Chinese Presence Grows With Penang Tunnel Concession

A consortium led by Chinese state-owned construction companies has signed the preliminary agreement with the state government of Penang to develop the state's MYR6.3bn (US$1.97bn) integrated road project, which includes Malaysia's first undersea tunnel. We believe the signing of the concession agreement not only highlights the opportunities for public-private partnership (PPP) expressway projects in Malaysia, but also the growing presence of China-based companies in Malaysia's transport infrastructure sector.

The consortium, known as Consortium Zenith BUCG , consists of Malaysia companies Zenith Construction , Sri Tinggi , and Juteras as well as Chinese state-owned construction companies Beijing Urban Construction Group (BUCG) and China Railway Construction (CRCC). The project will be carried out over four phases under a 30-year concession ( see table ), with the consortium in charge of conducting the feasibility and environmental studies as well as designing, building and operating the different roads. The project is scheduled to start construction works in 2015 and be completed by 2025.

Factbox - Penang Integrated Road Project
Phases Project Description Timeline
Source: BMI, Consortium Zenith BUCG
Initial Feasibilities Studies, Detailed Design And Environmental Impact Assessment 2013-2015
1a 11.5km 4 lane road from Tanjung Bungah to Teluk Bahang 2015-2018
1b 2.0km elevated 4 lane expressway and 2.2km tunnel from Tun Dr Lim Chong Ew Expressway to Ayer Itam Bypass 2015-2018
2 4.0km 2 double-lane underground tunnel from Tun Dr Lim Chong Ew Expressway to Gurney Drive 2017-2020
3 6.5km 4 lane undersea tunnel from Penang to Butterworth 2019-2023

We believe the signing of the concession agreement highlights the opportunities for PPP expressway projects in Malaysia. In mid-2010, Ali Hamsa, former director general of Malaysia's Public-Private Partnership Unit (3PU), said that seven new highways, worth a total of MYR20bn, will be constructed and operated by the private sector, though no timeframe was specified ( see 'Highway Projects Create Opportunities In Sluggish Infrastructure Industry', July 29 2010 ). Since that announcement, we believe that only three large-scale PPP expressways projects have been awarded - the Penang integrated road project, the US$500mn East Klang Valley Expressway and the US $1.96bn West Coast Expressway.

As such, we believe there are still opportunities for large-scale road projects in Malaysia, and this view is reflected in our forecasts. We are forecasting real growth for Malaysia's road infrastructure industry to average 6.1% per annum between 2013 and 2022. One of these projects could be the Kota Bahru-Pengerang costal highway project. In July 2013, the Malaysian Highway Authority stated that the government was considering plans to construct the highway. The project is located along the eastern coast of Peninsular Malaysia and is expected to create new economic growth centres in the east-coast areas

Laden With Political Risks
Malaysia Roads and Bridges Infrastructure Industry Forecasts

However, we highlight that there is significant political risk associated with these PPP expressway projects. Policies on Malaysia's toll road sector are often changed by the government as toll prices are a major political issue within the country. Approximately one in three citizens owns a car in Malaysia and the current incumbent, the Barisan Nasional (BN), has often made changes in toll regulations to maintain political support ( see 'Politically Motivated Toll Cuts A Potential Threat To Toll Companies', January 31 2011 ). For example, during the global recession in 2009, the BN government revoked a ruling on an increase in toll rates for five expressways in March 2009 so as to forestall a public outcry. This downside risk could affect the viability of the Penang-Butterworth undersea tunnel, the only toll-based road under the Penang int egrated road transport project.

The project could also be delayed by environmental concerns. According to the Penang state government, the integrated road project will only proceed to the construction phase if it complies with the recommendations set for construction impact mitigation. An environmental impact assessment for the project will be conducted while feasibilities studies and detailed design work are being done on the project. This phase is expected to last till the first half of 2015.

Growing Chinese Presence

The signing of the concession agreement also highlights the growing presence of China-based companies in Malaysia's transport infrastructure sector. Earlier this year, Road Builder Holdings , the wholly-owned subsidiary of IJM , signed a memorandum of understanding to divest 40% of its 100% stake in Kuantan Port Consortium to China's Guangxi Beibu Gulf International Port Group . The MYR334mn sale was finalised in September 2013 and the proceeds from the sale will be used to finance the expansion of the Kuantan Port. The expansion project is expected to be carried out over two phases, with the first phase costing MYR2bn and to be completed in 2015 or 2016.

While IJM is likely to take a major role in the expansion of the project, Chinese construction companies could be awarded the contracts to expand the port given their significant technical expertise. This was the case for the Penang integrated road project. Under the terms of the concession, CRCC will be responsible for 70% of the construction work, while BUCG will carry out the remaining 30%. CRR will work on detailed project design and engineering, materials procurement, and construction of the tunnel and expressways.

This article is tagged to:
Sector: Infrastructure
Geography: Malaysia

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