Putrajaya’s PFI that isn’t

By Khairie Hisyam

Why did Putrajaya choose to fund its private finance initiative through such convoluted means? And is it really a PFI when funding comes from the government? In this part of the issue KiniBiz looks at how the government could have done things differently.

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On paper, Pembinaan PFI Sdn Bhd was formed with noble intentions: the special purpose vehicle will drive public infrastructure projects with privately sourced capital throughout the country, alleviating the burden on the government’s balance sheet.

As with many other noble initiatives in Malaysia, however, the devil is in the detail — in other words, implementation. And the biggest question mark hanging over Pembinaan PFI is why the complicated lease-sublease arrangement was created.

To recap, Pembinaan PFI received seed funding of RM20 billion in the form of a loan from the Employees Provident Fund (EPF). Pembinaan PFI then gave this money to the government in exchange for the lease of 186 land parcels held by the Federal Lands Commissioner (FLC), along with the promise that the FLC would sublease back the land parcels from Pembinaan PFI.

According to the sublease agreement between the FLC and Pembinaan PFI, the total amount of rent that the FLC would be paying to Pembinaan PFI over 15 years comes to RM29.18 billion, with two payments  each year in February and August respectively.

This exercise creates cash flow for Pembinaan PFI to repay its loan from the EPF. In turn the government obtains RM20 billion upfront, which it presumably will use to help fund PFI projects by connected bumiputeras.

In a speech at the Bumiputera Economic Congress in September last year, Prime Minister Najib Razak had announced projects and financial aid worth an estimated RM30 billion for his Agenda on Bumiputera Economic Empowerment. Some say that PFI would be one way to achieve this, and specifically Pembinaan PFI.

Why borrow at all?

The PFI concept is premised on the private contractor, having won a concession for a public project, sourcing its own capital to undertake projects.

In effect, the ideal PFI undertaking would be wholly financed by the private contractor. The government’s role is to furnish regular payments as per the concession agreement to allow the private contractor to recover its financing and maintenance costs as well as make an agreed margin of profit in exchange for undertaking the project and building it according to agreed specifications.

This is different from the PFI concept that was to be driven by Pembinaan PFI. With its seed funding of RM20 billion, Pembinaan PFI was to finance selected contractors undertaking public projects in question.

It is a strange deviation as pure PFI undertakings had proved to be within the nation’s capabilities.

Previous PFI instances in Malaysia, such as the rise of independent power producers (IPPs) in the mid-1990s, had seen concessionaires raise their own funding to undertake their concession projects without capital injection from the government, recovering costs and making their profit from the concession payments — often obscenely so for the latter.

The emerging question then is why Pembinaan PFI needed to borrow in the first place.

As a driver of the PFI initiative, logically it could have acted solely as a coordinator to sift through applications for desired concession projects, select reliable contractors with good track record and award the concessions accordingly.

Payments as per the concessions would not be due immediately — only when works are completed as per government specifications and when performance meets expectations. And the resulting costs can then be allocated for in the respective budgets of the relevant ministry or government agency for whom each concession project was awarded. In other words the PFI costs to the government is incurred over time.

This would be different from the effect of the current lease-sublease arrangement whereby the government allocates billions in immediate expenses to pay rent to Pembinaan PFI.

A PFI undertaking is, ideally, meant to alleviate the burden of upfront costs on the government and Putrajaya’s execution through Pembinaan PFI does not accomplish this.

Overall, this means the government would not have needed an immediate injection of funds e.g. via a loan from the EPF.

A possible argument is that given the objective of providing construction work to smaller Bumiputera contractors, government financing is necessary as the small players may not be able to raise sufficient financing on their own.

However this gives rise to a new question: if they cannot finance a concession project under the PFI concept, should they be awarded the concession at all? Furthermore given the normally iron-clad earnings locked in by government concessions, even smaller Bumiputera players should be able to obtain sufficient financing without relying on government funding, either individually or by forming partnerships with each other.

BLT, a comparable predecessor

In finding an alternative to financing Pembinaan PFI, it is worth noting that it is not the first private finance initiative (PFI) in the nation. A very similar example that can be looked at is Pembinaan BLT Sdn Bhd.

Incorporated on July 28, 2005, Pembinaan BLT is a special purpose vehicle also wholly owned by the MOF. Its mandate is to construct office complexes and housing quarters for the Royal Malaysia Police Force through the build-lease-transfer (BLT) model.

In the 2006 budget tabling speech, then prime minister Abdullah Ahmad Badawi said that the government will be embarking on constructing some RM2.5 billion worth of three-bedroom police quarters nationwide which will be funded through the BLT model,

“Construction will be done by Bumiputera contractors, especially small local contractors,” he said then.

Fast forward to 2014, Pembinaan BLT had completed RM6 billion worth in projects so far according to its website.

The similarities in purpose are striking. Like Pembinaan PFI, Pembinaan BLT is supposed to source private capital for public projects. Both are initiatives under former prime minister Abdullah Ahmad Badawi. Both companies focus on providing construction jobs to smaller Bumiputera contractors.

However, unlike Pembinaan PFI, Pembinaan BLT is much more visible to the public eye. Pembinaan BLT boasts a professional management team — its chief executive officer Mohammed Redza Mohd Yusof traces his origins to Danaharta while the chief financial officer worked with Shell Malaysia for a decade before joining Pembinaan BLT.

In contrast, not much information is available to the public on Pembinaan PFI. Only three directors are listed in Companies Commission Malaysia (CCM) records and all are officers of the MOF, one of which is the secretary-general Mohd Irwan Serigar.

More pertinently, however, Pembinaan BLT had previously raised funds through sukuk offerings, garnering RM1.35 billion through its third series offering in 2012.

The emerging question then is whether the MOF, which wholly owns Pembinaan PFI on behalf of the government, could have looked at the bond market instead for funds.

Sources familiar with the arrangement told KiniBiz that the EPF loan of RM20 billion was extended on competitive market interest rates, i.e. at similar interest rates to borrowings from private sector financiers.

This means that had the government opted to issue a 15-year bond as opposed to a loan from the EPF, the resulting cost of capital would not have been too different from what is incurred by borrowing from EPF.

Hiding a liability?

However, if the purpose of the arrangement was to repay the loan from EPF to Pembinaan PFI by creating a revenue stream, the lease-sublease exercise seems an unnecessarily complicated avenue. Was the exercise the best option available to fund Pembinaan PFI?

When met at an event in Cyberjaya in mid-September, Ministry of Finance (MOF) secretary-general Dr Mohd Irwan Serigar Abdullah declined to address previously emailed KiniBiz queries on the matter, saying only that he “has nothing to say”.

Pressed further, however, he referred KiniBiz to his special officer on the queries. To-date KiniBiz had not received answers to the queries despite multiple follow-ups, though KiniBiz was informed in early October that the “questions have been sent to appropriate division for response”.

In any case, a glaring effect of the lease-sublease arrangement is that the government’s payments to Pembinaan PFI would appear to be rental expenses incurred by the FLC as opposed to an obligation to service the loan from EPF.

By having the FLC sub-leasing back the land leased to Pembinaan PFI, the latter would have its own revenue stream on record. This revenue stream would in turn allow the company to service its RM20 billion loan from EPF.

In effect, the liability of Pembinaan PFI, a company wholly-owned by the government, would appear serviced by its own revenue stream, though in reality this revenue is artificially created and is not based on real profit-generating activities.

Instead said “revenue” is essentially scheduled disbursements of money from the government to Pembinaan PFI in the name of rental expenses. The categorisation presumably places the resulting financial commitment on Putrajaya’s part to be placed under expenses as opposed to debt obligations.

A check on the list of the government’s contingent liabilities for 2012 — in the government’s financial statements for 2012 — found that Pembinaan PFI’s RM20 billion debt was not listed as a contingent liability, despite being wholly owned by MOF.

Similarly the financial statements for 2013 also does not list Pembinaan PFI’s debts as a contingent liability of the government.

For the FLC, its involvement in the lease-sublease arrangement appear a matter of formality.

While the commissioner Azemi Kasim declined to comment beyond stating that the rental payments are covered by additional funding from the MOF, it is worth noting that the lands commissioner is the trustee vested with ownership of the government’s land holdings. This means that in order for the government to enter into any contracts involving its land bank, the signee must be the FLC as owner of the land on behalf of the government.

Sources familiar with the lease-sublease arrangement said that the rental payments from the FLC to Pembinaan PFI are made directly by the MOF, i.e. the money does not go through the commissioner.

Coming back to Pembinaan PFI, the net effect is that the government raised RM20 billion in seed funding through its pseudo-PFI vehicle that may not have been necessary in the first place, repaying the loan over 15 years as artificially created expenses. But what has the money accomplished thus far?

Yesterday: Why does the Govt pay RM29 bil rent for its own land?

Tomorrow: What has Putrajaya to show for RM20 bil PFI drive?