ETP: Part 3 (iii) — Two dud projects

(Also published on The Malaysian Insider)

Doubtful EPPs; doubtful achievements and due diligence

Some PEMANDU “achievements” are doubtful. The Karambunai Integrated Resort and Tanjong Agas Oil and Gas Park do not appear viable and their private sector developers are financially weak. These two EPPs alone account for 7 per cent of the total investments trumpeted by PEMANDU during the first year of the ETP. Their inclusion weakens the credibility of the headline investments, national income and job accretion that PEMANDU claims to have achieved.

Karambunai IR — expensive and crowded? The investment cost for this project in rural Sabah soared from RM3 billion to nearly RM10 billion in the six short months from its first mention before the ETP was launched to its final incarnation as an EPP. At this price, we estimate it needs 2.8 million visitors per year to break even — more than all the passengers arriving at Kota Kinabalu airport!

Aghast at Tanjong Agas. The massive investment and construction work in this fishing village will result in infrastructure that duplicates the thriving towns of Kertih and Gebeng, which are the stated focus areas for oil and gas activities in the Eastern Corridor Economic Region. PEMANDU will no doubt deny that the infrastructure is redundant, and maintain that the transformation of this village is unrelated to its location in Pekan, the parliamentary constituency of Prime Minister Datuk Seri Najib Razak.

“D’ for execution — where is the due diligence? Karambunai in its current form is clearly unviable. Tanjong Agas is contrary to the government’s own Eastern Corridor master plan. Taxpayer funding for Karambunai soared six-fold in six months, from RM100 million to RM600 million. The single largest investor in Tanjong Agas is reportedly contributing barely any equity funding. Straight answers from PEMANDU would be appreciated.

Some very large EPPs are potential “duds”. The projects do not appear viable and their shareholders are financially weak.

● Karambunai IR needs more visitors than all the arrivals at Kota Kinabalu airport to break even; Tanjong Agas goes against the government’s own Eastern Corridor master plan.

● Stripping these out would dent the massive investments, income and job creation that PEMANDU trumpets.

● PEMANDU gets a “D” for Execution. The whole process from the labs that selected the EPPs to the actual implementation is riddled with defects.

The execution process at PEMANDU troubles REFSA

Success of the ETP (Economic Transformation Programme) boils down to execution of the individual EPPs (Entry-Point Projects). All the EPPs collectively add investments, national income and jobs to the ultimate goal of taking Malaysia to high-income status by 2020.

PEMANDU, based on its updates, is showing a crisp pace of execution. But below the surface gloss, REFSA sees deeper issues surrounding the execution of the ETP — the “E” in the DEEDs framework with which we are evaluating PEMANDU and the ETP.

● Part 3 (i) PEMANDU strengthens the know-who cancer:

a) Suggested that some of the quick pace of implementation was due to PEMANDU taking credit for projects already under way which were subsequently named as EPPs; and

b) Pointed out that PEMANDU is institutionalising the role of middleman if it cuts red tape on a case-by-case basis for EPPs. This reinforces the “know-who” culture that is killing Malaysian innovation, creativity and productivity. It does not matter how good your product or idea is, or how efficiently you can make it, it depends on who you know to get it through the system.

● Part 3 (ii) The hothouse labs probably killed innovation examined the NKEA lab process. We highlighted:

a) The high-pressure NKEA lab process was more conducive to incumbent companies with pre-existing business plans rather than start-ups with genuinely transformative ideas; and

b) The private sector participants would be championing their own interests first and national transformation second. A glaring example is the missing automotive sector. It is not one of the NKEAs, despite the huge sums of taxpayer and Petronas money that have gone into supporting our national cars.

In this third and final part of our evaluation we use the examples of two massive but economically tenuous EPPs to illustrate potential shortcomings in the due diligence process while selecting EPPs.

Some EPPs are questionable

We see possible “dud” projects — projects with very little hope of success — among the EPPs announced. We shall illustrate by spotlighting the Karambunai Integrated Resort City EPP under the Tourism NKEA and the Tanjong Agas Oil and Gas Logistics and Industrial Park EPP under the Oil, Gas and Energy NKEA.

Our concerns:

● Start with the financial feasibility of these EPPs;

● Extend to the qualifications, experience and track record or lack thereof of the private sector partners; and

● Widen to the reliability of the investment, GNI and job creation figures associated with these EPPs

Karambunai — how to triple your investment in six months!

Perhaps the most serious example of a possible dud EPP is the RM9.6 billion Karambunai Integrated Resort City (Karambunai IR) announced in the 5th ETP update on April 19,  2011.

Karambunai IR is actually an example of a pre-ETP project that was subsumed as an EPP. It received its first major mention in early October 2010 by no less than the prime minister himself:

● At that time, during the Budget speech, it was presented as a RM3 billion project to develop an integrated eco-nature resort in Karambunai;

● A few weeks later, in mid-October, Karambunai IR was presented as an EPP in the ETP Roadmap Report with a projected RM6.7 billion investment value;

● Six months later, when announced as an EPP in the 5th ETP update in April 2011, the investment cost had jumped to RM9.6 billion!

All in, the project investment cost had more than tripled in the span of just half a year from RM3 billion in October 2010 to nearly RM10 billion by April 2011. This massive escalation in the project cost has never been explained, which is particularly astonishing given the huge sum involved.

It may be asserted that the inflated investment between the time of the prime minister’s budget speech and its inclusion in the ETP Roadmap Report a fortnight later was due to value-enhancing activities by PEMANDU.

That might indeed be the case. But under PEMANDU’s watch, in the short six-month period from October 2010 when the ETP Roadmap was launched to April 2011 when Karambunai IR was highlighted in the 5th ETP update:

● The investment numbers ballooned from RM6.7 billion to RM9.6 billion;

● The expected GNI (gross national income) contribution soared 13-fold from RM707 million to RM9.3 billion;

● The jobs created were inflated from 7,700 to 11,000.

It beggars belief how the Karambunai IR’s business model could have been restructured to add so much more value, income and jobs in such a short span of time:

● Either the initial model was deeply flawed and left too much low-hanging fruit to reap, or the new plans are way too optimistic.

● Neither explanation reflects well on PEMANDU’s due diligence process for selecting EPPs and verifying the expected contributions to GNI and job creation.

In fact, investment analysts and market observers were already querying the viability of the initial RM3 billion project, particularly doubting the ability of project developer Karambunai Corp Berhad. The Star reported the following in October 2010:

Still, scepticism abounds on Karambunai’s ability to execute this grand plan, not least because of its weak financial status. The company has been in the red for the past three financial years…. In addition, it has piled on huge debts with short-term borrowings of RM192.07 million and long-term borrowings of RM283.77 million.

It was widely perceived that such a massive investment in rural Sabah would be financially viable only if the project included a licence to operate a casino. In Karambunai IR’s case, such conjectures gained further credence from:

● The “integrated resort” terminology used to describe this project. “Integrated resort” was the less-emotive term used by the Singapore government to help persuade its citizens that tourism resorts incorporating casinos were in the best long-term interests of the country;

● Three of the four integrated resorts named as examples in the ETP Roadmap Report have significant casino operations — Marina Bay Sands and Resorts World Sentosa in Singapore and the Atlantis in the Bahamas. The third — Palm Resort in Dubai — is backed by a government that had to be rescued by its neighbour Abu Dhabi during the 2008/09 financial crisis;

● The majority shareholder of Karambunai Corp Berhad, Tan Sri Chen Lip Keong, also controls Nagacorp, which operates a casino in Cambodia; and

● The fact that the project appears financially unviable without a casino.

Both Karambunai and PEMANDU have denied that Karambunai IR would include a casino. Malaysians may well be sceptical of such denials. The case of Ascott Sports comes to mind; the government initially denied a sports-betting licence had been issued, then admitted a “conditional” licence had been given and subsequently withdrew the licence following public opprobrium.

There is also another interesting denial. Petaling Tin, which owns some of the land involved, denied signing “any agreement with any parties pertaining to the resort project, and there are no corporate developments that warrant future disclosures to the stock exchange at this juncture”. This announcement was made on April 19, 2011, the day of the 5th ETP update in which Karambunai IR was announced.

But taking the denials at face value, it is startling that PEMANDU accepted this project as an EPP. Even a cursory examination suggests the project is unviable without the boost from a lucrative casino licence.

Our analysis shows that Karambunai IR would have to attract an exceptionally large crowd spending extraordinary amounts of money on lodging, entertainment and food and beverage to be viable.

Even after giving Karambunai IR the benefit of the doubt by assuming it manages to attract very big spenders and earns high profit margins, Karambunai IR would have to entertain over 2.8 million visitors per year just to cover its basic costs. This is more than the 2.5 million passengers arriving at Kota Kinabalu airport every year!

It is mind-boggling that PEMANDU accepted this project as an EPP given the obvious doubts about its financial viability. It is astounding that PEMANDU has committed at least RM600 million of government funds to this project. And we wonder about the veracity of the rapidly increasing investment, gross income contribution and job creation numbers.

Tanjong Agas — or Tanjong Tanpa-gas?

The issues surrounding the Tanjong Agas Oil and Gas and Logistics Industrial Park in Pahang announced in the 2nd ETP update are similar to those afflicting the Karambunai IR.

Firstly, like Karambunai IR, this is a “recycled” project. It was originally launched in February 2009, but featured in October 2010 as an EPP during the launch of the ETP Roadmap.

Secondly, like Karambunai, it is likely that this project will require taxpayers’ money from the Facilitation Fund:

● At its launch in 2009, it was said that RM8 billion would be invested to equip the park with shipyards, fabrication yards, supply-based fabrication for repairs and lay-ups, liquefied natural gas and petroleum terminals, dredger yards, liquid-bulk terminals and dockyards;

● Under the ETP update, the initial investment listed for this EPP was RM3 billion from 2011 to 2012. Of this amount, RM300 million will come from the Facilitation Fund from the 10th Malaysia Plan.

Thirdly, like Karambunai, the investment requires fund-raising which seems beyond the ability of the companies involved in the project:

● The concessionaire to develop the park, Tanjong Agas Supply Base and Marine Services Sdn Bhd (TASBMS), 30 per cent-owned by the Pahang State Development Corporation (PKNP), is to invest RM2 billion;

● The balance RM6 billion is to come from seven private companies.

TASBMS itself reportedly aims to borrow the entire RM2 billion needed from KAF Investment Bank and “hoped the federal government would financially support the state’s growth”. Is it furnishing any equity at all?

Next, one wonders how seven unknown private companies can hope to raise RM6 billion, particularly when details of the park are poorly publicised.

Taking a step back, why Tanjong Agas in the first place? Tanjong Agas does not feature in the Eastern Corridor Economic Region (ECER). Kertih and Gebeng were identified as the two focus areas for oil, gas and petrochemical clusters.

Gebeng already houses major oil and gas industry names including BP Chemicals and BASF Petronas Chemicals. It is also well connected, with direct pipelines and a railway line to Kuantan Port, a mere five kilometres away, with centralised tankage facilities and container and bulk liquid port services.

Tanjong Agas is a greenfield requiring massive investment. One cannot help but wonder who will be the beneficiaries of the contracts to conduct land reclamation, deepen the harbour, construct the port facilities and build the roads leading to this new industrial park.

Would our readers be aghast to learn that Tanjong Agas is located in Pekan, which also happens to be the parliamentary constituency of Prime Minister Najib?  Perhaps we are being too cynical. Perhaps the massive development of this particular fishing village, instead of others, is completely unrelated to its illustrious parliamentary representative.

With all these questions surrounding this Tanjong Agas project, it is not surprising that some have drawn parallels between this project and the Port Klang Free Zone fiasco. Would the taxpayer once again be left to pick up the bill if this project fails to take off?

“D” for execution — where is the due diligence?

PEMANDU rates poorly on the entire value chain from conceptualisation to execution of EPPs:

1. Firstly, the financial viability of at least some projects is dubious. This brings to mind the practice of “recycling: — the naming of existing projects as EPPs. Cynics would ask why these projects would need the shot in the arm of being declared EPPs if they were already viable in the first place. And we have pointed out that PEMANDU stepping in to give its “seal of approval” even for good projects reinforces the know-who rather than know-how culture;

2. Secondly, the qualifications, expertise and track record of some investors and project owners are weak. Besides the owners of the Karambunai IR and Tanjong Agas projects highlighted here, another example is the widely disparaged 1 Malaysia email ETP for which financially-distressed Tricubes Berhad was selected as the private sector partner;

3. Thirdly, this leads us to regard with scepticism the attainability of the vital statistics of these projects that are included in the ETP progress updates — the investment values, gross national income (GNI) contributions and jobs created;

4. Which then leads to doubts about the veracity of the astounding achievements touted at each ETP update. The two possible “dud” projects highlighted here have investments that total RM12.6 billion or 7 per cent of the projected RM177 billion of total investments committed during the first year of the ETP;

What if these are just the tip of the iceberg? How many other potential “duds” are there among the 113 EPPs announced so far?

It might be suggested that the highly-paid team at PEMANDU and its expensive consultants are not in a position to question the investment value, GNI contribution and jobs created by private stakeholders involved in any EPP. But this would be irresponsible for three reasons:

1. Some of these projects involve the spending of taxpayers’ money. For example, the government will contribute at least RM600 million to the Karambunai IR project;

2. The amount of public money involved is tied to the expected investment value of the project. This is a very important point.  There is an incentive for the private stakeholders to inflate the expected cost of their projects in order to increase the amount of Facilitation Funds which they can apply for from the Public Private Partnership Unit (UKAS);

Continuing with the Karambunai IR example, it is unclear if the public funding requirement has also increased with the subsequent ballooning of the project cost from RM6.7 billion to RM10 billion;

3. These figures contribute to the overall investment, GNI contribution and jobs created targets which are trumpeted by PEMANDU in its ETP updates and press releases. If the basis of these numbers is suspect, then the validity of PEMANDU’s claimed progress in taking us to the end goal of a high-income nation is questionable.

What should Pemandu do?

Doing the following will bolster credence of PEMANDU’s claimed progress and lead to more confidence in the economic viability as well as the numbers and figures associated with EPPs:

1. Back up the impressive headline numbers in each ETP update with a detailed progress update on each EPP including the amount of public and private investment already spent;

2. Work with the potential EPP owners to make sure that the figures of interest are economically and financially sound;

3. Be willing to oust EPPs from the ETP if subsequent analysis or events render them economically unsound. On this matter, PEMANDU should:

a) Avoid projects such as 1 Malaysia Email which explicitly seek the government or government agencies as a core customer;

b) Be especially careful with projects backed by the politically influential. These projects must be able to pass exceptional scrutiny; and

c) Avoid “recap” projects, especially those which have been in existence before the ETP such as Karambunai IR; and

4. Be ready to exclude investment, incremental GNI and job figures from individual EPPs which have been announced but cannot be executed.

About this series

Critics of PEMANDU and the ETP thus far have tended to focus on the expensive costs incurred by PEMANDU and its consultants, accusations of style prevailing over substance, the execution of specific projects and its apparently lofty, unrealistic targets.

We think these issues can be further debated, but these questions ultimately boil down to PEMANDU’s raison d’être. PEMANDU is already a fait accompli. Debating its existence serves no useful purpose at this point. Instead, we evaluate PEMANDU and the ETP on its own terms by looking at the goals, plans and targets outlined in the ETP Roadmap document. Doing so facilitates constructive debate as it uses the same framework which PEMANDU has chosen to work within.

In that vein, and in keeping with the spirit of the alphabet soup of NKEAs, NKRAs, SRIs, EPPs, GNI surrounding the entire GTP, we evaluate PEMANDU and the ETP on its DEEDS:

1. Data transparency — the ease with which an independent analyst can evaluate the figures relevant to the ETP and its targets;

2. Execution — the progress, or lack thereof, of announced EPPs (Entry Point Projects);

3. Enterprise — whether the target of stimulating private investment is being achieved. The ETP aims for a 92:8 split between private and public investments;

4. Distribution — the distribution of EPPs across the NKEAs (National Key Economic Areas), which shows whether a healthy balance of projects is being maintained; and

5. Socio-economic impact — an evaluation of the main beneficiaries of the economic activities generated by the EPPs. — REFSA (Research for Social Advancement)

* Dr Ong Kian Ming and Teh Chi-Chang wrote this analysis for REFSA.

Read Dr. Ong’s critiques of the ETP in full here