This article first appeared in The Edge Malaysia Weekly on December 12, 2022 - December 18, 2022

THE Klang Valley Mass Rapid Transit Circle Line, or MRT3, is arguably the only new mega infrastructure project that has been worked on over the last five years. There has been talk, however, that the unity government helmed by newly minted Prime Minister Datuk Seri Anwar Ibrahim may review the project, given its astronomical price tag.

The RM50 billion that the previous administration had committed to fund includes an allocation of RM11 billion for financing charges. This means interest costs that the government would have to bear to build the MRT3 is 22% of the total cost. According to experts, the government had allocated RM11 billion for interest charges to develop the MRT3 mainly because of the requirement for the private sector to finance the project in the first two years.

“While the private sector, especially the big construction boys, has the capacity to raise funds to pay for the construction of the MRT3 in the first two years, none can borrow at a lower rate than the government,” says an expert on public infrastructure projects.

The previous government under the leadership of Datuk Seri Ismail Sabri Yaakob was adamant about going ahead with the MRT3. The project is touted as the “missing link” that will connect the entire rail-based infrastructure in the Klang Valley, making the system integrated and comprehensive.

According to the project owner MRT Corp, MRT3 will have 10 interchanges that will connect the disparate lines of rail public transport in the Klang Valley. However, since the government has had to spend the past three years battling the Covid-19 pandemic to ensure the well-being of the people and the economy during the various iterations of the Movement Control Order, it is in a tight fiscal position and would lack the capacity to fund the construction of the MRT3 in the initial years — hence the private sector financing scheme.

The private sector will, however, still have to be repaid by the government. The debts that the successful contractors raise to fund the construction in the first two years of the project will have commercial rates that are often higher than the coupon rates on government debts.

 It is worth noting that all the major contractors have broken up their bids into two proposals — one for the design and construction and another for the initial financing period of two years, says an observer.

“The contractors have broken up their bids for each of the packages. One bid is for the design and construction works and another that only entails their financing cost of the works for the first two years. This is in anticipation [of the possibility] that the government would choose not to have them finance the project,” says the observer.

MRT Corp opened several tenders for the MRT3 project after it was revived in 2021. (The project was scrapped in 2018 under the Pakatan Harapan government because of its heavy debt burden.) The construction portion of the MRT3 project comes in three packages (CMC301, CMC302 and CMC303), while one tender is for the systems turnkey contractor package.

The packages are for the design, construction and completion of viaduct guideways, elevated stations, tunnels, depot, ancillary structures and other associated works of the MRT3. CMC301 is for civil construction works between Pandan and Jalan Cheras; CMC302 is for works between Jalan Cheras and Pantai Dalam, and Jalan Kuching and Pandan; and CMC303 is for works between Pantai Dalam and Jalan Kuching.

The tender submissions for CMC301, CMC302 and CMC303 had closed in August.

Based on the shareholders’ fund requirements for the civil construction packages, it can be assumed that CMC301 will have the smallest contract value of the three packages. The consortium bidding for CMC301 must have shareholders’ funds of at least RM100 million.

For CMC302 and CMC303, the bidding consortia must have shareholders’ funds of at least RM250 million and RM300 million respectively. The winning bidders of each package will need to have the funds to finance the initial two years of construction works worth at least 10% of the contract value. They must also be able to take on the jobs without receiving payment in the first two years.

If the contract value of the package is RM10 billion, the consortium must have the funds to finance RM1 billion worth of construction works. On top of that, the two-year moratorium is a huge undertaking for many contractors.

In a normal construction project, the contractor will be paid within 90 days of the submission of their progress billings. In the case of the MRT3, where the contractors will only start to be paid on the 25th month of the project, their cost of financing will also be higher than usual, says a construction industry expert.

“Usually, when contractors take on a job, they will have approached their banks for a line of credit. They will gradually draw down from this line of credit for the requirements of the job. The banks will charge extra for this line of credit, compared with normal loans. The bigger the cost of the project, the bigger the line of credit that the contractors will need to have.

“When the MRT3 contracts require them not to be paid for the first 24 months of the job, the banks will only offer credit lines at a much higher rate because of the risks associated with the longer stretch before getting paid by the project owner,” the expert says.

All this means that the contractors bidding for the MRT3 works have factored in the financing costs for the project, at least in the first two years. And this financing cost would have been included in the RM11 billion allocated by the government.

Therefore, the current government has leeway to review the project, especially from the financing point of view. The private financing element as well as the two-year moratorium will only render the project more expensive than it would have been in normal circumstances.

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