A bridge to Sumatra?

  • Business
  • Saturday, 22 Aug 2009

At a cost of RM44bil, it is a massive mistake that the country simply cannot afford

MASSIVE multi-billion ringgit projects can spell catastrophe, not just in terms of costs but the lost opportunity where huge sums of money could have been better utilised.

The more massive they are, the costlier the consequence can be. We had trouble with a bridge to Singapore – a crooked one would have cost just RM600mil. For various reasons neither a crooked nor a straight bridge materialised.

Now there are plans for something far more ambitious. Before we could settle the construction of the bridge to the island republic, a stone’s throw away – a little bit more than that actually, its slightly over 1,000m – we have a proposal for the construction of one to Indonesia, across the Straits of Malacca.

Now hold your breath! This bridge is some 50 times longer, its almost 50km long and will cost – are you ready for this – some RM44bil. That’s nearly 75 times the cost of the aborted crooked bridge to Singapore!

It would without any doubt become the largest infrastructure project that Malaysia has ever taken part in or is likely to take part in for quite a while.

Earlier this week a special seminar was called to explain the bridge. A little-known company called Straits of Malacca Partners Sdn Bhd (SOMP) proposed a bridge which will be almost four times the length of the Penang Bridge.

The new bridge will cross the straits at its narrowest point between Malacca and Dumai, Sumatra, it was reported.

SOMP chairman Tan Sri Ibrahim Zain said the company had submitted the proposal to both the Malaysian and Indonesian governments for approval.

“We hope to secure the approval from the two governments by the end of this year or early 2010,” he said, adding that the company does not want to pay higher construction costs.

The key question about such a large project is how it can possibly be profitable. SOMP’s own figures, as reported in the press, don’t look encouraging. It projects traffic at 15,000 vehicles a day and toll charges of US$75-US$85 per vehicle.

Let’s assume these assumptions are reasonable, which they are not, and use a mean figure of US$80 a vehicle as toll and an exchange rate of RM3.50 per US dollar.

Total toll collection per day works out to RM4.2mil (15,000x80x3.5), or RM1.5bil a year. Is that enough revenue? Certainly not!

Recall that the project cost is RM44bil. That might require a return of say a minimum 10% a year, after taking into account risks.

That means net cash earnings of RM4.4bil a year. But revenue – not profit – is just RM1.5bil a year, or a paltry third of required cash earnings.

Even if we impute substantial growth in the company’s own numbers, the targets are extremely unlikely to be met. That alone is enough to ensure that this project is simply not viable and won’t be for a long, long time.

But there’s more. Let’s assume on average that there are three passengers in each vehicle, not unreasonable for a car but there will obviously be buses which can take the figure up much higher. Conversely, cargo vehicles such as lorries will have lesser numbers. Thus, three seems OK.

That means 45,000 people (15,000 vehicles x 3) travelling between the two countries, of whom half, or 22,500, can be assumed to be coming into Malaysia – tourist arrivals in other words. That makes it 8.2 million (22,500x365) tourist arrivals a year from Indonesia.

Last year, the number of tourist arrivals from Indonesia was a mere 2.4 million but SOMP’s figures imply that the bridge will magically increase this number by over three times.

Is that realistic considering that Sumatra is neither the most developed or populous part of Indonesia? No.

Java has some half of Indonesia’s population of around an estimated 245 million with Sumatra accounting for perhaps 50 million, according to some estimates.

Those coming from Java or other parts of Indonesia – without doubt the majority of those who come to Malaysia as tourists – will not take the land option from Sumatra because it is simply too far. Just look at the map if you doubt this!

According to Ibrahim, who with his partner Datuk Lim Sue Beng, owns the majority of SOMP, 15% of the funding for the project will come “internally” with the rest from bank borrowings.

China’s Exim Bank plans to support the project. “Under the bank’s policy, we can provide funding up to 85% for such infrastructure projects,” Exim Bank of China general manager Tang Yinlian was quoted as having said.

The question is, who will provide the guarantee for such a huge amount of funding. The answer is, the only one who can is the Malaysian Government.

And where will SOMP go for the 15% or RM6.6bil in equity capital? That will take it from zero to one of the most highly capitalised companies in Malaysia.

This project has the support of the Chief Minister of Malacca Datuk Seri Mohd Ali Rustam, who was also present at the seminar, but one wonders if Malacca has done proper numbers for the viability of the project. To quote him: “The bridge is a viable and profitable project and expected to boost the economies of both countries.” Really?

He added that the Prime Minister is supportive of the project, which was first mooted by former Prime Minister Tun Dr Mahathir Mohamad in 1995 but shelved because of the 1997 crisis, and brought up again during the Ninth Malay World Islamic Convention in Malacca in January this year, a newspaper report said.

Be that as it may, let’s lay down some ground rules for this as well as any other major project. Let it be totally private sector driven and devoid of any help, subsidy, grant, financial assistance or guarantee from the Government. If it can survive on that basis, so be it.

Managing editor P. Gunasegaram is reminded of the old saying that the proof of the pudding is in the eating. He would like to see if anyone would eat this without having his arms twisted or getting indigestion.

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