Billions silently spent through ‘innovative financing’

By Khairie Hisyam

A Putrajaya-owned company has quietly grown its pile of debt to RM26 billion in just six years through what is called an innovative financing method by a lawmaker. Yet little is known about what the company really does and how the money is really spent.

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Six years after its incorporation, Pembinaan PFI Sdn Bhd, that enigmatic wholly-owned subsidiary of the Ministry of Finance, is now sitting on a debt pile of RM26.6 billion. That was the total amount of debt outstanding from two phases of financing the company undertook in 2007 and 2013 respectively.

Funds raised from these two phases amounted to a total of RM30 billion from the Employees Provident Fund (EPF) and Retirement Fund Inc (KWAP), said the Public Accounts Committee (PAC) previously.

In a press conference on March 18, 2015, PAC chairman Nur Jazlan Mohamed said this amount had translated into funding for 886 projects encompassing public infrastructure works such as schools. However, there are no details of what they are.

These projects were presumably undertaken via private finance initiative (PFI), essentially a concessional procurement concept whereby the government awards concessions in exchange for the funding, construction and maintenance of public infrastructure by the private sector.

“Pembinaan PFI … is used to fund government projects with funds from EPF and KWAP,” said Nur Jazlan to the media after a PAC hearing with ministry officials on the company’s affairs. “It (Pembinaan PFI) is innovative financing.”

That, however, is not accurate. EPF and KWAP fund the government, the government uses these funds to finance the projects and in turn repay the loans from these two bodies.

Innovative? Yes, because the PFI concept at work here differs from the traditional approach seen in other countries such as the United Kingdom. The Malaysian version sees the government – instead of the private sector – funding the projects. The government gives the concession but also funds it, effectively bearing the risk as well.

However, pursuing this sort of innovation raises concerns.

The primary benefit of the traditional approach to PFI is the public sector rides on the private sector’s ostensibly superior efficiency as well as forgoing the financing risk of public infrastructure by getting the private sector to fund and later maintain the construction of public infrastructure. In return, the public sector awards concessions to the private sector and the stable returns form the carrot for the private sector.

With Putrajaya’s PFI approach, however, the only gain by the public sector is the private sector’s supposed efficiency. The government still bears the financing risk. In turn, all the private sector needs to do is show up – yet some fail to do even that in the case of Putrajaya’s PFI drive.

Projects where?

Little is publicly known about the exact nature of these 886 projects, their locations and which contractors were awarded the contracts for them. And government officials KINIBIZ contacted are reluctant to divulge information.

Some people in the construction sector mention anecdotally to KINIBIZ on a number of public infrastructure projects under the PFI initiative. Other construction players, however, seem ignorant of Pembinaan PFI itself when asked by KINIBIZ.

The Malaysian Malay Contractors Association (or its Malay acronym PKMM), when queried by KINIBIZ previously, claimed none of its members received project awards from Pembinaan PFI. In turn PAC chairman Nur Jazlan previously suggested PKMM’s membership may not extensively cover Malaysia’s contractors’ pool, adding the awards may have gone to qualified non-members.

Attempts to discover more information about the projects funded with Pembinaan PFI’s funds had been unfruitful as the company does not seem to have a website, nor are its activities recorded on the Ministry of Finance’s website. Previous KINIBIZ queries on these questions and other matters to the Ministry of Finance did not yield replies.

And the ministry’s officials seem evasive. When met previously in an event at Cyberjaya in mid-September 2014, the ministry secretary-general Mohd Irwan Serigar Abdullah acknowledged receipt of the emailed queries but declined to comment.

“I have nothing to say,” said Mohd Irwan to KINIBIZ, though when pressed further he referred KINIBIZ to his special officer Mohd Zahrain Mohd Nor who promised to follow up on the queries.

Several weeks later Mohd Zahrain stated to KINIBIZ that “the questions have been sent to the appropriate division for response” though to-date no reply had been forthcoming. He did not respond to further follow-ups by KINIBIZ.

When posed questions by the media in mid-March, PAC chairman Nur Jazlan said the committee in its hearing had quizzed Mohd Irwan and Mohd Isa Hussain, the ministry’s secretary for the Government Investment Companies Division. “PAC asked on the risks borne by the ministry, how the funds are overseen and utilised,” said Nur Jazlan, adding the projects are awarded through normal ministry procedures.

When asked further whether this meant through open tender process or direct award to contractors, Nur Jazlan stated the process may have involved a mixture of both as required by the Ministry of Finance.

Market sources told KINIBIZ that the second phase of financing for Pembinaan PFI, done in 2013, involved direct financing from both EPF and KWAP with government guarantee. However, it is unclear what the interest rate was for both EPF and KWAP in respect of this financing tranche, which amounted to RM10 billion.

Meanwhile, the first phase of financing, which was Pembinaan PFI’s seed funding of RM20 billion, originally came from a term loan from EPF in 2007, though subsequently restructured multiple times.

Silently spending billions

While little is known about the public projects under the PFI initiative, out of the public eye nearly all the billions raised by Pembinaan PFI had been spent, said the PAC.

From the total number of 886 projects across two tranches of financing, 547 projects were rolled out and financed with the first funding phase of RM20 billion while the remaining 339 projects were given the go-ahead under the second phase.

“RM6 billion (of the second phase) came from EPF and another RM3 billion came from KWAP,” said PAC chairman Nur Jazlan. “The remaining RM1 billion (of the second phase) is not yet spent.”

However, an exact breakdown of the spending by sector and number of projects is not known, though some light was shed on the projects in the third series of the Auditor-General’s Report 2013, released last year.

According to the report, as of Dec 31, 2013 some 92.8% or RM18.56 billion of the first RM20 billion had been spent in the first wave of PFI projects. That leaves a balance of RM1.44 billion unspent as of end-2013 and it is unclear whether this had been subsequently spent.

As for the second PFI drive, as at Dec 31, 2013 the auditor-general found 313 projects initiated with an allocation of RM7.57 billion, leaving another RM2.43 billion from the second financing round.

This first RM20 billion from Pembinaan PFI was put under the ‘Akaun Amanah Inisiatif Pembiayaan Swasta’ or Private Finance Initiative Trust Account, according to the auditor-general’s report.

The second tranche of RM10 billion was placed under a separate account called ‘Akaun Amanah Aktiviti Pembangunan Khas Pembiayaan Swasta’ or the Private Finance Special Development Activities Trust Account.

Given the total figure of 339 projects under the second PFI wave as noted by the PAC in March 2015, this means the remaining 26 projects would have been rolled out in 2014 with a collective allocation of RM1.43 billion, taking into consideration a leftover RM1 billion according to the PAC.

Overruns, under-spending galore

The auditor-general’s inspection of public projects initiated under Putrajaya’s PFI drive found two key issues – gross mismanagement of funds on one hand and lack of development urgency on the other.

For the purposes of the audit, the auditor-general sampled roughly 10% of the 547 projects under Putrajaya’s first PFI drive, specifically some 58 projects undertaken by the Ministry of Education and the Ministry of Home Affairs with a budget of RM1.34 billion.

However, this budget was not fully spent. A majority of these projects exceeded their budgets while for others the government spent less than half of what was allocated. By end-2013, there was a leftover of RM150 million from the original budget for these 58 projects.

The same can be seen in the auditor-general’s findings for the second PFI drive. In auditing this wave of projects, the auditor-general’s sampling was bigger at 21%. That translates into some 66 projects of the 313 rolled out.

Of the auditor-general’s sampling for the second wave, more than a third of the projects spent less than 50% their allocated budget. About a quarter of the projects inspected went over-budget. Worse, some ministries did not even spend any of the funds allocated to them for public projects.

A number of questions emerge from these findings.

First, public projects going over-budget raises concerns of mismanagement. Did the government procure the best prices available when awarding these projects? Were the elements of corruption present? What are the reasons for these overruns and, if blame lies with the contractor as opposed to the ministry involved, were there penalties imposed?

Second, spending less than 50% the allocated budget rings alarm bells. For public infrastructure projects to be awarded, it stands to reason there would be clear specifications and careful cost projections. How then were so little spent in executing these projects? It stretches the imagination that cost savings, for example, can shave costs by more than half. In turn the question should also be addressed on what happened to the remainder of the funds.

Third, that projects were awarded yet none of the budgeted funds were spent is strange. The apparent lack of urgency in executing these projects in turn raises concerns. Were the projects necessary in the first place? Or is this a case of poor follow-up and contractual enforcement by the public sector?

Implicit is the opportunity cost of allocating funds for these projects when the cash may have gone elsewhere to greater – and more immediate – benefit of the public.

Overall it is alarming that there is little clarity on exactly what proportion of PFI projects were awarded via open tender as opposed to direct negotiation. Nor is the exact nature of these projects clear, even those within the auditor-general’s sampling.

And the full list of PFI undertakings by the federal government remains elusive.

One potential explanation for the longstanding shadow shrouding the entire undertaking is its original intention to ostensibly provide opportunities for smaller bumiputera contractors. In search of further clues, KINIBIZ traces back the origins of Pembinaan PFI which began during the reign of the fifth prime minister Abdullah Ahmad Badawi.

Yesterday: Putrajaya’s dodgy dealing to raise billions in secret

Tomorrow: How Putrajaya’s PFI drive was born