singapore that had already invested S$250 million (RM754 million) in the project, while project managers SG HSR Pte Ltd and MyHSR Corp Sdn Bhd had to call off its tender for an assets company.

Malaysian Resources Corp Bhd (MRCB) and Gamuda Bhd were initially brought on as the project delivery partners for the rail line, but have since seen their contract terminated.

All Quiet on the Bandar Malaysia Front

The future is bleak for the multibillion Bandar Malaysia project as the 197ha site was meant to be the main hub for the eight-station KL-Singapore HSR.

Difficulties in securing developers and links to the controversial 1Malaysia Development Bhd (1MDB) have left the former Sungai Besi air force base idle since it was first mooted in 2011.

The cancellation of the HSR will be perceived as the final nail in the coffin for the mega development.

Project owner TRX City Sdn Bhd (formely 1MDB Real Estate Sdn Bhd) sought to sell a 60% stake in the project to a consortium comprising Iskandar Waterfront Holdings Sdn Bhd (IWH) and China Railway Engineering Corp (M) Sdn Bhd (CREC).

The deal fell through in May last year as the consortium failed to meet payment obligations, despite being given repeat extensions.

IWH and CREC won an open tender to be the master developer for the project back in 2015 with a RM7.41 billion bid.

Bandar Malaysia was expected to raise as high as RM200 billion in gross development value, but is unlikely to be revived in the near future as the nation’s priorities look to be elsewhere.

ECRL

The East Coast Rail Link (ECRL) was among the first casualties of the government’s review of mega projects after it was discovered that its cost escalated some 47% from initial estimates.

Upgrades and extensions made to the original line, coupled with land acquisition and financing costs, resulted in the project running up a bill of RM80.92 billion — substantially higher than the original RM55 billion cost.

The government moved quickly to cut its losses and works on the 688km rail line from Port Klang, Selangor, to Pengkalan Kubor, Kelantan, were suspended in July by project owner Malaysia Rail Link Sdn Bhd.

China’s state-owned China Communications Construction Co Ltd was brought on as the engineering, procurement, construction and commissioning contractors for the ECRL on November 2016. The aborted project reportedly resulted in 1,800 people losing their jobs.

George Kent (M) Bhd, perceived as a prime proxy for rail projects in Malaysia, was among the construction companies materially affected by the suspension. The engineering company also expressed interest to bid for the now deferred HSR project.

Lafarge Malaysia Bhd and HSS Engineers Bhd had also secured contracts for works on the ECRL.

The project is cancelled for now and may be revisited in the future. Initially slated for commercial operations by 2024, the ECRL was touted to bring a host of economic benefits to the East Coast states of Pahang, Terengganu and Kelantan.

Pipeline Projects Terminated

Allegations of misappropriated funds and links to controversial state fund 1MDB led to the cancellation of three extensive gas pipeline projects in the country.

The Ministry of Finance (MoF) unit, Suria Strategic Energy Resources Sdn Bhd, was tasked to oversee the development of the Multi-Product Pipeline from Melaka to Jitra, Kedah, and the Trans-Sabah Gas Pipeline from Kimanis to Sandakan and Tawau.

Both pipelines were worth a combined RM9.41 billion and China Petroleum Pipeline Bureau (CPPB) was awarded both projects in November 2016.

The gas pipelines came under scrutiny shortly after GE14 when MoF discovered in June that only 13%, or RM1.22 billion, of works were completed. This is in spite of the RM8.3 billion in contracts being awarded to China-based firms for both projects.

This led to allegations that the loan secured from the Export-Import Bank of China last year to finance the projects was redirected to pay off 1MDB’s ballooning debt.

China Petroleum Pipeline Engineering Co Ltd, the parent company of CPPB, denied the allegations.

The unaccounted funds were enough for the government to pull the plug on the projects, as well as a third pipeline linking Melaka to Petroliam Nasional Bhd’s refinery and petrochemical plant in Pengerang, Johor.

Future of MRT3 Hanging

First thought to be scrapped, but now pending a government review, is the Mass Rapid Transit Line 3 (MRT3) project which was aimed at facilitating improved connectivity in the busy and densely populated Klang Valley region.

Expected to cost almost RM50 billion to construct, the 40km public rail line will be part of the overall MRT structure, which consists of MRT1 from Sungai Buloh to Kajang and MRT2 from Sungai Buloh to Serdang to Putrajaya.

Prime Minister Tun Dr Mahathir Mohamad first announced on May 30 this year that the MRT3 was to be cancelled, but has now been deferred to determine if the overall cost of the project can be reduced.

Meanwhile, the underground works package for the MRT2 is expected to be opened to a fresh international tender process after the federal government terminated the previous contract given to Gamuda and MMC Corp Bhd on a joint-venture (JV) basis.

A government-appointed independent engineering consultant found that RM4.19 billion to RM5.79 billion in cost savings could be achieved for the underground portion of the works. Companies bidding for the job will need to meet this expectation.

LRT3/Penang Undersea Tunnel/PBH

Not all mega projects in the country suffered suspension or deferment as several infrastructure developments were given the green light after cost cutting efforts.

The third line of the Light Rail Transit (LRT3) is to proceed after its cost was brought down from RM31.65 billion to RM16.63 billion on reduced capacity, and is set to serve two million residents from Bandar Utama to Klang by 2020.

George Kent and MRCB were appointed the project delivery partners for the 37km line in 2015 and have since agreed to undertake the project on a fixed price contract regime.

Similarly, the Pan Borneo Highway (PBH) is to proceed at a reduced overall cost with the Sarawak portion of the 706km highway having already been brought down by 4% to RM15.83 billion. The Sabah portion of works was last reported at RM12.86 billion.

Meanwhile, TMR recently reported that the feasibility study and detailed design for the RM3.5 billion undersea tunnel project in Penang is to be submitted by the end of this month. This is in spite of calls to abort the project to help trim the country’s debt.

– The Malaysian Reserve

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