Penang’s debt reduction, a tale of prudence

This is in response to the news ‘Don’t proceed with Penang dam project until Guan Eng says sorry, says Najib’ (Free Malaysia Today, 10 January 2021).

Dato Seri Najib Razak claimed that Penang’s debt reduction was due to Barisan Nasional federal government’s giving “free grant for the Mengkuang dam worth RM1.2 billion and converting the state’s debt into annual instalments,” following the federal-state water restructuring deal in 2011.

How the debt conversion works is by requiring the state government to transfer water-related assets to the federal government, and in return the assets are leased back to the state government for annual payment for 45 years.

Najib then casted doubt over the DAP-led state government’s economic prowess and accused former Penang Chief Minister, Lim Guan Eng for propagating “fairy tales of reducing state’s debts.”

This accusation against Penang government is not new, aggressively circulated by BN machinery in 2017, in preparation for GE14.

To know whether who is telling fairy tales is very simple, by comparing Penang with the other six states that participated in the water deal from 2008 to 2016. We just need to compare each state’s debt before entering the water deal and the amount of leftover debt in each state by 2016. Attached is the table for reference.*

As seen in the table, the debt conversion does not guarantee low state debt over a sustainable period. The two obvious examples are Johor and Kelantan.

Johor received the highest debt conversion of RM4,030 million, which was three times more than the state’s debt of RM1,010 million. If the debt conversion guarantees sustained low debt, then Johor shouldn’t have any debt at all. However, by 2016, Johor had accumulated RM413 million of debt. Clearly, the water deal’s debt conversion does not guarantee low state debt over a sustainable period.

Kelantan’s debt was RM1,354 million before the water deal. The state’s debt conversion was RM604 million. Again, if the debt conversion guarantees sustained low state debt, then Kelantan’s debt should be (RM1,354mil – RM604mil = ) RM750 million. But that is not the case. Just one year after the debt conversion, Kelantan’s debt increased by 3% to RM1,396 million. Again, clearly, the water deal does not guarantee low state debt over a sustainable period.

Longer duration in the water deal also does not guarantee high debt reduction and low state debt. Despite being the first to enter into the water deal, Melaka had only managed to reduce debt by 23%. So, clearly, the debt conversion does not guarantee low state debt even over a longer timeframe.

Out of the seven states participating in the federal-state water deal, Penang’s debt reduction rate is the highest, at 91%, over a sustainable period.

So, why is Penang’s debt remaining low over a sustainable period? I think it goes back to the state government’s prudence and economic prowess.

I have already explained this in 2017, but BN still repeating this misleading claim.

Reference

*Data of state debt are taken from Auditor-General Reports: Penyata Kewangan Kerajaan Negeri Dan Pengurusan Kewangan Jabatan/Agensi Negeri Melaka Tahun 2007, p.vi; Penyata Kewangan Kerajaan Negeri Dan Pengurusan Kewangan Jabatan/Agensi Negeri Sembilan Tahun 2008, p.31; Penyata Kewangan Kerajaan Negeri Dan Pengurusan Kewangan Jabatan/Agensi Negeri Johor Tahun 2008, p.34; Penyata Kewangan Kerajaan Negeri Dan Pengurusan Kewangan Jabatan/Agensi Negeri Perlis Tahun 2009, p.xiii; Penyata Kewangan Kerajaan Negeri Dan Pengurusan Kewangan Jabatan/Agensi Negeri Pulau Pinang Tahun 2010, p.32; Penyata Kewangan Kerajaan Negeri Dan Pengurusan Kewangan Jabatan/Agensi Negeri Perak Tahun 2011, p.28; Penyata Kewangan Kerajaan Negeri Dan Pengurusan Kewangan Jabatan/Agensi Negeri Kelantan Tahun 2015, p.xi.

Request For Proposal differentiates PTMP from other mega projects

There are some misconceptions that the PTMP is the same as other mega projects that should be reviewed, if not cancelled. Some have even lobbied all the way to the Prime Minister Office and the Council of Eminent Persons against PTMP.

These misconceptions are based on the wrong understanding about PTMP. It is therefore important for the public to know the uniqueness of PTMP in order to discern properly.

What sets the PTMP apart from other mega projects is the use of an open tender process known as Request For Proposal (RFP). The RFP is a type of open tender that allows for competitive evaluation among different innovative proposals before a decision is made.

The RFP differentiates PTMP from other projects, such as the RM81 billion East Coast Rail Link (ECRL), that do not use open tender. 

Regular open tender and RFP

There are several types of open tender. Each type is employed according to the scale and limitation of the project. I will only elaborate on the tender processes related to PTMP.

Let's say you are hungry and desire for a burger. Regular open tender is like going to the pasar malam and coming back with the cheapest burger.

RFP on the other hand is like holding a contest, and inviting all the pasar malam burger stalls to participate. The stall that makes the tastiest burger and at the best price - but not necessarily the cheapest - gets the prize.

The main difference between the two is that price is the primary consideration in regular open tender whereas other factors come into play in RFP.

RFP allows bidders to offer their own proposal, with room for innovation. This tendering method was first employed by Penang state government in 2010 to develop landmark and restore heritage sites.

Goh Ban Lee, a former associate professor at Universiti Sains Malaysia, has this to say about RFP:

“I find the RFP idea very refreshing and interesting. If it is left to state planners or architects, it will only be one design. Generally, planners working in the civil service, as government officers, follow the normal procedures and plans and rarely take risks. However, by opening it up to the private sector, it will provide a myriad of ideas and, with competition, the bidders strive to give their best shot — and the sky is the limit to their innovation... This is new thinking, it... gives the state government the pick of the best proposals. Ultimately, the state government decides and picks on the best options offered.”

Closed and open RFP

RFP can be either closed or open. Closed RFP is like holding a contest where you only invite one burger stall to participate.  No need to guess who's the winner. No alternative to be considered or compared.

Open RFP, on the other hand, is an invitation to any one in the market to bid or tender for the job. It is competitive, as the submitted proposals will be evaluated with alternative.

Double open RFP for PTMP

Penang state government employed open RFP twice for PTMP. Let's call this double open RFP.

Double open RFP is like, you want to open a restaurant, but first you hold a contest to choose a restaurant consultant to advise you what food to serve. Say the winning consultant's choice is burger. Next you hold a second contest to choose the chef who can prepare the best burger.

For PTMP, the first open RFP was conducted to appoint a consultant to prepare an initial study of building an integrated transport infrastructure in Penang. Many criteria were set, one of which is that the project has to have a funding mechanism.

The first open RFP began on 12 March 2010 and ended on 30 April 2010. There were six companies that applied. They were AECOM Perunding Sdn Bhd, Melewar Metro Penang Sdn Bhd, Jurutera Zaaba Sdn Bhd, Systra MVA Singapore Pte Ltd, Perunding Trafik Klasik Sdn Bhd, and AJC Planning Consultants Sdn Bhd.

On 27 April 2011, the RM3.2 million project was awarded to AJC Planning Consultants Sdn Bhd, which was set up by Halcrow, Singapore Cruise Centre, and AJC. The cost was shared between the Northern Corridor Implementation Authority (NCIA) and Penang state government at RM1.5 million and RM1.7 million respectively. The consultant produced a recommendation with estimated cost of RM27 billion.

The second open RFP was carried out from 15 August 2014 to 16 December 2014, and was then extended to February 2015, looking for the Project Delivery Partner (PDP) to implement PTMP. 

Fifty-five local and overseas companies expressed interest, with six submitted proposal through the open RFP. Among them were Gamuda, IJM Corp, MMC Corp Bhd, Scomi Group Bhd, and WCT. The consultancy and audit firm KPMG was appointed to provide independent evaluation of the six proposals for their technical expertise and funding model. 

Based on KPMG's evaluation, on 14 August 2015, SRS Consortium (formed by Gamuda, Loh Phoy Yen Holdings, and Ideal Property Development) was appointed as the PDP.

SRS Consortium was selected after it went through the competitive open RFP.

Open RFP is internationally recognised as open tender

Despite the open and transparent nature of the RFP used in PTMP, there are deliberate allegations stating that the RFP is not open tender.

For example, Lim Mah Hui and Ahmad Hilmy wrote that, “In RFP, bidders are not placed on a level playing field. The criteria for bidding under the RFP are not transparent or necessarily consistent. Clearly, RFPs are not open tenders...”

They also argued that “the best way to evaluate open tenders is for a government to follow the guidelines established by the World Bank,” implying that the World Bank does not practice RFP.

They are mistaken. As mentioned above, the RFP used in PTMP is open tender. Moreover, World Bank itself uses RFP and even has its own standard guidelines for RFP. This method is used by World Bank for its global meetings management programs, data center, digital entrepreneurship, and many others.

Open RFP is sometimes used interchangeably with open tender by other international institutions such as the United Nations. In the United Nations Development Programme's procurement notice, “open tender” is bracketed as “RFP.” (See the photo below.)

"Open request for proposal tender" is similarly employed by a Queensland government's project and the National University of Singapore Society.
 

Whether it is Penang's PTMP, World Bank's guidelines, United Nations' procurement notices, Australia's project, or Singapore's institution, open RFP is internationally recognised as open tender.

Lim and Ahmad have therefore misinformed the public. Their misinformation has been taken up and disseminated by others such as the Consumers Association of Penang.

Both Lim and Ahmad may have preferred the regular open tender over against open RFP because of their concern for the cost. They want the cheapest transport infrastructure. But given our local road condition, geography, socioeconomic outlook, and other considerations, the cheapest is not necessarily the best for Penang.

Neither is the most expensive proposal the best. Therefore, the open RFP was necessary to enable the state government to evaluate different proposals with different estimated cost and suggestion, based on independent review, to decide the best for Penang.

As a competitive and transparent tendering process, open RFP allows for innovative solution at a reasonable cost. This sets apart PTMP from other mega projects.