Improving the PDP model

By Khairul Khalid

Despite various shortcomings, the PDP model now seems to be the preferred model for mega infrastructure projects such as the MRT, LRT and other transport projects. Critical issues related to the PDP need to be addressed to improve the model.

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There are two major deficiencies in awarding projects to project delivery partners (PDPs) – no open tender and opacity in selection.

Critics have pointed to the PDP model’s lack of competitive bidding as one of, if not the biggest, the weaknesses in implementation. The basic argument is that to get the maximum value at the lowest possible cost, a project should be awarded through an open tender process.

To improve the PDP model, therefore, projects should be open to all interested and qualified parties.

For example, the first two lines of the new mass rapid transit (MRT) will cost an estimated RM51 billion, one of the biggest infrastructure projects in Malaysian history. It is only logical that such a huge expenditure requires open tenders, potentially saving significant amount of public funds.

This was not the case with the first two MRT lines, both of which went to the MMC-Gamuda consortium as the PDP. Although both companies have the track record and experience to handle the projects, opening the projects to other players could have potentially lowered the total project price.

According to opposition member of parliament (MP) Tony Pua, the MMC-Gamuda PDP for MRT was chosen neither on merit nor for price considerations.

“The MMC-Gamuda consortium will be awarded the MRT project not because they possess the best technologies, or because they have the cheapest price, or because they can deliver the highest quality services, but because they were the first to present their proposal to the prime minister and were able to lead the Performance Management Delivery Unit (Pemandu) by the nose on the entire project from conception to the full project details as outlined in the entry point projects,” said Pua in 2010 just before the project was awarded to MMC-Gamuda.

The MP held up rail systems in Hong Kong and Singapore, widely praised and acknowledged as world class, as examples for Malaysia to follow since both were constructed using the open tender model.

Subsequently, Pemandu chief executive officer (CEO) Idris Jala refuted Pua and defended the selective open tender approach. The Pemandu CEO’s rationale was that expensive public projects such as the MRT could not take off using completely open tender because the costs were too high for many private companies.

Jala added that limited bidding and direct negotiations could sometimes even lower project costs through diligent cost comparisons and benchmarks.

“Direct negotiations can bring down the prices if you know what you’re doing,” said Jala.

The other major flaw is the selection of PDPs. Criteria such as experience, track record, financial strength and other relevant benchmarks for a company to be considered a PDP in a particular project should be publicly disclosed.

As we have seen in the MRCB-George Kent example, criteria in awarding a PDP are neither consistent nor transparent.

Another example is the 1,089km Pan Borneo Highway project connecting major towns in Sarawak and Sabah. It was initiated five years ago and has just begun its first phase of construction. It is another massive infrastructure project that is estimated to cost RM27 billion. A Sarawak-based company Lebuhraya Borneo Utara Sdn Bhd (LBU) was appointed the PDP for the project.

LBU stands to gain up to RM1.6 billion in management fees as the PDP of Pan Borneo Highway, but what is the company’s experience in building highways?

LBU was set up in 2011 with a paid-up capital of RM1 million and its income statement as of Dec 31, 2013 filed with the Companies Commission of Malaysia (CCM) shows LBU has no revenue generating activities yet.

The largest overall shareholder of LBU is Mohamad Zaidee Abang Hipni, who joined the company in December 2014. Previously, he was the chief financial officer of Petra Energy.

A story in the Sarawak Report dated April 30, 2015 claims that Mohamad Zaidee is the nominee of influential Sarawak businessperson Bustari Yusuf, who is said to have close links with Prime Minister Najib Abdul Razak.

Bustari is the brother of Public Works Minister Fadillah Yusuf. Bustari is also a major shareholder of Petra Energy. Another substantial shareholder in Petra Energy is Mohamed Nizam Abdul Razak, brother of Najib.

In April this year, Bandar Kuching MP Chong Chieng Jen harshly criticised the selection of LBU as the PDP of Pan Borneo Highway.

“While LBU has only been registered in 2011 and (has) zero track record in construction and any trading activity, why was LBU appointed as the main contractor? Is the government intending to continue with the ‘Ali Baba’ modus operandi in the implementation of its projects?” said Chong in a press statement.

Chong also recommended an open tender process and awarding Pan Borneo Highway jobs directly to contractors rather than using the PDP model.

What other alternatives could our government consider besides the PDP model?

“As we have seen in some companies in RAM’s rating portfolio, an alternative that can be considered is the public-private partnership/private finance initiative model. Under this model, a private entity is entrusted to construct/deliver an asset for the government in return for scheduled payments over time.

“The concessionaire bears the construction risk as the concession can be terminated if it fails to deliver according to specifications on time. Cost overruns are also borne by the concessionaire,” said Thong Mun Wai of RAM Rating Services.

According to a report published in 2010 by KPMG International titled ‘Project Delivery Strategy: Getting It Right’, the spectrum of project delivery strategies ranges from those where owners are fully involved to where their involvement is minimal.

It listed four different categories of project delivery such as the traditional, collaborative, integrative and partnership methodologies but said that there is no one-size-fits-all approach.

“The responsible action to take is not to default to any one delivery method, but to consider all options. Owners need to understand the potential benefits and risks associated with each of the options and make smart decisions,” said KPMG.

That is also applicable in Malaysia’s increasing appointments of PDPs for mammoth infrastructure projects such as the MRT and Pan Borneo Highway, which are often vague. To remove public doubt and ensure that funds are optimised, the government needs to consider all options transparently to get the most out of PDPs.

In the next article, KINIBIZ examines the fatal flaw of the PDP model – accountability.

Yesterday: Are we overpaying PDPs?

Tomorrow: PDP’s fatal flaw of accountability