Tread carefully with MMC-Gamuda contract issue

QUESTION TIME | Until Tony Pua threw in his 10 sen worth in an open letter in the war of words between MMC-Gamuda and Finance Minister Lim Guan Eng over the MRT2 project, it seemed that the former was beginning to get the edge over the latter. Pua is Lim’s political secretary.

It is a complicated issue and one needs to read closely the carefully hedged statement by MMC-Gamuda as well to understand the nuances behind the two arguments to be able to have an informed opinion as to who is right and who is wrong.

But looking through both statements, one cannot help but wonder if there is a game of brinkmanship involved in the cancellation of part of the contract and whether there will be further costs incurred from any compensation to be paid to MMC-Gamuda.

The dispute between the two relates to the MRT2 project in Kuala Lumpur approved by the previous government in February 2014. The construction costs were RM22.64 billion for the above ground portion and RM16.71 million for the underground portion, a total of RM39.35 billion.

With all the talk about overpriced contracts, one of the goals of the new Harapan government, and in particular Lim, was to cut down on contract prices. This they did with a creditable RM5.22 billion savings or some 23% of the original above ground contract cost of RM22.64 billion even though some of the savings may have been as a result of specification and down-sizing changes. The number of stations were maintained though.

But Lim simultaneously announced that the remaining 60% of the underground portion was cancelled because no agreement could be reached with MMC-Gamuda on the new contract price and that a new international tender for this will soon be called, the tender for which the company could participate in.

Following this, MMC-Gamuda issued a statement stating it offered a reduction of RM2.3 billion or 24% of the RM9.6 billion outstanding works for the remaining tunneling work. But the reduction was achieved by cutting stations and specifications.

It also complained bitterly that some 20,000 workers will have to be laid off as a result of the cancellation and appeared to orchestrate some worker unhappiness over this. It added that it will face lawsuits from the workers and suppliers. However, these are temporary employees and in any case can be re-employed once the tunnelling resumes.

MMC-Gamuda stopped short of saying that it will sue the government although that option is probably available to it.

Pua’s reply was significant in that he said that the costs were evaluated by an independent engineering consultant, unnamed, who said that total savings on the 60% remaining portion of the works should be between RM4.19 billion and RM5.79 billion.

“Yes, this potential savings is just for the balance of works to be completed. Imagine if it was for the entire contract,” he added for good measure.

That puts things in a totally different context and it is right, if the expert help is to be relied upon, to angle for more reduction from MMC-Gamuda over the project. But clearly the government is not yet closing the door on MMC-Gamuda.

As Pua said, “To the purported 20,000 workers who, according to MMC Gamuda, would lose their jobs as a result of the underground contract termination, let me emphasise that the Malaysian government is not terminating the project. You will find plenty of opportunities when the new project is awarded at a lower cost, while the savings generated would mean even more projects for the future.

“But perhaps, instead of starting a petition on change.org to seek the government to reverse its decision on the termination, it might be more productive to start a petition to ask your bosses at MMC Gamuda to make the government an offer it cannot refuse.”

Hint to cut price

That has to be seen as a clear indication to MMC-Gamuda to negotiate down the price of the contract to an acceptable level so that the project can go forward without any hitch or delay. And going by the consultant’s figures, it looks like the project may have been considerably overpriced, by over 50%!

An agreement over the price would negate any need for lawsuits against MMC-Gamuda by its employees, suppliers etc, by MMC-Gamuda against the government for contract transgressions etc, and by the government against MMC for overpricing etc, and result in some form of a reconciliation which benefits everyone, not least the long-suffering public which is hoping for a better transport system.

Also, that could also mean some recovery of the share price of MMC and Gamuda, the two listed companies in the joint venture, whose prices have been battered down on the back of news of the cancellation.

And hopefully it would provide some kind of template for negotiations when it comes to other overpriced contracts with none of the angst associated with this and without the issue of sanctity of contracts being raised which could affect future investor confidence and raise risk premiums.

That is actually quite a balancing act. The government and those who are involved in the contracts should proceed cautiously, very cautiously.

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P GUNASEGARAM believes sometimes in the old adage that haste causes waste but is often guilty of that same mistake. He hopes the contract parties are more patient than him. Email: t.p.guna@gmail.com.) - Mkini

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