Letter to the press by economist Dr Lim Mah Hui from Penang Forum, followed by a full rebuttal by the developer SRS Consortium, and followed by a response by Dr Lim.
Selling Penang for a song and a dance? — Lim Mah Hui
Malay Mail, 17 May 2021 02:31 PM MYT
MAY 17 — The Penang state government’s plan to reclaim Island A, the first part of Penang South Reclamation (PSR), seems like a fait accompli. But how did we get here? Following the progress of the Penang Transport Master Plan (PTMP) might show that a sweet promise made to the public for a self-financing project, has been used to sell a questionable privatisation-cum-marketisation deal.
In early 2013, the Penang state government approved a RM27 billion Penang Transport Master Plan to address the state’s transport and traffic problems. Two years later the SRS Consortium proposed an amended PTMP which ballooned the costs to RM46 billion. The proposal included the reclamation of three islands (4,500 acres) off the southern shores of Penang to finance the PTMP.
SRS was appointed to be the project delivery partner (PDP) to manage this massive project, charging a fee equivalent to 6 per cent of total project cost. SRS sold this Penang Southern Reclamation (PSR) proposal to the Penang state government as self-financed, that is, the proceeds of land sale will pay for the PTMP projects. According to the SRS request for proposal (Volume 1, Chapter 4), reclamation of islands A and B, taking about 8 years, will net an income of RM 16.1 billion for the Penang state government (RM7.2 billion from Island A and RM8.9 billion from island B).
Volume 1 page 1-06 of the same proposal states, the PTMP project, “Does NOT require the State (or the Federal Government) to raise or guarantee any loans to finance the delivery of the TMP (Transport Master Plan).” The emphasis “NOT” in capital letters is original. All funding, except the initial capital, is supposed to come from reclamation of the three islands. SRS promised to source the initial RM1.3 billion bridge loan to kick start the reclamation. But this promise was never fulfilled.
Instead, the Penang state government had to desperately approach multiple sources, including a Japanese government agency, to help finance the PTMP. When Pakatan Harapan became the federal government, the Penang state government asked the latter to provide a loan or loan guarantee for up to RM10 billion.
By right the Penang state government should have rescinded its agreement with SRS since the latter could not fulfil its basic commitment, something with Penang Forum consistently advocated.
Eight years later, the people of Penang are sold a different story.
On March 25, 2021, the Chief Minister of Penang Chow Kon Yeow revealed that Island A, the largest island to be reclaimed, will become “private”. This is because the Penang state government was unable to secure a loan or financial support from the federal government to jump start the mega-project.
Under the new public-private arrangement, a 30-70 joint-venture called the Project Developer (PD) would be set up — 30 per cent owned by a Penang state government nominee and 70 per cent by SRS. The PD has sole and exclusive rights to develop and sell the reclaimed land in Island A. The PD in turn would award all construction work (not through open tender) to a turnkey contractor (TC), another 30-70 joint venture between a Penang state government nominee and SRS, to manage and implement the project. The TC will directly award the reclamation work to Gamuda Engineering and other work packages (infrastructure work, PIL2A and Phase 2 reclamation) via competitive bidding. Upon completion, Island A will be handed over to the PD who will in turn call for tender on land parcel sales. This new scheme puts Gamuda in the driver’s seat as it owns 70 per cent of the JV through SRS. Gamuda will be responsible for financing the project and the Penang state government will be absolved from all financing responsibility and risks.
The PD will have full control over the reclamation schedule — reclaiming and selling according to market conditions, stipulating that the condition that the work should be completed within 10 years from work commencement. It is expected the reclamation will take up to 6 years with initial land sales beginning from year 4. This means the original intention of financing PTMP projects based on land sale is no longer applicable, for the link between land sale and PTMP project construction has been broken. Land reclamation and sale are driven purely by market conditions, not by PTMP projects.
According to the chief minister, the Penang state government doesn’t have to fork out a cent and it will still own all the reclaimed land. This deal sounds too good to be true.
So, what will the Penang state government get out of this new arrangement? The short answer is RM600 million in 7 to 10 years’ time. It is even less (about RM400 plus million) on present value basis.
Let us follow the arithmetic of this new deal. According to Gamuda’s new estimates, land sale proceeds from Phase 1 of Island A are between RM8-9 billion over 7 years, reclamation costs are between RM4-4.5 billion, and construction costs between RM2-2.5 billion. (The reclamation and infrastructure costs have more than doubled compared to the SRS 2015 proposal.) Taking the higher estimates, the net revenue is estimated at RM2 billion (RM9 billion less RM7 billion). Hence, the net revenue for the Penang state government is RM600 million (30 per cent of RM 2 billion).
If the Penang state government gets only RM600 million from this new deal, what will Gamuda stand to gain? Plenty. It has complete monopoly over all reclamation work. All proceeds from land sale shall be used to pay for all the PD’s and TC’s costs and liabilities, including but not limited to payment to the TC, payment of interests and loan principal, all fees and taxes. In other words, Gamuda would be “double-dipping”, by making good profit from the reclamation work and, on top of that, chalking up 70 per cent of net proceeds of the PD and the TC.
The original idea and intention of the PSR project was to fund the RM46 billion PTMP. The initial estimated costs of the PIL1 and LRT (the first two PTMP projects) came to about RM6 billion each. These costs have ballooned to about RM8 billion for each.
Penang Forum is in principle against the PIL1 and LRT because these megaprojects are overdesigned for local population needs, too costly and entail unacceptable environmentally impacts. However, for the purposes of this essay, there is a need to analyse whether the PSR will deliver what the government promised.
Is the Penang state government admitting that the LRT and PIL1 will not start until they are able to get money from reclaimed land sale in 7 to 10 year’ time? Even then, how is a projected revenue of RM600 million from Island A going to pay for the LRT and PIL1 which will cost RM8 billion each?
What can we conclude from all the twists and turns in the agreements between the Penang state government and SRS/Gamuda?
Financing a bloated PTMP was put forward as the original justification for the PSR project. But it is now clear this has failed. It is impossible to finance even the 2 initial projects of the PTMP (LRT and PIL1) with RM600 million. PTMP and PSR have been decoupled. Perhaps the PTMP was simply a bait for the people of Penang, which is now switched for the original intention of land reclamation for land sales per se and nothing further.
In face of the pandemic, the economic forecast for the next 10 years is uncertain. What happens if the cash flow starts to falter before land sales can begin, will Island A end up like so many other stalled reclamations. The Penang state government is willing to gamble away the state’s fortunes given unforeseeable externalities that will have to be borne by future generations.
In this whole process, Penang loses its environment, valuable fishing ground, food security, and loss of fishermen’s livelihood etc. SRS’s consultants in its Environment Impact Assessment (EIA) admitted that the PSR project will result in “irreversible change” to the environment and a “permanent loss” of physical and biological resources in the seas of southern Penang island.
This new arrangement clearly does not make any economic, financial and ecological sense. It is against all public interests and is a folly to continue.
* This is the personal opinion of the writer or publication and does not necessarily represent the views of Malay Mail.
Response from SRS Consortium Sdn Bhd to Dr Lim Mah Hui’s Opinion in Malaysiakini on 22 May 2021
Malaysiakini, 23 May 2021, 11:11 pm
In reference to Dr Lim Mah Hui’s article on 18 May 2021; the reality is anyone can selectively pick and choose excerpts from a request for proposal (RFP) document, take them out of context and spin a narrative.
For example, he chose NOT to mention that for both the Penang Transport Master Plan (PTMP) and the Penang South Islands (PSI) reclamation projects, it is the State who is the Asset Owner; and as Asset Owner, it has to “take into consideration the need to adequately fund the PTMP and reclamation costs” and “consider the matching of supply of these lands to balance with demand from the market” (Chapter 4, page 3). This statement clearly highlights that under the Project Delivery Partner (PDP) model of the RFP, the State is indeed the ultimate funder of both the PTMP and the PSI projects, and apart from assuming all the financing risks, it also has to contend with the full assumption of market risks in selling reclaimed land real estate.
The other fundamental point worth noting is that the RFP called in August 2014 was based on the existing Halcrow study that was estimated at RM 27 billion but only caters to short term demand up to 2030. SRS Consortium (SRS) submitted the “Alternative” Transport Master Plan for long term demand up to 2050. Upon appointment of SRS as PDP, the State with KPMG as their consultant was still the final arbiter and decision maker, and any decision it makes with respect to accepting the RFP’s proposed strategies (in part or in whole), is its prerogative alone.
State then included additional public transport infrastructure in Seberang Perai and the ‘Three Major Roads and Third Link’ project into the final PTMP thus the final amount of RM 46 billion. As such it is clear that the PTMP transport components and the PSI are mutually exclusive components and not inextricably linked, as it is obvious the ‘Three Major Roads and Third Link’ have a separate source of funding and not via PSI.
Upon the formation of the Pakatan Harapan Federal Government in 2018, the State then had a renewed belief that they are able to obtain Federal Government allocations and/or loan guarantees to fund their PTMP components, just like other States have similarly already benefited from for their own transport infrastructure. For example, the LRT systems within Selangor’s borders and the Pan-Borneo highways in Sabah and Sarawak.
Subsequently in early March 2020, the RM10 billion loan guarantee that was promised for the State’s LRT was withdrawn. Nonetheless, the State still took the view that:
It would pursue the Federal Government for the LRT loan guarantee to be reinstated given it is purely a development expenditure for social needs of its rakyat; AND
The reclamation of the first island of PSI (Island A) must proceed forthwith to provide a pivotal addition and extension to the State’s E&E hub in Bayan Lepas, and attract E&E foreign investors – in doing so, there would be an influx of foreign direct investments (FDI) and tremendous job creation for Penangites, especially in the highly-skilled.
To achieve the 2nd objective of kick-starting the PSI Island A reclamation as a major economic impetus for Penang State, especially as a post-pandemic economic stimulus, it was agreed that a Joint Venture would be formed between SRS and Penang Infrastructure Corporation (wholly owned by Penang State Government) to enable SRS to fully fund the Island A development, whilst the State is absolved of all financing risks and costs of Island A’s development.
Even though the State has fully absolved itself of all risks, it still retains a substantial stake of 30% to reap in any rewards or profits from the Island A development. Not to mention the State can wield substantial influence of control via its 30% stake and its authority over all land matters, to ensure its socio-economic and land planning objectives are all met, for the people of Penang. For Federal projects, typically any privateer would reap 100% of the reward given it would absorb 100% of the risks. For independent power producers (IPPs), or highway concessions or developments, this is the underlying prevailing equitable rule. Yet, the Penang State has clearly done one better here for itself.
In this 70-30 joint venture arrangement, the State insisted on an enterprise, not only with a strong enough balance sheet to fully shoulder the funding liability of RM4 billion to deliver Island A, but also with the requisite track record of delivery of large infrastructure projects, on time and on budget, all the time. Furthermore, the same enterprise is also responsible for delivering Phase 1 of the reclamation.
This will ensure that the project gets delivered and Penang benefits from the ensuing FDI, estimated at over RM70 billion and the ensuing GDP contribution and job creation is estimated to be RM100 billion and more than 300,000 jobs respectively where at least half are knowledge and highly skilled jobs, over a 30-year development time-frame for the 3 PSI islands.
And to ensure the delivery of the lands is done on the most cost-efficient basis, the State had also insisted on the appointment of an independent checking engineer (ICE), to oversee that cost estimates and work programmes are reasonable, fair and equitable. Thus, there is clearly no double dipping or leveraging off the State in any way.
SRS CONSORTIUM SDN BHD
Project Delivery Partner of the Penang Transport Master Plan
Laying out the facts on the Penang South Reclamation project – Lim Mah Hui
The Vibes, 22 May 2021
Lack of transparency in contract management allows shareholders to double-, even triple-dip into profits of developer
IN my article of May 17, “Selling Penang for a Song and a Dance?”, I showed that the Penang government was trading off its coastal ecosystem, fishermen’s livelihoods and food security for only RM600 million in the Penang South Reclamation (PSR) project.
In their reply dated May 22, 2021, the developer consortium assured the public that it will not be “double-dipping or leveraging off the state in any way”, as the state government will be appointing an independent checking engineer to oversee the costs and work programme of the Penang South Islands (PSI) project.
As usual, instead of addressing my arguments, SRS Consortium skirts around the issues, creating obfuscation and confusion for readers.
Let me explain from the beginning. In 2015, SRS Consortium responded to the state government’s request for proposal for the Penang Transport Master Plan (PTMP) and was awarded the project. SRS Consortium proposed land reclamation as a way of financing the transport plan.
The following year, after repeated requests from civil society for more information about the public project, the SRS Consortium proposal was exhibited at Dewan Sri Pinang during office hours. As we were not allowed to bring in any recording device or cameras, and not even our handphones, members of Penang Forum painstakingly copied salient portions of the proposal by hand with the pencils and paper given to us.
Here are the figures. In 2015, SRS proposed to reclaim Island A of 2,430 acres (983.4ha) for a cost of RM4.9 billion (RM3.3 billion for reclamation and RM1.6 for infrastructure) and Island B of 1,110 acres (449.2ha) for RM3.1 billion (RM1.9 billion for reclamation and 1.2 billion for infrastructure).
In short, two islands of 3,530 acres would cost a total of RM8.1 billion to reclaim. The money made from the sale of land from these two islands would pay for the implementation of the transport plan. Hence, the state government agreed to undertake the PSR project, which later expanded to three islands.
Since then, the costs of both PTMP and PSR have been hiked up every one or two years. In 2021, we were told that it will cost the state government RM7 billion to reclaim half of Island A of 1,200 acres (485.6ha) (RM4.5 billion for reclamation and RM2.5 billion for infrastructure).
Now, let us look at how SRS Consortium’s role in the endeavour has evolved.
Under the 2015 proposal, SRS was to play the role of project delivery partner for fees amounting to 6% of the project costs. In 2021, SRS has now become the majority shareholder in a joint venture (the project developer) with the Penang government, represented by its subsidiary Penang Infrastructure Corporation, the minority shareholder.
Protection ‘thrown out the window’
Even more worrying is the complex arrangement of the contract management. This has been designed in such a way that the same players are involved in two or three levels of project implementation. The first layer is the project developer (30% owned by a state government nominee, 70% by SRS), the second layer is the turnkey contractor (also with the same 30% and 70% ownership structure), and the third layer comprises the companies carrying out the construction and reclamation work.
Needless to say, the operationalisation of the contract management set-up is less than straightforward or transparent. In addition, the multilayered structure, whereby the same parties are both project developers and turnkey contractors, may compromise corporate governance, weaken cost performance and impair time performance.
This is how SRS Consortium, being involved in the second and third levels of project implementation, may enjoy opportunities for “double dipping”. Gamuda Engineering gets to keep 100% of profits, and SRS, 70% of turnkey contractor’s profits. Indeed, Gamuda may even uniquely enjoy the opportunity for “triple dipping”, if profits are made by the project developer.
Under the 2015 SRS request for proposal for PTMP, it was clearly stated that SRS Consortium as the project delivery partner and its affiliated companies will not be bidding for construction work, as that would entail a conflict of interest. This protection is now thrown out of the window.
As for the safeguards supposedly put in place by the Penang government, whether or not this independent checking engineer will be truly independent remains to be seen.
Plucking figures ‘from thin air’
Finally, let me address two other points raised by SRS’s statement.
The first is that its claims of the project attracting RM70 billion in foreign direct investment, contributing RM100 billion to Penang’s gross domestic product, and creating 300,000 jobs over 30 years. Suffice to say that anyone can pluck any number out of thin air. How credible are these numbers?
The credibility can be reflected in SRS’ population projection of 446,000 inhabitants on the three islands by 2030 in its 2015 proposal. Are we to believe that Penang’s population will increase by 446,000 in a span of 10 years, when it has taken 200 years for its population to reach 720,000?
Second, SRS said I was selective in my arguments by not mentioning that the Penang government, in the 2015 proposal, would be funding the reclamation, be the owner of the islands and take on all the financial risks.
On the contrary, I have from the very start cautioned the state government against SRS’ proposal to fund PTMP through land reclamation precisely because of the huge financial risks arising from the mismatch of cash flow between land sales revenue and construction expenditure.
The Penang government should have rejected SRS’ proposal from the start. Instead, it has now acquiesced to a back-seat role in a private-led joint-venture model, with Gamuda in the driver’s seat.
The state government is required to do due diligence before signing the agreement. They should go over the figures once again and explain how the costs of PSR has escalated from RM8 billion for two islands (totalling 3,530 acres) in 2015, to RM7 billion for half an island (only 1,200 acres) in 2021. Work has not begun, but project costs have almost tripled!
It is the Penang government’s duty to protect public interest and not become entangled with private interests. What it should do now is to simply abandon the massive reclamation project, which will destroy the state’s environment and biodiversity, as well as its fishermen’s livelihoods, and threaten local supply of fresh and affordable seafood to Penangites. Move the development to the mainland and scale down PTMP to sustainable proportions. – The Vibes, May 24, 2021
Dr Lim Mah Hui is former member of Penang Island City Council, an economist, and former banker.
Before you go, please remember to share the petition!
https://www.change.org/p/prime-minister-of-malaysia-save-penang-reject-the-3-islands-reclamation