Hidden costs much higher than actual project cost
CONSIDERING the fact that the real cost of the two rail projects that are being implemented has ballooned, it should not surprise anybody if the cost of completing the prestigious high-speed rail (HSR) project running between Kuala Lumpur and Singapore is more than RM100bil.
Prime Minister Tun Dr Mahathir Mohamad has said the HSR would cost some RM110bil, something that the Economic Affairs Minister Datuk Seri Azmin Ali, echoes. Azmin has said there are “hidden costs” in implementing the HSR.
Former Prime Minister Datuk Seri Najib Tun Razak has dismissed the figure. Najib has said that the project would be open for competitive tender only in December this year and there was no way the new government would be able to estimate the cost.
However, looking at the real cost that the government would incur by carrying out the East Coast Rail Link (ECRL) and the light rail transit 3 (LRT3) projects, the indications are that Dr Mahathir is not wrong in his estimate.
The hidden cost related to both projects is huge if they were implemented in their original form.
The ECRL was estimated at RM55bil in the budget last year. Hardly 15% of the work has been done so far and the cost is estimated to be closer to RM81bil.
The RM81bil does not take into account the expenses incurred in running the operations such as purchasing new train sets to run along the railway line that would operate between Gombak in Kuala Lumpur and Wakaf Baru in Kelantan.
When it is completed and ready to roll after seven years, it should not surprise anybody if the ECRL touches RM90bil.
Similarly, when the 37km LRT project from Bandar Utama in Petaling Jaya to Johan Setia in Klang was first announced in the federal government budget in 2016, the cost was estimated at RM10bil.
In March this year after almost 40% of the work had been carried out, Prasarana Malaysia Bhd – the project owner – had estimated the cost to be RM31.6bil due to changes to upscale the design.
To complete the project, it had sought an additional RM22bil from the government before the May 9 general election.
The previous government did not approve the RM22bil, while the new government has promised to keep a tight rein on the LRT3 project, stating that the price cannot exceed RM16.63bil.
The blame on the increase in cost for the LRT3 has been put squarely on the shoulders of Prasarana that has not come out to defend itself so far.
Towards this end, the previous government cannot distance itself from Prasarana because it is an entity controlled by the government. The government, particularly the Finance Ministry, determines candidates to head Prasarana and the board of directors.
It is hard to fathom that Prasarana would dare upscale the design of the LRT3 significantly without the tacit approval of the key officials from the previous government.
The other pertinent question to ask is whether Prasarana would have received the approval for additional funds if there was no change in government on May 9? The answer is YES.
Prasarana would most likely have gotten a decent amount of the additional funds it wanted.
The same goes for the ECRL project. The stated cost is RM55bil. But Malaysia Rail Link Sdn Bhd already has approvals to up-scale the works by an additional RM10bil.
By the time the project is completed, be rest assured that the cost would be much higher, if allowed to continue without changes.
There are many hidden costs that effectively increase the total cost of the project. It is not mentioned when projects are announced. That was the practice of the previous government.
The cost does not include land acquisition, the fees for consultants, payments for the project delivery partner (PDP) if one is appointed, the reimbursement of the cost incurred by the PDP, fees for consultants and the interest cost during construction (IDC).
There is a view that the IDC should not be accounted for as cost.
That view is flawed because it is part of the cost incurred in implementing construction projects. Any project manager will attest to that.
For railway projects, there is an additional cost to acquire train sets and feeder buses, elements that are required to run operations.
On top of all these, most projects incur variation orders (VOs) that run into millions. The well-connected companies tend to get away with the VOs.
When the LRT3 started, in all probability, Najib would have been informed that it was RM10bil – the figure he had stated in Budget 2016. As the project progressed, the cost started to rise, which nobody talked about then.
Late last year, speculation was rife that the construction cost was more than RM14bil.
But when the new government disclosed the cost to be RM31.64bil, it came as a surprise.
Going by the examples of the LRT3 and the ECRL, one wonders how much previous rail projects really cost the government.
The cost of the Ampang and Kelana Jaya LRT line extensions, both completed in 2016, was stated at RM10bil.
The first phase of the mass rapid transit project, that was completed last year, was put at RM32bil.
But are these the real costs incurred? What were the hidden costs related to these projects that have not been disclosed?
What about the MRT2 project? It was stated at RM32bil in the 2016 budget. Is that really the entire cost?
Apart from the rail projects, the RM17bil Pan Borneo Highway project is another big-ticket item under the previous government.
Was there any other additional cost incurred?