The risks of easy financing for MRT3

A QUESTION OF BUSINESS | While Mass Rapid Transit Corporation (MRT Corp) CEO Shahril Mokhtar’s attempts to get the lowest possible price for MRT3, estimated to cost RM40 to RM50 billion, is laudable, some key questions involved go beyond his brief and need answers from his boss Prime Minister Najib Abdul Razak, who is also the finance minister. MRT Corp is wholly-owned by the Minister of Finance Incorporated.

This is a terribly convoluted project - it most likely involves massive amounts of foreign financing, interest rates to be set and whether they are floating or not, a minimum moratorium of eight years and a minimum repayment period of 30 years.

Last week, we explained why the tender terms favour China contractors. The focus here will be on the risks that MRT3, as tendered, poses to the country in general.

First, there are few bona fide organisations which are able to provide a 90 percent loan for a minimum period of 30 years. Even if they could, the nation faces horrendous risks in terms of movement of exchange rates and interest rates.

As an example, in 1980, one US dollar was worth 2.4 ringgit - now it’s about 4.2. That’s a depreciation of some 40 percent! If the ringgit depreciates against the currency in which the loan is taken, then the repercussions can be serious.

Former prime minister Dr Mahathir Mohamad lamented endlessly in the 80s about the fall of the ringgit against the yen when he took billions of ringgit equivalent in cheap (low-interest rate) yen loans to finance his heavy industrialisation programme. When the yen appreciated, there were huge foreign exchange losses which more than mitigated the low-interest costs.

And then there is the interest rate - one cannot assume that the interest rate will continue to be low. Few, if anyone, can hedge interest rates to provide a fixed rate for a period of at least 38 years - which is the minimum period for the moratorium and the repayment combined.

Also, low-interest financing is usually provided by governments or their agencies in return for sourcing products and other services from the host country. In the 80s, in return for easy financing, Japan required that products and services be sourced from the country.

Financial prudence out the window

The other danger of easy financing is that financial prudence gets thrown out of the window. Since one worries about repayment only much later, when one is no longer in power and accountable, the leadership more or less throws money away, especially if there are kickbacks and other corrupt practices involved.

It is a sad fact of life that powerful, developed and developing countries have often thrown whatever moral leanings they have aboard into some deep ocean so long as their self-interest and their hegemonic intentions are served by getting nations overly into debt to them.

On top of that, like moneylenders since time immemorial, they then swoop down on the poor borrower, in this case Malaysia, if they can’t repay and demand land and other assets far in excess of what is owed to them, extracting their pound of flesh in the end.

It is no exaggeration to say that we could pawn our country and jeopardise our future for many generations to come if we are not prudent about borrowing. There is also the considerable opportunity for corruption and pilferage of the country’s precious resources, which can impair good judgment.

Many companies cannot provide both a great financing package and a low, non-binding project cost which allows the cheapest possible and the most beneficial sourcing. As such, those that can provide the financing already have an advantage and are bound to inflate costs and other arrangements in their favour to compensate for favourable financing arrangements.

The financing may be in the name of MRT Corp, but without government guarantees - as in the loans for 1MDB - the financing cannot be arranged. And this loan, although effectively the government’s, does not get counted as government borrowing, again leading to rather loose financial controls. This is what we saw in 1MDB.

Extracting pound of flesh

Let’s go hypothetical now. A foreign state-owned company, “X” (let’s not mention which country because it needlessly biases a lot of people), gets the project. The interest is 3.25 percent (but there is no mention of currency), the moratorium is eight years and the repayment is 30 years.

Company X brings in its own workers, houses them separately, works them for 16 hours a day. It brings in its own equipment and supplies. And it over-prices to compensate for all this.

And then X waits. Eight years later, payment becomes due. The project may have cost X perhaps half of that RM50 billion: RM25 billion. It sits back and collects the dues on the projected cost of RM50 billion. It takes a very long-term view. Its country is interested in control.

If the debt gets repaid, it’s a good deal for it. Because its own construction company got the project and its own workers were involved in the building. Eventually Malaysia may pay well over four times the cost of the project.

If Malaysia does not pay, well it’s time to extract the pound of flesh - and this country has the might and the muscle to ensure Malaysia does.

The simplest way for Malaysia to check abuse is to keep financing and project tenders separate. Have open tenders for the project - no specification such as turnkey. Allow everyone to come up with their own innovative packages. And specify that a minimum 51 percent of the total project cost must be locally sourced, and preference will be given to those who can promise higher.

If project delivery partners can’t deliver lower costs, out they go. Reduce conditions to allow more companies to participate. If I have done one tunnel successfully, I can do others as well.

And then once the project has been finalised, call for tenders for the financing of the project and pick the best one. To reduce foreign exchange and differential interest rate risks, specify that financing must be in ringgit.

That will totally eliminate conflicts between construction and finance, which is a very good thing and which is something that can be done easily.

What do you say Shahril? Can you take that back to your boss? And if somehow the government and MRT Corp don’t agree to this proposal, can we infer that things are not above board?

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P GUNASEGARAM says that complex things can be simplified by breaking them down into parts. E-mail: t.p.guna@gmail.com.- Mkini

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