The cost of constructing the Light Rail Transit 3 (LRT3) is expected to escalate to RM15 bil from the initial estimate of RM9 bil due to the higher cost of raw materials and labour.
The increased cost may not augur well for the contractors, which are likely to see a dent in their margins, as steel and labour form the bulk of the project cost.
However, MRCB George Kent Sdn Bhd, which is the project delivery partner (PDP) for the project, stands to benefit as the higher construction cost will translate into higher fee payable for the 37km project.
This is in contrast to Prasarana Malaysia Negara Bhd’s statement in 2015 that in the event the project costs more than the initial estimate, the PDP fee will be reduced in accordance with an agreed formula.
As the PDP, MRCB George Kent will be paid 6% of the total construction cost. At RM15 bil, this works out to RM900 mil against RM540 mil if based on RM9 bil total cost.
“Substantiation of costs must be adhered to by all WPCs (work package contractors). The tender process is on-going. It is not appropriate to speculate on the project cost at the moment,” says a MRCB George Kent spokesperson when asked to comment.
As of Nov 20, only 21 out of 59 LRT3 work packages have been awarded. The spokesperson says the LRT3 tender award process is expected to be completed in the first quarter of next year.
In 2015, Prasarana president and CEO Datuk Azmi Abdul Aziz gave an assurance that the construction cost for the LRT3 will be contained at RM9 bil
Kenanga Investment Bank, in a recent research report on George Kent, says it foresees a higher revision in construction cost of the LRT3 due to higher building material and labour costs.
“We do not rule out the potential escalation in construction cost for the entire project given that the cost of RM9 bil was quoted several years ago,” it adds.
Using steel prices as a basis, which has seen its prices increased about 60% from a year earlier, the research house reckons the LRT3 cost could potentially go up to the range of between RM14 bil and RM15 bil.
“Every RM1 bil increase in the LRT3 project cost would represent RM30 mil in additional pre-tax profit to its existing locked-in PDP fee pre-tax profits of RM270 mil (based on RM9 bil contract size).
“Based on the recent LRT3 contract awards amounting to RM8.7 bil, we believe there is further upside to the initial budgeted cost of RM9 bil as several work packages are still not awarded,” Kenanga adds.
Based on announcements, a total of RM7.15 bil worth of contracts have been dished out to Gabungan AQRS Bhd (RM1.2 bil), Mudajaya Group Bhd (RM1.21 bil), Sunway Construction Group Bhd (RM2.3 bil), TRC Synergy Bhd (RM760.55 mil) and WCT Holdings Bhd (RM1.66 bil).
According to reports, the RM7.15 bil worth of contracts awarded to date make up 70% of the total work packages. Prasarana has reportedly said another RM2 bil worth of contracts will be dished out by the end of this year and early next year.
On Aug 2, Prasarana awarded the RM1.56 bil Light Rail Vehicle work package to a consortium made up of China-based CRRC Zhuzhou Locomotive Co Ltd, Siemens Limited China and Tegap Dinamik Sdn Bhd.
PDP’s job scope
In September 2015, George Kent (Malaysia) Bhd and Malaysian Resources Corporation Bhd were appointed by government-owned public transportation systems manager Prasarana as the PDP for the construction of the RM9 bil Bandar Utama-Klang LRT extension.
In an earlier response to a FocusM article, George Kent said its role as the PDP is to manage the LRT3 project and the contractors involved.
“The selection of contractors largely depends on their track record and costs submitted in the tenders for the respective works,” it explained.
The company added that such selection translates into a natural cost management mechanism, as costs are pre-agreed and contractors will have to manage within their costs as pre-stipulated in the contracts.
“The fee payable to the PDP will not be impacted and in turn will not directly affect George Kent’s earnings over the course of the project,” George Kent had said.
For the third quarter ended Oct 31, George Kent’s net profit rose to RM28.68 mil from RM23.74 mil a year earlier, on the back of higher revenue of RM127.09 mil from RM122.09 mil.
Moving forward, George Kent says it will continue to work on sustaining its profitability for the next few years, by delivering works from its RM5.9 bil outstanding order book.
Challenging to maintain project cost
In 2015, Prasarana had given an assurance that the construction cost for the LRT3 will be contained at RM9 bil, amid the weakening ringgit then. It added that if the project costs more than the initial estimate, the PDP fee will be reduced in accordance with the agreed formula.
Based on the current scenario, it may be challenging to keep the lid on the cost of LRT3 construction.
A construction analyst foresees the construction cost for LRT3 to escalate, as raw materials such as steel are on an upward trend. Contractors are also expected to incur higher labour cost due to the labour shortage following the freeze on recruiting foreign labour implemented from last year.
In the next six months, the analyst expects steel prices to rally following China’s pollution restriction. “Beginning September, steelmakers in Hebei will be forced to halt production if they fail to meet the tougher new pollution restriction,” he adds.
The analyst explains that the regulation imposed in China will impact the global price of steel, as with more steelmakers closing down, demand for the commodity is expected to outweigh supply in the short term. “The overhang could continue to March next year,” he adds.
China rebar prices rallied to a three-year high of RMB4,559.21 (RM2,833.97) per tonne on Nov 29, from a three-year low of RMB2,007.93 on Dec 14, 2015.
Earlier this year, China introduced a tougher environmental policy which is expected to result in steelmakers incurring a higher environmental cost. Hebei produces a quarter of China’s steel demand, and the province has promised to shut facilities producing at least 60 million tonnes out of the 286 million tonnes in annual output.