Gamuda – double dipping or triple dipping?

It is the Penang state government’s duty to protect the public interest and not get all entangled with private interests

In my recent article, “Selling Penang for a song?”, I showed that the Penang state government was trading off its coastal ecosystem, fishermen’s livelihoods and food security for only RM600m in the Penang South Reclamation project.

In their reply (Malay Mail, 22 May 2021), the developer consortium assured the public that it would not be “double-dipping or leveraging off the state in any way”, as the Penang state government will be appointing an independent checking engineer to oversee the costs and work programme of the Penang South Reclamation project. As usual, instead of addressing my arguments, SRS Consortium skirts around the issues creating obfuscation and confusion for readers.

Let me explain from the beginning. In 2015, SRS Consortium responded to the Penang state government’s request for proposals for the Penang transport masterplan and was awarded the project. SRS Consortium proposed land reclamation as a way of financing the transport plan.

The following year, after repeated requests from civil society for more information about the public project, the SRS Consortium proposal was exhibited in Dewan Sri Pinang, during office hours only. As we were not allowed to bring in any recording device or camera, and not even our mobile phones, members of Penang Forum painstakingly copied salient portions of the proposal by hand, with the pencil and paper given to us.

Here are the figures. In 2015, SRS proposed to reclaim island A (2,430 acres) for a cost of RM4.9bn (RM3.3bn reclamation costs and RM1.6bn infrastructure costs) and island B (1,110 acres) for RM3.1bn (RM1.9bn reclamation costs and RM1.2bn infrastructure costs). In short, two islands totaling 3,530 acres would cost RM8.1bn to reclaim. The money made from the sale of land from these two islands would pay for the implementation of the transport plan. Hence, the Penang state government agreed to undertake Penang South Reclamation (PSR), which would in phase two expand to three islands.

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Since then, the costs of both the SRS proposal for the transport plan and the Penang South Reclamation have been hiked up every one or two years. In 2021, we are told that it will cost the Penang state government RM7bn to reclaim half of Island A, ie 1,200 acres (RM4.5bn reclamation costs and RM2.5bn infrastructure costs).

Now, let us look at the how SRS Consortium’s role in the project has evolved. Under the 2015 proposal, SRS was to play the role of project delivery partner for fees amounting to 6% of the project costs. In 2021, SRS has now become the majority shareholder in a joint venture (the project developer) with the Penang state government, represented by its subsidiary, Penang Infrastructure Corporation, the minority shareholder.

Figure 1: Organisational Structure for Penang Southern Reclamation Project

What is even more worrying is the complex arrangement of the contract management. This has been designed in such a way that the same players are involved in two or three levels of the project implementation.

The first layer is the project developer (30% owned by a Penang state government nominee, 70% by SRS).

The second layer is the turnkey contractor (also with same 30:70 ownership structure).

The third layer are the companies carrying out the construction and reclamation works. See Figure 1 above.

Needless to say, the operationalisation of the contract management set-up is less than straightforward or transparent. In addition, the multi-layered structure, whereby the same parties are both project developers and turnkey contractors, may compromise corporate governance, weaken cost performance and impair time performance.

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This is how, SRS Consortium, being involved in levels two and three of project implementation, may enjoy opportunities for “double dipping”. Gamuda Engineering gets to keep 100% of profits and SRS 70% of the turnkey contractor’s profits. Indeed, Gamuda may even uniquely enjoy the opportunity for “triple dipping” if profits are made by the project developer.

Under the 2015 request for proposals, SRS’ proposal for the Penang transport masterplan clearly stated that SRS Consortium as the project delivery partner and its affiliated companies would not be bidding for construction work as that would entail a conflict of interests.

This protection is now thrown out of the window. As for the safeguards supposedly put in place by the Penang government, whether or not the independent checking engineer will be truly independent remains to be seen.

Finally, let me address two other points raised by SRS’s statement.

The first is its claims that the project will attract RM70bn in foreign direct investments, contributing RM100bn to Penang’s gross domestic product (GDP) and creating 300,000 jobs over 30 years. Suffice to say anyone can pluck any number out of thin air. How credible are these numbers? The credibility is reflected in SRS’s population projection of 446,000 inhabitants on the three islands by 2030 in its 2015 proposal. Are we to believe that Penang island’s population will increase by 446,000 in a matter of ten years when it took 200 years for the population to reach 720,000?

Second, SRS said I was selective in my arguments by not mentioning that the Penang state government in the 2015 proposal would be funding the reclamation, be the owner of the islands and take on all the financial risks. On the contrary, I have from the very start cautioned the Penang state government against the SRS proposal to fund the Penang transport masterplan through land reclamation precisely because of the huge financial risks arising from the mismatch of cashflow between land sales revenue and construction expenditure. The Penang state government should have rejected SRS’s proposal from the outset. Instead, the Penang state government has now acquiesced to a backseat role in a private-led joint-venture model, where Gamuda is in the driver’s seat.

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The Penang state government is required to do due diligence before signing the agreement. They should go over the figures once again and explain how the costs of the Penang South Reclamation has escalated from RM8bn for two islands (total 3,530 acres) in 2015, to RM7bn for half an island (only 1,200 acres) in 2021. Work has not begun but project costs have almost tripled!

It is the Penang state government’s duty to protect the public interest and not get all entangled with private interests. What the Penang State Government should do now is abandon the massive reclamation project, which will destroy Penang’s environment, biodiversity and fishermen’s livelihoods and threaten the local supply of fresh and affordable seafood to Penangites. Move the development to the mainland and scale down the transport masterplan to sustainable proportions.

Dr Lim Mah Hui is an economist, former banker and former Penang Island city councillor

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