20/12: Malaysia's Big Money Railroad Hustle

Posted by Kim Quek

The government revives a white elephant project for a politically connected construction firm

Prime Minister Abdullah Ahmad Badawi, who came to office vowing to stop a wide range of money-swallowing projects put in place by former Prime Minister Mahathir Mohamad, has caved in to political pressure and reinstates several of them. Now, it appears he is restarting what may be the biggest of them all, a massively expensive rail project tied to a well-connected construction firm that seems to have little hope of recouping its investment.

The government has approved the no-bid contract with Gamuda-MMC for RM 12.5 billion (US$3.73 billion) to double-track the country’s main north-south railway line, a 329 km run from the central city of Ipoh to the Thai border. The MMC part of the consortium is a construction company backed by Syed Mokhtar Al-Bukhary, a long-time backer and fundraiser for UMNO, the largest party in the country’s ruling Barisan National coalition.

Malayan Railways Ltd serves the Malaysian Peninsula with a network of 1,700 km of railways, but it earned only RM 288 million in transportation revenues in 2006, made up as follows:

- Intercity services: RM 71 million
- Commuter services in Kuala Lumpur areas: RM 85 million
- Freight services RM 132 million
- Total: RM 288 million

Excluding the commuter services in Kuala Lumpur, the total transportation revenue is RM203 million from a network of 1,525 km of railways. Apportioning 30 percent of this revenue to the Ipoh-border sector — only 22 percent of the 1525 km network — the corresponding revenue is RM60 million.

Granted that traffic volume would increase substantially after completion of the double-tracking project, there is still a limit. Assuming generous seven-fold revenue growth, future annual revenue for this sector could — could be RM 420 million, just 3.3 percent of the initial capital investment of RM 12.5 billion. Such a meager return means that the project would have little significant impact on the economy or transportation in this sector after completion.

But every family in Malaysia would have to shoulder an average burden of RM 2,500 to pay for this folly. If this money were spent for other purposes, the government could complete any one of the following feats:

- Plant 1.2 million hectares of mature oil palm capable of generating annual revenues of RM 10 billion (5 million tons of palm oil @ RM 2,000 per ton), or
- Build 400,000 low cost housing units, capable of housing to 2 million people, or
- Establish 100 medium sized institutions of higher learning, capable of taking in 300,000 students for tertiary education, or
- Build 1,200 km of expressways.

The contrast in returns between the double-tracking project and any of the alternatives should indicate that this project is a very low priority. With the country still short of funds to address many social-economic needs, why do this? The circumstances are troubling.

First, there has never been a proper cost/benefit analysis. For a project this large this omission is shocking, but then the cabinet was likely aware that the proposition could not have survived even a preliminary round of analysis.

Second, the project has never been properly discussed in the cabinet – neither during Mahathir’s reign, when the contract was first dubiously awarded to Gamuda-MMC in October 2003 before being shelved in December 2003 after Mahathir left office, nor during Abdullah’s premiership when it was revived in March 2007.

Third, it was the Cabinet Committee on Public Transport – not the cabinet itself– which resurrected the project and awarded the contract to the same contractor in a subcommittee meeting held on March 16, 2007 chaired by Deputy Prime Minister Najib Tun Razak, who also made the announcement. That such an important project should have been left in the hands of Najib’s subcommittee reflects Abdullah’s weakness as well as a serious flaw in the decision-making process.

Fourth, no open tender was called. The decision to re-award the contract to Gamuda-MMC was made even before prices were known to the government, thus weakening the latter’s bargaining position and throwing the door wide open for collusion and corruption. What happened to Abdullah’s promises of open tenders, transparency and accountability?

Fifth, the announcement on the official award of this contract with a finalized price was left to the contractor, who also spoke at length on the project’s economic justification, while the government kept silent. Is it the contractor’s business to justify public expenditures? Shouldn’t that be the responsibility of cabinet ministers? Shouldn’t the ministers have appeared to bask in the glory of launching such a project?

Noting the minuscule projected return in relation to the huge capital layout, a series of questions beg for answers. Why did former premier Mahathir Mohammad push for the double-tracking project so urgently days before he stepped down on in October 2003? The contract then was for the construction of both the northern Ipoh-Padang sector and the southern Seremban-Johor Bahru sector for a total contract sum of RM 14.5 billion.

Having rightly shelved the project in December 2003 due to its low priority, why did Abdullah revived it in March 2007? Finding no compelling economic or social rationale, what conclusion can we draw other than to attribute the motivation to base greed – both on the part of the giver and the recipient of the contract?