By Stephanie Jacob
Along with subsidy rationalisation and broadening its revenue base, the government has also announced that it will sequence the mega projects it is involved in to reduce spending while ensuring that the projects that are most pressingly needed by the nation go ahead. But along with re-prioritising these multi billion ringgit contracts, it will also be important for the government to make sure that it is getting the best deal when awarding contracts to begin with.
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The government has said that in line with plans to reduce expenditure, narrow the fiscal deficit and take into account the weakening ringgit it will look at sequencing or re-prioritising the various mega projects it is involved in.
Each mega project will be evaluated based on two criteria, the first being if the project has a high multiplier effect (basically whether it will have greater impact on the economy than the amount being pumped in), and the second being if it has low import content.
While the reasoning behind the high multiplier requirement is obvious, the low import content criteria is necessary because of the narrowing of the country’s current account surplus (net trade in goods and services).
“We are currently experiencing a narrowing of the current account balance, which is basically exports of goods and services minus your import of goods and services. We used to have a current across surplus of around 10%, of GDP and it has actually narrowed to 6 to 8%, and is eventually projected to be at 2% to 4% of GDP for this year” says Yeah Kim Leng, chief economist of RAM Holdings Group.
Yeah says that sequencing projects based on the level of imports in goods and services is a response to the narrowing, in an attempt to create a bigger surplus and avert it from turning into a deficit. Should it turn into a deficit, Malaysia will find itself in a twin deficit situation – both for the budget and the current account – which has not happened since 1998.
According to the government, while no project will be scrapped, any project that fails to meet the criteria will be put on the back burner in order to facilitate prudent spending of limited government funds and balance the current account, at least until the country and the global economy is in a stronger economic position.
In his mid-year Economic Transformation Programme (ETP) briefing a couple of weeks ago, Idris Jala who is Minister in the Prime Minister’s Department and chief executive officer of Pemandu, the Performance Management and Delivery Unit), said that the aim of this rescheduling was also necessary as a response to capital flight.
Irwan Serigar Abdullah, the secretary-general of the Finance Ministry who was also part of the question and answer session at the the ETP briefing, echoed Jala’s sentiment saying the point was not to cancel projects, but rather sequence them according to what was needed the most at this point to bring the most multiplier effects.
He reiterated that there was sufficient funds for current projects in the pipeline which already had been determined to have obvious multiplier effects and that these would go ahead as planned.
From their comments, the message seemed to be that it was a funds issue, rather that in a time of economic uncertainty the government was taking a prudent and cautious view to big spending.
Following the briefing, the discussion quickly moved to what projects would be affected. While Irwan made it clear that the MRT 1 project would go ahead as per schedule, questions immediately arose to whether MRT 2 and 3, which are currently up for cabinet approval would be continued.
The questions grew louder especially after it emerged that the Suruhanjaya Pengangkutan Awam Darat (SPAD) in a presentation to the Economic Council highlighted the high level of gearing Malaysia is grappling with as a major concern and touched on the MRT 2 and 3 lines.
However, the government quickly put the issue to rest, with the prime minister himself saying that the MRT 2 and 3 would proceed as planned. So with the MRT safe, what other projects are likely to be sequenced?
To get a better idea, it is necessary to evaluate each project against the criteria which has been clearly outlined by the government say analysts.
Using the case of the MRT as an example, a UOB KayHian analyst says that despite the fact that MRT 2 is expected to cost around RM25 billion, it is seen as an important radial line and will be key to serving the mass population living in the suburban areas, making it a high multiplier project.
Alliance Research analyst Jeremy Goh also highlighted that the MRT 2 and 3 projects will be using much of the same equipment (such as tunneling machinery) and expertise as the first line, and therefore further import content will be low. He added that seeing most of the necessary components were already available, it made sense to go ahead with the second and third line.
The UOB Kay Hian report also highlighted the West Coast Expressway (WCE) as a project that will likely go on as scheduled at it meets both the criteria. The project will be important in connecting several developments such as IJM Land’s Bandar Rimbayu and Tropicana Corporations Canal City, and the expressway will enhance the speed of the developments while boosting property prices. Furthermore it is understood that the project is already close to securing financing.
So which projects do not fall into this category?
Other rail related projects
Perhaps rather contradictorily, just weeks after saying that it was looking to sequence and prioritise, the prime minister announced that the government will be undertaking RM160 billion in rail related projects toward 2020.
Details of the projects were not specifically listed, but the big one on everybody’s mind seems to be the High Speed Rail project which will link KL to Singapore, and whether this will be a project that is part of this sequencing.
The HSR has received mixed reviews and its high cost has been the subject of much debate. Questions have continued to be raised, with suggestions that even those in the Ministry of International Trade and Industry (Miti) and Bank Negara are questioning the numbers that Spad is touting.
Spad is seemingly estimating a catchment of 23.7 million passengers a year, and at a ticket price of RM180 is anticipating projected revenue of over RM4 billion a year. The numbers seem extremely hopeful, as currently air traffic between the countries only stands at three million passengers annually.
Even if road and rail travellers are added to the mix, it is unlikely the number will hit over 20 million travellers. Especially, as the estimated cost of the ticket will likely put it out of reach of families and budget tourists who will likely opt to drive or take a regular train at that price. In addition to that, Spad has estimated the project will cost RM30 to RM40 billion, a price tag that many see as unrealistically low.
If the HSR is put to the test of the two criteria that has been set, the project does not fare well. In addition to the fact that it has questionable multiplier effects, there are also questions to whether or not local companies will be able to take the lead on this.
Most analysts and rail experts say that it is unlikely a local player will be able to manage this alone and will likely have to depend on foreign partner and technology. Taking all that into account, it is reasonable to assume that the HSR will be one of the projects sequenced to a later date.
1MDB related projects
According to an analyst report by Maybank IB, a likely area of focus will be “major government land and real estate developments in the Kuala Lumpur and Central Business District (CBD).” If that holds true, then 1MDB projects should be an area of focus for sequencing.
A wholly owned government company, 1MDB is currently in the process of carrying out two large developments, the Tun Razak Exchange and Bandar Malaysia. These two multi-billion developments have an estimated combined gross development value of RM47 billion.
According to a KiniBiz report, 1MDB is partnering with Qatar Investment Authority (QIA) for the Bandar Malaysia project, with the later pumping in US$5 billion in exchange for getting first choice in picking land plots before the local players.
Questions have been asked as to why 1MDB has chosen to partner with foreign companies, at the expense of local ones who themselves have a wealth of expertise and solid international reputations.
In addition there has already been much discussion about oversupply and concerns over a lack of demand for office space in and around the city centre. At a time when money is tight, are these developments the best way to be spending the resources?
According to above mentioned article, the Valuation and Property Services Department said that occupancy for purpose built offices in KL in the third quarter of 2012 was only 77.3%. Considered in tandem with a report from real estate firm CB Richard Ellis, which says a further 18 million square feet is expected to be available in the Klang Valley by 2015 (excluding projects like the TRX and the controversial Warisan Merdeka project) and the question of how immediate the need for these projects are.
With the projects not showing any pressing near future multipliers effects, and with foreign companies likely to be getting the choicest projects; 1MDB’s development projects seem ideal to be sequenced.
Petronas overseas projects
In recent years, Petronas has been increasingly looking outside Malaysia’s borders for investment opportunities in oil and gas companies. According to the company, this is necessary to ensure Malaysia’s long term energy security.
Last December, reports say that Petronas made its largest ever acquisition when it bought Calgary-based Progress Energy for RM16 billion to gain a position in its shale gas reserves. During the negotiations, prime minister Najib said that Petronas might eventually invest over RM200 billion over the next 30 years there. The national oil company is also investing in risky markets such as Iraq and Africa among others.
Questions as to whether or not Petronas should be focusing on increasing its gas reserves versus increasing its oil reserves aside, the more important consideration should be if at a time when the Malaysian economy is seeing plenty of capital flight, is it not more necessary for Petronas to focus its resources on local projects and investment as it will come with the multiplier effect of providing jobs and contracts for local companies?
Balancing the need to develop and prudent spending
Of course it will mean nothing if these projects are sequenced if those that do go ahead are not kept on schedule and on a tight budgets. Projects like the MRT and the West Coast Expressway are susceptible to delays and overspending and the government must be vigilant in keeping them on track and on budget.
In addition to keeping existing projects on point, it is also necessary that the government practices the highest levels of transparency and international standards in the process of awarding contracts and tenders. A good place for them to start would be to put all government projects to an open tender process.
Yesterday: Where’s the government going to get more money from?
Tomorrow: Getting it right
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