Taking care with mega projects

A QUESTION OF BUSINESS
By P. GUNASEGARAM
Saturday October 23, 2010 - The Star Online

IT’S common during times of economic slack for the Government to push for projects to get activity up to provide jobs and incomes for people.

It was economist John Maynard Keynes, who is now fashionable again, who famously said that the economy would be better off during a depression if all workers did was to dig up ditches and fill them up again.

Sometimes, governments tend to take that statement too literally forgetting that for small open economies it is not possible to print money without disastrous consequences on the currency rate, inflation and investment.

Keynes’ statement must be taken with a pinch of salt given that there is a limited amount of government resources that can be put into stimulus packages. The most has to be obtained from the limited amount the Government ploughs into these projects.

Each ringgit must count and the leakage in terms of both over-pricing as well as foreign sourcing of goods and services must be limited as much as possible so that maximum benefits accrue to local industry and enterprise and creates jobs for Malaysians.

It is not always easy to do that. Take the mass rapid transit system (MRT) for instance. At an estimated cost of RM40bil, it’s a very massive project, even if it is undertaken over 10 years with all the potential for costs to increase the further out into the future it goes.

That it will have major benefits in terms of moving people around and in Kuala Lumpur and the vicinity, reducing traffic congestion, enhancing the quality of life, etc, cannot be denied. But if it is not properly planned, designed and executed it could become a major disaster and fall far short of the expectations.

Economically, there will be plenty of leakage from this project. Trains and tracks will be ordered from overseas and could account for 30% or more of the cost. Tunnelling will be highly automated and use a lot of expensive equipment sourced from outside the country.

Labour is likely to be largely foreign as well as expertise. The rest of the remaining costs are likely to be for acquisition of land and other civil works. The latter has little impact on economic growth.

Thus, while the RM40bil figure is huge, the final contribution to the economy in terms of production of goods and services will be smaller than expected even if we take into account the multiplier effect.

This theorises that spending of a sum in the economy enlarges the economy by more than the amount spent. But if there is high leakage of project costs to outside the country, that’s not going to happen.

It is imperative that much more thought is given to the project. There is no hurry to get it off the ground – or under the ground in this case! – given the huge capital expenditure involved. Considering that nowhere in the world is an MRT profitable, we must expect that the Government will in one way or another bear this burden.

Meantime, authorities should focus on other ways to get traffic down during rush hour. Car-pooling will work if there is incentive and punishment to get it going. You need to have a surcharge on cars going into congested areas for instance and for existing public transport to improve.

Ditto for the rapid train to Singapore. If you can open Subang airport to flights to Singapore in a big way and allow boarding 15 minutes before departure for passengers without check-in baggage, you can get people to Singapore in an hour or so. That will be quite comparable with a rapid train – without all that expense, last estimated at a whopping RM8bil.

Finally, all that hooha over Permodalan Nasional Bhd’s (PNB) RM5 billion plan to put up a 100-story tower between Merdeka Stadium and Stadium Negara seems a bit overplayed considering the project will span 10 years.

But what is worrisome is the question of why the tower needs 100 storeys, to be built at much greater expense per square foot. Is it really true that you need such height to attract interest? There are examples of many projects around the world much shorter than that but which are considered to be of high quality and which attract plenty of interest.

PNB should be more forthcoming with what it plans to do and how it will make it something the nation can be proud of with – and this is important – minimal cost.

● Managing editor P Gunasegaram does not like the word “iconic”. It does not say much but conveys unambiguously one important message – expensive.