By Khairul Khalid
MRCB-George Kent’s win as the project delivery partner for the RM9 billion LRT3 creates doubts, given their connections and unproven track record. Could PDPs turn out to be another controversial gravy train?
________________________________________________________________________
Eyebrows were raised in September when a joint venture between Malaysian Resources Corp Bhd (MRCB) and George Kent was announced the project delivery partner (PDP) for the RM9 billion Light Rail Transit 3 (LRT3) project in the Klang Valley.
The joint venture beat other established players such as UEM Group, Gamuda and MMC, potentially netting a whopping RM540 million management fee (6% of the total project value). Even more mind-boggling was the fact that one-half of the consortium – George Kent – is better known for manufacturing water meters instead of building railways.
Click to enlarge
Is the PDP model an essential way forward in developing Malaysia’s infrastructure or is it just, as some critics would suggest, another potential gravy train for well-connected companies and individuals?
The LRT3 is not the only infrastructure project using the PDP business model. Arguably the biggest PDP in Malaysia currently is the 50:50 joint venture between MMC and Gamuda. MMC and Gamuda are engineering and construction companies of influential tycoons Syed Mokhtar Al-Bukhary and Lin Yun Ling respectively. Both are known to be politically well connected.
In 2011, the Malaysian government chose MMC-Gamuda as the PDP for the first phase of the RM23 billion mass rapid transit (MRT) line between Sungai Buloh and Kajang. At 6% of project cost, the PDP fees came up to a massive RM1.38 billion.
Subsequently, MMC-Gamuda also won the RM8.2 billion tunnelling job for this project which raises a conflict-of-interest situation of how the PDP is also overseeing its own project.
Last year, MMC-Gamuda was announced the PDP for the second MRT line between Sungai Buloh and Putrajaya, a project that will cost an estimated RM28 billion and give a fee of a massive RM1.68 billion.
It is not just the federal government that is enlisting PDPs. Last August, the opposition-controlled Penang state government appointed a Gamuda-led consortium as the PDP to implement the Penang Transport Master Plan (PTMP) that is worth an estimated RM27 billion. The SRS Consortium consists of Gamuda with a 60% stake, while Ideal Property Development Sdn Bhd and Loh Phoy Yen Holdings Sdn Bhd each holds 20%.
Very little is known about the latter two but if the standard fee of 6% applies to this contract as well, the fee may be as high as RM1.62 billion, which is again a lot of money.
According to Penang Chief Minister Lim Guan Eng, the state will be financing the project in a proposed land swap deal with the PDP. But if the 6% management fee also applies, then Gamuda’s share of PDP fees could be RM970 million. At the time of writing, Gamuda has not replied to KINIBIZ’ request for an interview.
There is also Lebuhraya Borneo Utara (LBU) Sdn Bhd, an unknown company that was appointed PDP for RM27 billion Pan Borneo Highway project, which we will discuss further in a later story in this series. LBU stands to net RM1.6 billion in fees from this massive project.
Including the MRT and LRT3 jobs, MRCB George Kent’s RM540 million, the RM1.62 billion for the Penang PDP and LBU’s RM1.6 billion – the total estimated sum of PDP fees alone comes up to a mind-boggling RM6.8 billion!
What exactly does a PDP do? As its name implies, the PDP’s main task is ensure that the project runs smoothly, delivered on time and within budget.
According to Gamuda, “the main concept of PDP is that the PDP assumes complete risk ownership and accountability for project delivery, from conceptualisation until date of completion, including specifications to cost, time and quality by integrating all contractors (civil, infrastructure and systems) involved.”
In the MRT project, MMC-Gamuda’s main role is to oversee the overall performance of design consultants and work package contractors; manage the procurement process for all construction work packages jointly with the government; step in when a contractor or sub-contractor does not meet pre-determined works and undertake of all preparations, submissions and obtaining all approvals for the execution of the project.
But in reality, does the PDP model really ensure that these massive infrastructure projects are optimised?
Why didn’t the government stick with the traditional design and build approach – where the project owner completely designs and defines the scope of work before hiring a qualified contractor to execute the project at the best possible price through competitive bidding?
The MRCB-George Kent’s win again shines the spotlight on the merits of the PDP model. With George Kent taking some flak for the delay in the RM1.1 billion Ampang LRT system integration works, sceptics are already questioning the wisdom of awarding the huge PDP job for LRT3 to George Kent.
George Kent’s chairman and major shareholder is Tan Kay Hock, who is said to be a close friend of Prime Minister Najib Abdul Razak. For its financial year ended Jan 31, 2015, the company posted a profit after tax of RM28 million on the back of a RM353 million revenue. Tan has previously denied profiting from his friendship with the prime minister and said that the company’s sudden prominence in the railway construction business was based on the company’s strong capabilities.
Does this mean that any company, even without the necessary expertise, background or track record can become a suitable candidate for PDP?
Thong Mun Wai
According to Thong Mun Wai, head of agribusiness, real estate and construction ratings at RAM Rating Services, the experience of a company in a specified field is a critical factor in selecting a PDP.
“Given the demands of mammoth projects, the PDP – usually an experienced contractor – is valued for its experience in evaluating sub-contractors for the numerous work packages to be awarded, and to be able to effectively coordinate among them to ensure the smooth sequencing of multiple project components,” said Thong without referring to any particular PDP.
Nevertheless, Thong feels that the reasons for using the PDP model for project delivery become more compelling for large and complex construction projects, especially when timely delivery within budgeted costs is crucial.
He compared the LRT and MRT projects as examples.
“We opine that the benefits of preventing budget overruns and project delays under the oversight of a PDP can outweigh its costs – especially considering the opportunity cost of potential hiccups in strategic, high-priority projects.
“For example, the LRT extension project that had been undertaken on a more traditional model had suffered lengthy delays. So far, the PDP model has proven successful in keeping the Sungai Buloh-Kajang MRT Line on track in terms of both cost and scheduled progress,” Thong.
Taking into consideration both the pros and cons, there could be benefits of employing the PDP model if the most capable partners were selected transparently, at the lowest possible costs. Clearly, this is not always the case.
With projects worth billions at stake and a 6% management fee up for grabs, it is little wonder that even companies with scant track record in the business would be eyeing a piece of the PDP pie.
In the next article, KINIBIZ speaks to analysts on managements fees for PDPs and if the fees are justifiable.
Tomorrow: Are we overpaying PDPs?
You must be logged in to post a comment.