The Malaysian Insider reported that the federal government has created a 100 percent-owned special purpose vehicle (SPV) to be the concession holder of the 2nd Penang Bridge. The SPV will, in turn, give out the contract to build the 2nd Bridge. 2nd Finance Minister Nor Mohamed Yakcop is quoted as saying that the government will decide later on who will collect the toll and how much.
Initially, the concession and privatisation of the 2nd Penang Bridge was given to the UEM Group and the project was to be undertaken on a build-transfer basis. Now the deal will involve a basic construction contract.
The government is now directly undertaking the 2nd Penang bridge project by establishing the SPV called Jambatan Kedua Pulau Pinang Sdn Bhd (JKPP), and slashed by almost 40 percent the contract sum that was initially supposed to be awarded to UEM Builders Bhd.
It is also reported that letters of award have been given to Chinese Harbour Engineering Company Ltd (CHEC) and UEM Builders, involving sums of about RM2.3 billion and RM1.3 billion respectively to build various parts of the bridge.
Read more here.
The good part
I have a qualified sense of happiness in analysing this new approach by the federal government. The happy part is that the federal government is adopting the stand urged by this blog (and many others, I'm sure) that infrastructure projects are public goods. The primary responsibility for providing public goods rest with the government.
In the earlier build-transfer model, UEM would have had the privilege of recouping the construction cost by setting up toll operations. Such arrangements have been criticised by this blog (and many others, I'm sure) as classic rent-seeking arrangements that have burdened the Malaysian public for the past 2 decades under the label of privatisation.
With the establishment of the SPV, the federal government is effectively the client who will pay the contractor as the work of constructing the 2nd Penang bridge progresses.
The dodgy part
Now I want to describe the qualified happiness part.
First, why is Nor Yakcop leaving the door open for a third party to collect the toll on the bridge? The government via the SPV should be the toll collector. Why is there a need for a third party to do toll collection? At most, the SPV can outsource the collection to established carpark operators who are efficient at this task. But it cannot go beyond this. It's a no-brainer task!
Second, how will the federal government finance the cost of construction of the bridge? It can draw from the Consolidated Revenue, of course. But, the federal budget is running at about 2.3% deficit. So, the government needs to borrow.
I have blogged about financing models that will help replace privatised public goods here and here. I am essentially advocating the issuance of Ringgit-denominated sovereign bonds by the federal government to partially finance the construction of the 2nd Penang bridge. The yields to bondholders have to be worked out based on the projected cashflow from nett revenues from toll collections after deducting operating expenses.
The other financing source is, of course, the USD800 million soft loan from the Chinese government. And, finally, the residual funding can be by way of direct fiscal policy by allocating a portion of the Consolidated Revenue to the construction costs.
Is this the first step towards de-privatising public goods?
Before we start celebrating the end of rent-seeking policies under the guise of privatisation, we should pause to consider the vast extent to which many public goods in Malaysia are supplied by privateers. Ranging from generating electricity to telecommunications to water and waste collection, the rent-seeking formula is deeply embedded in the Malaysian economy.
The detoxification (if you call privatisation a toxic activity, which I do!) will take some years. But, the billion Ringgit question is; Does the 2nd Penang bridge review signal a policy shift? Or, is it another ad hoc policy decision by an Administration that is euphemistically described as flip-flop.