This article first appeared in The Edge Financial Daily on August 29, 2018
KUALA LUMPUR: The award of big infrastructure developments to project delivery partners (PDPs) by the government is likely to come to an end after incidences of cost overruns affected its budget, said Tony Pua, special officer to the finance minister.
The government is also stopping the award of directly negotiated private partnership projects (PPPs) to companies, he said at a seminar on “Procurement as part of good governance in new Malaysia: Challenges and Recommendations”, organised by the Center to Combat Corruption and Cronyism (C4) here yesterday.
“There are some benefits from PDPs, especially if there are delays and cost overruns and these are borne by them, but instead of pricing cost overruns into their contract, we are paying more for the same thing we would get.
“[In PDP] contracts, they get 6% of the cost of the project. The incentive is for the project manager to inflate the cost of the project because it gets 6% of whatever the cost of the project is. So this structure needs to change,” he said.
Pua was citing the example of the RM21 billion Klang Valley mass rapid transit (MRT) Line 1 consortium, consisting of MMC Corp Bhd and Gamuda Bhd, and one of the first projects to be based on the PDP concept, whereby the cost did not include RM7 billion associated costs for engineering consultancy, system integration works, site investigations and PDP fees.
“I am not the finance minister and there is no official decision but at this point of time, we do not see any big projects going forward being awarded via the PDP mechanism,” he said.
Pua said there have been dialogues with the works ministry, and officials from the Public Works Department (JKR) have urged the ministry of finance (MoF) to get rid of PDPs.
“There is no official decision but feedback from civil servants [is] to get rid of PDPs, and we don’t see a real reason not to abide by their advice,” he said.
On PPPs, Pua said previously, contracts were negotiated and awarded by Unit Kerjasama Awam Swasta (Ukas), which was under the Prime Minister’s Department and was later placed under the MoF so that the MoF looked for funds for the projects.
“However, Ukas is being moved to MoF to ensure the entire process of project tenders could be done holistically, and to keep an eye on the project cost and funding. [So] there won’t be directly negotiated PPPs in future,” he said.
He also noted that the previous government’s practice of government guarantee projects that inflated contingent liabilities was a corruption of the concept of PPP.
“A lot of these contracts were designed in this manner to circumvent the debt constraint or procurement problems, making it an opaque transaction,” he said.
Pua said the government spends RM150 billion on procurement annually, which has prompted a review of the entire chain of procurement process.
He cited one of the sources of problems is “copy and paste” budgeting, which has led to wastage such as the purchase of shoes by the Customs Department from 2009 to 2013 that amounted to RM6.86 million.
The Auditor-General’s Report 2012 showed that at the end of 2012, the balance of shoes purchased in 2009 had yet to be distributed and a total of 7,669 pairs of shoes worth RM602,089 were damaged and needed to be disposed of.
“This happens because there is remaining budget and it has to be utilised, otherwise it returns to the MoF. So the officers use the same baseline from the previous year, add some numbers and items, and submit it to the ministry. The budget continues to increase every year, although it does not differ much from the previous year.
“It is not feasible for the MoF to check the stock of shoes. We have to assume that they have done their homework and the request is bona fide, and [if] we have the budget we will allocate the money for you to buy more shoes. This not only creates wastage but also creates an inherent structural increase in budget every year.
“So this year, the MoF has started zero base budgeting, meaning starting from scratch. The officers have to think about what they want to do next year, and write down the items. It is more challenging because you cannot copy and paste. It means more work but we hope it will break the process of that inherent structural problem of always wanting more for the same items resulting in wastage that is not necessary for expenditure,” he added.
He said the changes would show in the budget this year but was not able to quantify the amount that would be saved.