The Malaysia China Hydro Joint Venture (MCHJV), the Sime Darby-led consortium undertaking the construction and commissioning of the Bakun Hydroelectric Project, is expected to incur another RM490 million in cost overruns, say sources.

With the additional sum, the total cost of the Bakun Dam for MCHJV is projected to be RM3.3 billion. The initial estimate is RM2.5 billion.

“The total cost overrun for the project is now estimated at more than RM855 million, out of which RM365 million has  been provided for. This leaves another RM490 million that the consortium may have to make provisions for as it completes the project,” says a source.

Of the RM365 million that has been provided for, Sime Darby’s portion is RM130 million, for which it made provisions in its last quarterly results. The other consortium members have also made provisions.

It is said the additional cost is due to claims by subcontractors amounting to RM140 million and additional cost to be paid to Sino-Hydro amounting to RM190 million for work done.

Sino-Hydro, which has a 30% stake in the MCHJV, is the Chinese partner in the Sime Darby-led consortium that is carrying out major technical works under the civil works contract for the dam.

In addition to the cost overruns, the MCHJV also faces claims from Sarawak Hidro Sdn Bhd, a Ministry of Finance (MoF)- controlled entity, for late delivery of the dam.

The additional claims that Sarawak Hidro can impose on the MCHJV are estimated at RM460 million. This sum includes a claim of up to 20% that Sarawak Hidro can impose on the MCHJV for late delivery. The 20% is based on the contract sum of RM1.79 billion, which works out to RM360 million.

The remaining RM100 million comprises claims that Sarawak Hidro has already incurred from turbine suppliers Alstom and Impsa Malaysia.

Sarawak Hidro has already paid Impsa Malaysia some RM145 million and Alstom RM80 million for additional costs incurred due to the delay in the civil works. The turbine suppliers, it is said, claim that late delivery of the civil works and unforeseen increases in raw material prices have raised their costs.

It is learnt that Sarawak Hidro has already notified the MCHJV of its liability in relation to claims made by Alstom and Impsa Malaysia on the MoF entity.

“Sarawak Hidro has already sent the MCHJV a letter stating the liability to claims made by Impsa Malaysia and Alstom. So the consortium members must be prepared to provide for the claims,” says a source.

Put together the RM490 million in estimated cost overruns and up to RM460 million in claims that Sarawak Hidro can impose on the MCHJV, and the consortium could face a total additional cost of as much as RM951 million.

Assuming the entire RM951 million is realised, Sime Darby’s portion amounts to RM340 million.

However, sources say it is unlikely that Sarawak Hidro will claim for late delivery from the MCHJV.

“So the MCHJV’s claims may be restricted to what Sarawak Hidro has incurred from the turbine suppliers, which is about RM100 million,” says a source.

The civil works were supposed to have been completed by the end of 2007, but were delayed several times. “Substantial completion”, which effectively means the dam is in a state of readiness for the impounding of water, is now slated for this December.

“We have given them some form of assistance by extending the time for completion. If they are able to achieve substantial completion by October this year, we will waive the claims for late delivery,” says Sarawak Hidro managing director Zulkifle Osman.

MCHJV’s claims
The MCHJV is also claiming more than RM420 million from Sarawak Hidro. However, it is not known how much of the claims will be paid as the payment for the contract is a fixed lump sum.

“This means the MCHJV cannot claim for an escalation in material costs or other events that led to the late delivery of the dam,” says a source.

The largest component of the MCHJV’s claims from Sarawak Hidro is costs incurred due to the extended period of construction arising from inaccurate geological studies of the site where the main dam is located.

In fact, the biggest portion of the cost overruns for the MCHJV came from the increase in work scope due to the inaccurate geological surveys. Additional claims from Sino-Hydro for its expanded job scope amount to more than RM700 million.

Initially, Sino-Hydro’s portion was budgeted at less than RM900 million, but sources say that has ballooned to almost RM1.6 billion.

“There was a dispute on the scope of work and it resulted in prolonged negotiations between Sime Darby and Sino-Hydro. This caused substantial delays,” says a source. 

According to officials familiar with the project, the reason the MCHJV incurred such high cost overruns is that it did not impose the same conditions on its subcontractors as Sarawak Hidro.

“The Sime Darby-led consortium was awarded the job for a fixed lump sum cost. But the MCHJV awarded the jobs to the subcontractors on the amount of work to be done, not on a fixed lump sum basis. This caused the consortium to be exposed to delays,” says an official.

The only consolation for the MCHJV is that if it decides to walk away from the job, it can simply close shop and liquidate.
Sime Darby, as the lead member of the consortium, has given Sarawak Hidro a corporate guarantee of RM1 billion.

“But it would be difficult to enforce as it is a corporate guarantee and not a bank guarantee that Sarawak Hidro can cash in without having to take legal action,” says the official.

But because the consortium is led by Sime Darby, which has a reputation for completing jobs even when it incurs losses, Sarawak Hidro can rest assured that the job will get done.

This article appeared in Corporate page, The Edge Malaysia, Issue 819, Aug 16-22, 2010