Nobody can put a finger on what the leakage in government spending actually is. In this context, the term “leakage” has no precise meaning. But by and large, it refers to the amount that goes towards corruption, payments to rent-seekers and inflated pricing of government contracts and procurements.

An economist with Morgan Stanley had, in 2004, estimated that over the past two decades, Malaysia had lost some US$100 billion in the form of corruption. Two years ago, Khairy Jamaluddin, a candidate for the Umno Youth leadership, was reported to have said that 10% of government spending was wasted through leakage.

But ask private sector chief executives and they will claim that government spending, especially on construction projects and procurement, can be inflated by as much as 50%.

Second Finance Minister Tan Sri Nor Mohamed Yakcop is well aware of the perception that spending by the government does not have full impact. But he says the administration is determined to ensure that every ringgit spent gets maximum value.

“We want to get that value for money. We will make sure the money is well spent,” he says.

How the government plans to do it is through effective implementation via various committees and by inviting tenders for projects.

“Each project has its deadline and KPI (key performance indicator). By having a tender process, there will be price discovery and such leakages will be eliminated. So this issue of leakages, hopefully, will be an issue of yesterday,” he says.

But to the sceptics, this is a familiar line.

In the past, ministers and high-ranking government officials, such as the chief secretary to the government Tan Sri Sidek Hassan, had broached the subject of minimising leakage in government spending to ensure that the return on every ringgit is maximised.

To this end, Pemudah, a body that comprises representatives from the civil service and private sector, was established in February 2007 to improve the public sector’s delivery service. In the process, it came up with measures to cut red tape, rent-seeking and corruption.

But the pessimism continues, especially when the government has announced a RM60 billion stimulus package, which is  9% of this year’s GDP and probably the biggest Malaysia has ever seen.

The amount has drawn scrutiny, particularly on how effective the government will be in minimising leakages.

Some see certain elements of the second stimulus package as likely areas for leakages.

Among the items is the RM2 billion set aside as assistance to get projects going under the private finance initiative (PFI) and public-private partnership (PPP) concepts. Under these initiatives, the government effectively gives the private sector free money to kick-start big projects.

Big-ticket items such as the RM2 billion for Malaysia Airports Holdings Bhd to build a low-cost carrier terminal and the RM2.4 billion to be spent by the Malaysian Communications and Multimedia Commission to provide telephony services in 89 districts in rural areas are also said to be likely sources for rent-seekers.

Others items include the RM1.2 billion allocated to build infrastructure and increase economic activities in Sabah and Sarawak, RM350 million for rural roads and RM250 million to increase the availability of electricity and water in Sabah and Sarawak.

Nor Mohamed dispels the notion that the projects under PFI or PPP would not bring about a large multiplier effect.

“Government assistance is only a small form to help it get started. We believe the private sector can undertake a lot of projects on its own. But some projects are good for the nation but the viability is at the margin. With a little bit of help from the government, the project becomes viable and the multiplier effect on the country is high. We will create the tipping point,” he says.

He also says that there would be a bidding process for the funds.

On the LCCT, aspersions are being cast on the RM2 billion tag because AirAsia Bhd had come out with a proposal for an airport to be built at RM1.6 billion.

Nor Mohamed says that it would not be an apple to apple comparison.

“It’s very complicated… the LCCT has another runway and the scale of the project is different. We will make sure that MAHB does it in a very transparent manner and there will be value for money,” he says.

As for money spent on small projects, he says the reason the government is adopting the strategy is that it is easier for the projects to take off and they put money in the hands of the people immediately.

“Some of the iconic jobs have a long gestation period. In times like these, we must spend on projects that are able to take off tomorrow, small projects throughout the country. The effect is faster,” says Nor Mohamed.

The strategy was adopted in the first stimulus package where some 11,301 projects were identified to be carried out for a total of RM6.5 billion. Of this, RM1 billion was set aside for 6,267 projects under the maintenance and basic infrastructure programmes (Program Penyenggaraan Infrastruktur Awam or PIA and Projek Infrastruktur Asas or PIAS) undertaken by the Implementation and Coordination Unit (ICU).

A common criticism of the first stimulus package is that although RM6.5 billion of the RM7 billion has been channelled into various ministries, the impact has hardly been felt.

According to some contractors, spending money on small projects has its advantages, but it is sometimes not effective because of the difficulty in ascertaining if the money is well spent.

To this, Nor Mohamed says the leakage in small projects, if at all there are any, is very small.

“We know the cost and you cannot cheat very much. It’s only in the big design-and-build projects that you really don’t know (the cost),” he says.

Managing cost
To effectively manage cost, Nor Mohamed says  projects on a  design-and-build basis will not be allowed.

“We are not allowing design-and-build projects unless they are highly technical,” he says.

In addition, every project has to get approval from the ministry’s Standards and Cost Committee. Any changes in cost will also need the committee’s approval.

Design-and-build projects are notorious for cost overruns, inflated pricing and rewards to crony companies.

Very often, the initiation and completion of such projects are entirely in the hands of a major contractor that is given the job on condition that it uses certain nominated sub-contractors who are politically connected. Eventually, the cost of completion balloons and the return on investments is hardly there.

There have been several examples of this in the past, such as the North-South Expressway and the Rawang-Ipoh railway double track electrification job.

The North-South Expressway, which was awarded to the well-connected Renong Group, was completed way above its initial cost of less than RM4 billion.

As for the Rawang-Ipoh job, the initial costing was RM4.6 billion on the reasoning that the project was done on a fast-track basis. Also, the main contractor was told to sub-contract portions of the job to nominated contractors, some of whom had no experience in building an inch of railway track.

The project was delayed by more than a year and the cost ballooned. The dispute was between the main contractor — DRB-Hicom Bhd — and the Ministry of Transport. The contractors claimed changes were made to the design at the request of the client but these were subsequently not approved for payment by the Ministry of Finance after the job was done.

Finally, the government had to fork out an additional RM1 billion to UEM Builders to complete the job.

In the past four years, we have not had design-and-build projects because Prime Minister Datuk Seri Abdullah Ahmad Badawi did away with mega projects. The biggest spending was on public infrastructure, where a sum of RM40 billion is to be spent over the next five to eight years. But that has been slow to take off.

However, the issue of nominated sub-contractors, which add little value to a project, is still prevalent. For instance, last year, India’s Ircon International was awarded the southern portion of the RM3.45 billion double-tracking railway project. Ircon in turn subcontracted out the jobs to local contractors that were forced to partner nominated contractors.

In the second stimulus package, Finance Minister Datuk Seri Najib Razak has identified some fairly large projects, such as the LCCT and spending by MCMC. But the money will not be from the government’s coffers.

In fact, what the government is offering companies is some support for their credit enhancement so that they can raise cheap funds from the bond market to undertake projects.

Najib also outlined the terms of projects under the PFI and PPP concepts where there would be some element of competitive bidding for funds.

The strategies are new as opposed to previous measures. Whether they are effective in reducing the leakages will be known a few months down the road when the implementation process starts.

This article appeared in the Cover Story page, The Edge Malaysia, Issue 746, March 16-22, 2009