The federal government will be retendering all the unfinished underground work of the Mass Rapid Transit Line 2 (MRT2) project through an international open tender process.
This follows the Cabinet’s decision to terminate the underground work contract with project delivery partner (PDP) MMC–Gamuda KVMRT Sdn Bhd, after failure to reach an agreement on cost reduction after two months of discussion.
“All unfinished underground work will be retendered out through an international open tender process,” said Finance Minister Lim Guan Eng in a statement.
“This decision was made after considering that the federal government can achieve further significant savings by retendering the underground work package compared with the offer made by the existing contractor.”
Under the original contract awarded in February 2014, the joint venture between MMC Corp Bhd and Gamuda Bhd (MMC–Gamuda) was to complete the entire project at an initial cost of RM28 billion.
Under the new terms, MMC–Gamuda would complete the above-ground works as a turnkey contractor at a cost of RM17.42 billion—down RM5.22 billion (or 23 per cent) from the original RM22.64 billion. The savings will come from cost reduction and work-scope rationalisation while retaining all the above-ground stations.
The government expects further savings with the retendered underground portion.
Generally, the underground works are the most expensive component of such construction projects. In the first phase of the Kajang–Sungai Buloh line, the underground works made up almost half of the total construction cost of the project, at an estimated RM30 billion.
PDP vs Turnkey
The PDP model would see the partner ensuring the completion of the project within a pre-determined target cost and date. The role includes overseeing the overall performance of design consultants and work package contractors; manage the procurement process for all construction work packages with the government; intervene if a contractor or sub-contractor does not meet pre-determined work package requirements; and undertake all preparations, submissions and obtaining all approvals for the execution of the project.
In return, the PDP earns a fee of about 6 per cent of the total project’s cost and is reimbursed for some expenses incurred. Payment comes directly from the project owner. In the case of MRT 1 and 2, funding was obtained through the issuance of government-guaranteed sukuk issued by DanaInfra Nasional Bhd.
Under the turnkey model, the turnkey contractor requires strong financial muscle as it will assume the construction and financing risks. The returns are based on how well the project cost is managed, while the government will save on the PDP fee, according to The Star.
PDP companies are generally not allowed to participate in any construction work packages related to the project. But as a turnkey contractor, Gamuda may now be able to participate in the underground works for the MRT2 project.
The retendering of the underground package would be crucial for Gamuda as it would affect the construction company’s order book.
“In our view, despite Gamuda’s cost/logistical advantage, it remains to be seen if the company will be able to prevail in the international competitive tender rounds, which are likely to feature Chinese contractors too,” says CIMB Equities Research, which is retaining its underweight recommendation on the construction sector.
The MRT2 line runs from Sungai Buloh to Serdang and ends in Putrajaya. It is to complement the existing MRT1 line that runs from Sungai Buloh to Kajang
It had an initial estimated cost of RM28 billion, which did not include consultant and PDP fees, interest costs and overheads for project owner, MRTCo Sdn Bhd. The cost had subsequently ballooned to RM56.93 billion, due to the approval for a Railway Scheme that had a new line extended to Bandar Malaysia, a change in scope, depreciation of the ringgit and various other factors.
The Finance Ministry embarked on a cost rationalisation exercise on the project since May 2018, with the cooperation of the Attorney General’s Chamber, Transport Ministry, MRTCo and the private sector. A local engineering consultancy firm was engaged to conduct the cost rationalisation.[update 9 October 2018]
Urged to reconsider
In a statement, MMC–Gamuda asked the government to reconsider its decision citing exposure to a flood of lawsuits and the loss of jobs for more than 20,000 personnel involved in the underground works.
It also said the local engineering consulting firm’s review that the underground works could cost less does not take into account the complex technicalities involved.
According to MMC–Gamuda, the underground portion of the project, valued at RM15.47 billion, is already 40 per cent completed. The company said it had offered the government a reduction of 24 per cent, or RM2.3 billion, on the balance works, valued at RM9.6 billion, but the offer was not accepted.
The price reduction involves lowering specifications for mechanical, electrical and architectural finishes of the stations, reducing the number of entrances to stations, and reducing the number of stations constructed, from 10 to six.
MMC–Gamuda was awarded the initial contract based on technical score and price, following an international competitive tender back in 2016, where it was the only local company among the five pre-qualified contractors.
In a separate statement, MRT Corp said it accepts and welcomes the government’s decision to switch the model from PPD to turnkey contractor for the elevated portion of MRT2, while terminating the current contractor for underground works, and for it to be retendered. — Construction+ Online[updated 10 October 2018]
Following MMC–Gamuda’s response to the Ministry of Finance’s announcement, Member of Parliament Tony Pua, in his capacity as political secretary to the Minister of Finance, issued an open letter to MMC–Gamuda.