The long-term financial risks and burden will ultimately be borne by the people of Penang and Malaysian taxpayers, writes Khoo Salma Nasution.
The “Penang Transport Master Plan” (PTMP) kicked off in 2013 with a RM6.3bn agreement signed between the Penang state government and Zenith Construction Sdn Bhd to undertake the building of three highways and a tunnel. A land swap of 3.7 acres was made in payment for the feasibility studies and detailed designs of the highways.
The Zenith deal has been plagued by Malaysian Anti-Corruption Commission investigations and today, almost seven years later, the highways have barely started. The ground-breaking ceremony for “the first project under PTMP” was finally carried out several days before the expiry of the environmental impact assessment approvals for the highways (The Sun, 1 November 2019).
Yet, the Penang chief minister is now in a great hurry to sign yet another PTMP agreement with an uncertain timeline. This time it is a “project delivery partner” agreement with SRS Consortium, for 6% fees, excluding expenses that will be reimbursed. The total value of this project has doubled from RM20bn to RM40bn. The PTMP cost totals RM46bn when the Zenith packages are included.
The Penang chief minister has prioritised three mega-projects under the first phase of the PTMP:
- the reclamation off the southern coast of Penang Island, known as Penang South Reclamation
- the Pan-Island Link highway
- the elevated light rail project (from Komtar to Bayan Lepas)
The reclamation is supposed to pay for the two transport infrastructure projects.
The justification for these projects is not supported by any online or publicly viewable detailed plans and documents. Lacking are the cost-benefit and comparative analyses to show that they are the best solutions to benefit the local population. Lacking too are the plans to illustrate that the north–south Pan-Island Link and elevated light rail projects can really ease overall traffic congestion.
There is also the chicken-and-egg question: Was the massive scale of the land reclamation project conceived to pay for the PTMP? Or was the PTMP unnecessarily bloated to justify the 4,500-acre reclamation?
The three-island reclamation will take 15 years while the stand-alone elevated light rail line will be completed only in 2029 (according to the timelines in the environmental impact assessments), without any plan for feeder services. Bus users are groaning from the long waits along certain routes and the government’s apparent unwillingness even to reach for the low-hanging fruit of public transport service improvement. At this rate, mainland Penang residents might have to wait until 2040 for the PTMP to roll out any items for Seberang Perai.
The proposal to buy and sell highways started with Pakatan Harapan’s famous promise to abolish all tolls. As it turns out, the land reclamation may be funded with proceeds from the sale of highways linked to Gamuda, the 60% shareholder of SRS Consortium. Pankaj C Kumar called it a “windfall gain of RM2.82bn” for concession holders, “effectively taking all their future profits upfront” (The Star, 29 June 2019). Because of its convenient timing, this buyout of Gamuda-linked highways might appear too much like a federal subsidy for the controversial Penang South Reclamation project. (Straits Times, 2 December 2019).
At the same time, the Penang government is asking the federal government to guarantee its plan to raise RM10bn from sukuk bonds to finance the Komtar-Bayan Lepas elevated light rail project. This begs the question: if the Penang government can raise a RM10bn sukuk loan to start the light rail project, why does it still need to undertake the Penang South Reclamation project?
The Penang government might argue that the massive land reclamation is needed to repay the loan and that land value will increase over time.
But the ability to repay is subject to the condition that the market is not sluggish when the reclaimed land is ready to be sold and that the land can be sold fast enough to repay the loan plus interest. Otherwise, the cost of financing the loan will eat up all the profit gained from sales of reclaimed land. If the financial aspects of the project are not managed prudently or if the land cannot be sold at the targeted price, the federal government might have to bail out the state government with public funds!
Problematic costings behind the Penang South Reclamation
Two figures have been bandied about for the 4,500-acre reclamation costs: RM16bn and RM11bn for 4,500 acres, which works out to be RM82 or RM56 per square foot respectively (The Edge, 22 July 2016; Mongabay, 2 May 2019; Malay Mail, 8 July 2019; Malay Mail, 5 November 2019).
Either way, these costings are higher than 1MDB’s Pulau Indah Port Klang reclamation offering for a little over RM30 per square foot (The Edge Markets, 27 May 2019) and Benalec Holdings Bhd’s Melaka Gateway reclamation, sold at RM34 per square foot (The Edge Markets, 9 January 2019). In January 2020, Benalec, a self-styled “land manufacturer”, had to call off a deal to sell several parcels of Melaka land sale due to non-payment.
The reclamation costings set by the Penang government seem to be tied to the potential sales price of the land: RM110 per square foot for the second phase of the Seri Tanjung Pinang project and Gurney Wharf land, which was tagged at RM1,300 per square foot in 2013, and RM56 per square foot or RM81 per square foot for PSR which could potentially sell for RM300 per square foot.
However, an engineer will tell you that reclamation works should cost more or less the same anywhere in the Malacca Strait. The vast difference between reclamation costings in Penang, Port Klang and Malacca cannot easily be explained even by taking into account the depth of the seabed or the distance of the sand transport. This type of non-transparent price fixing is especially worrying when the client is not a private company but a state government.
What is the projected Penang South Reclamation sale price? Bayan Lepas land nearby normally sells for around RM150 per square foot although recently commercial land was sold for as much as RM300 per square foot. For low-lying island real estate, a lot of investment into top-side development and marketing will be required to make it commercially marketable at RM300 per square foot. The seller of the reclaimed land will expediently leave out any mention of defects or risks of an impending rise in sea levels for fear that banks won’t finance the reclamation or insurance won’t cover the reclamation properties in a few decades.
Learning from the Melaka Gateway
Experience shows that a long-drawn out reclamation project can be problematic during a slump. Property prices in Dubai’s Palm Islands – the original inspiration for resort-island-type reclamation – have dropped 40% since 2016 (Financial Times, 29 January 2020). A similar discount was held out for the newly reclaimed land in state-owned Gurney Wharf, tagged at RM1,300 per square foot in 2013, but offered at only RM746 per square foot (The Edge, 12 November 2019).
The optimistic projections of the proposed Penang South Reclamation might end up in a heap of disappointment, like the Melaka Gateway project. Wade Shepard, author of Ghost Cities, wrote:
Melaka Gateway was supposed to have been the catalyst that would completely alter the face of Melaka and the southwest coast of peninsular Malaysia, transforming the region from a low-key epicenter of traditional cultures and traditions—a legitimate UNESCO World Heritage site—to a modern, booming, economic powerhouse. But the winds of economic fundamentals combined with political upheavals have left the project little more than a stagnant slab of reclaimed land. (Forbes, 31 January 2010)
Like Malacca, Penang is exploiting the George Town world heritage “brand” to sell real estate, while blanking out the ugly reality of its coastal despoliation. The three “smart and green” islands in Penang South Reclamation are meant to showcase Penang’s economic powerhouse future – but Penangites will not be able to afford to live on the fake islands.
The project targets a population of 446,000 by 2038. But where will the majority of these residents come from? Just look south to Johor’s Forest City, which targeted a population of 700,000, for comparison. In 2017 Tony Pua wrote an article, “Chinese Property Projects in Southern Johor: Should We Be Concerned?” pointing out that of 23,240 units approved in the Forest City, 98.5% of the units were sold to foreigners, 70% from China (Penang Institute, Issues, 23 August 2017).
Despite Forest City’s strategic location near Singapore, the uptake has not been as projected. The Hong Kong-listed Country Garden, developer of Forest City, recently cut almost 400 jobs in a “restructuring” exercise (The Edge Markets, 21 January 2020).
In Penang, Tanjung Pinang Development Sdn Bhd, a subsidiary of E&O Properties, carried out Phase A of the 760-acre second phase of the Seri Tanjung Pinang project while undertaking a 131-acre reclamation of Gurney Wharf for the Penang government. When E&O Properties made a cash call in early 2019, stock prices tumbled (Star, 13 February 2019). In December, E&O Properties sought to raise an additional RM1.5bn through Islamic medium-term notes (sukuk murabahah) (New Straits Times, 19 December 2019).
Clearly, private developers take risks with shareholders’ money in facing the ups and downs of the property cycle. However, when the Penang government issues sukuk bonds for the PTMP backed by a federal guarantee, it is Malaysian taxpayers’ money which is being risked.
Creating more real estate amidst a property overhang
I have been told that projections for Penang’s reclamation property prices were initially done in 2010, when Asian markets were boosted by inflows of global capital. In the meantime, the national property overhang has grown 500% between 2014 to 2018 (The Star, 29 June 2019), prompting the government to reduce the price threshold for foreign ownership of high-rise properties.
Newspaper headlines shouted that the Penang South Reclamation project would fetch RM70bn in real estate development value (The Star, 16 April 2019). This overstated development potential has excited some Penangites.
Realistically, the government might only have 3,000 out of the 4,500 acres to sell – minus roads, public facilities, 15km of coastal parks and bike tracks and so forth. At RM300 per square foot, this would generate RM39bn, not even enough to pay for the transport infrastructure (Aliran, 28 January 2020).
The Penang government should be very worried about the scale of the Penang South Reclamation project, which is 19 times the size of the first phase of the Seri Tanjung Pinang project (where Straits Quay is located) and six times the size of its second phase. The global economic outlook is unpredictable. The oligopolistic nature of assigning a single consortium to manage 4,500 acres of state-backed real estate creation, is another cause for alarm.
Without a detailed financial plan, is it financially prudent for the Penang government, whose own revenue is projected at RM519m this year, to raise RM10bn by issuing sukuk bonds to start a RM46bn transport infrastructure project? Judging from the start-and-stop progress of other reclamation projects, it is unlikely that the Penang South Reclamation project will be immune from cashflow problems, delays and cost overruns. The 15-year timeline could easily drag on for a generation or more. A federal bailout would mean further increasing Malaysia’s debt burden – yet another case of “privatising the profits and socialising the losses”.
The Penang government might go ahead and sign the project delivery partner agreement, knowing full well that the decision-makers of today will not be around to foot the consequences. Only one thing is for sure – the “project delivery partner” will be assured of its percentage-based fees while the long-term financial risks and burden, for better or for worse, will ultimately be borne by the people of Penang and Malaysian taxpayers.
Khoo Salma Nasution, an Aliran member, is a steering committee member of Penang Forum, a coalition of Penang-based NGOs.