______________________________________IT'S A LONG ROAD written by Hakim Joe
Would anyone sensible award a multi-billion Ringgit mega-contract for the building of a 512 kilometer highway to an engineering cum construction firm that has zero experience in the construction of highways and has never built an inch of it?
Would anyone sensible choose this company over two other local companies that had bids lower than “the chosen one”?
Would anyone sensible choose a company that has such a poor record (of other constructions like the infamous collapse of the Northam Court in Penang) that it was suspended by the KLSE and had accumulated RM90 million in operating losses between 1981 and 1985 over two financially sound companies?
Would anyone sensible award this mega-contract to a company that is almost insolvent (stocks suspended at 30 sen) that the body that is awarding the contract also needs to provide part of the capital, stand guarantee for the remaining commercial loans that is taken and provide a written guarantee of profitability when the other two competing companies did not seek such extreme financial assurances?
Would anyone sensible award this mega-contract to a company and then grant them “Pioneer Status” so that this company will be exempted from taxes for the next 10 years?
Well this someone did all the insensible things above. Not only was the multi-billion Ringgit highway mega-contract awarded to this “zero-experience highway builder” over other experienced highway builders, this someone also had to cough out the initial “almost-interest-free” capital plus stand as guarantor over the massive billion Ringgit loans this “KLSE suspended public company” would have to take in order to complete this mega-project. Additionally, this someone also had to provide written guarantees that the “poor-record-construction-company” would not lose one sen in this venture. To cap it all off, this company is exempted from taxes for the next ten years and the proposed 25 years concession period is extended to 30 years.
Let’s start from the beginning.
In February 1986 the Ministry of Public Works launched a tender exercise for privatizing the construction and operation of the remaining portion of the North-South Highway (NSH). The 867 kilometer NSH was about 41% completed by the Malaysian Highway Authority (MHA) then. Five out of the six pre-qualified companies showed interest, namely Pilecon Engineering Berhad, United Engineers Malaysia Sdn Bhd, Shahpadu Holding Sdn Bhd, Unico Holdings Sdn Bhd and Pembinaan Hasbuddin (M) Sdn Bhd. Of these five companies, only Pilecon and Hashbuddin had the necessary experience building highways and only Pilecon and UEM submitted “conforming bids”. (MBF Holdings Sdn Bhd showed no interest at all.)
The question is why the construction of the NSH is being privatized when almost 41% of it has already been completed by MHA. What is an additional 512 kilometer of highway after building 355 kilometer? The Government’s answers to these questions were (1) It is aimed at relieving the financial and administrative burden of the Government in undertaking and maintaining a vast and constantly expanding network of services and investments in infrastructure; (2) Privatization is expected to promote competition, improve efficiency and increase the productivity of the services; (3) Privatization, by stimulating private entrepreneurship and investment, is expected to accelerate the rate of growth of the economy; (4) Privatization is expected to assist in reducing the size and presence of the public sector and its monopolistic tendencies and bureaucratic support in the economy; and (5) Privatization is also expected to contribute towards meeting the objectives of the New Economic Policy (NEP).
Of the five bids, only 3 were considered. Pilecon submitted 4 alternative proposals ranging from RM3.372 billion to RM3.76 billion. Hashbuddin submitted various alternative proposals with a standard tender of RM3 billion. UEM also submitted various proposals but had the highest bid of RM3.5 billion. Additionally, Pilecon’s tender also only specified a requirement of a RM498 million standby credit from the Government while Hashbuddin needed the Government to provide loan support (to its commercial loans). UEM needed RM1.65 billion from the Government. Pilecon proposed a 7 sen/km toll rate for a concession period of 25 years. Hashbuddin proposed a 5 sen/km toll rate for a concession period of 22 years and UEM once again came in highest at 7.5sen/km toll rate for a concession period of 25 years (extended to 30 years after the contract has been awarded.)
If conforming bids were mandatory, only Pilecon and UEM can be considered and Pilecon would win the tender owing to its lower bid, its proven experience at building highways plus the fact that the company only required a RM498 million standby credit facility from the Government.
If conforming bids were not considered mandatory, Hashbuddin would win this tender hands down. One, the company was an experienced highway builder. Two, its bid was the lowest at RM3 billion. Three, the company did not require any money from the Government, it merely required the Government to provide loan support to its commercial loan application(s) and lastly, its proposal for the collection of toll is the lowest at 5 sen per kilometer and the shortest concession period of 22 years only. In fact Hashbuddin also submitted the lowest estimated toll collection at RM17.9 billion. (Pilecon estimated it at between RM18 billion to RM19 billion and UEM’s figures were a whooping RM34 billion.)
On 8 July 1987, Samy Vellu tabled the Federal Roads (Private Management) Amendment Bill, and the Highway Authority Malaysia (Incorporation) Amendment Bill in Parliament to enable the government to privatize the NSH of which was awarded to UEM ahead of Pilecon and Hashbuddin. The total contract was worth RM3.5 billion.
When one studies the conditions imposed upon the Government by the contractor, it exhibits a parody of sorts whereby it is akin to a beggar enforcing strict rules and regulations upon a rich man that has offered him a high-paying job. UEM is asking practically everything (including the kitchen sink and more) from the Government in order to cover all possible risks in the NSH project and yet the Government proceeded to award the NSH project to UEM.
One, UEM does not have to lay one single sen into the RM3.5 billion project. The UEM award is based on a pre-completion government loan of RM750 million to be drawn down during the construction period and a post-completion government loan of RM950 million (reduced to RM900 million) to be drawn down during the operation phase of the project. Furthermore, UEM also wants the interest rate on both these huge government loans to be floating at an interest rate set at the rate of inflation (this means that UEM will pay no interest to the Government if the inflation rate is zero) which the Government eventually denied after protests from DAP in Parliament.
Additionally, UEM wants an External Risk Undertaking (or commonly called a Guarantee) from the Government, to cover costs arising from adverse foreign exchange movements on its external debt, adverse interest rate movement, adverse changes in taxation, delays in completion due to factors outside its control, and cost overruns due to changes in Government Policy, and that this External Risk Guarantee is to be supported by a revolving loan facility whereby UEM could make drawings from the Government in order to cover any costs caused by external risks. (The External Risk Guarantee was rejected by the Government after once again being protested by DAP in Parliament but the revolving loan facility of RM500 million was approved.)
If one thinks that these demands are unreasonable, wait, there’s more. UEM is also asking for a Traffic Volume Undertaking (Guarantee) whereby the Government has to provide a revolving loan facility to it to meet any shortfall in the volume of traffic using the expressways. Repayment of principal of this loan will be subordinated to all operating cost, debt service and dividends due to equity investors. Furthermore, the completed sections of the NSH (by MHA) would also be handed over to UEM gratis. (The RM3.32 billion cost to build the 355 km stretch by MHA will be absorbed by the Government including the discharge of RM1.7 billion in commercial loans made by the MHA.) Click HERE to read the rest of the post.
Kopi-O I love "The Long And Winding Road" by the Beatles".
Have A Beautiful Sunday