Home Civil Society Voices Private Finance Initiative: Another shocking scam unravelled!

Private Finance Initiative: Another shocking scam unravelled!

Searching for accountability, when there is none

C4 CENTER

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When it was reported that Pembinaan PFI Sdn Bhd had racked up debts close to RM50bn in 2018, this issue had the makings of a major scandal.

Pembinaan PFI, a government-linked company, had reportedly been created to implement a policy called Private Finance Initiative (PFI), introduced to allow private enterprises securing public contracts to first shoulder the costs to complete these projects.

However, two pension funds, the Employees Provident Fund (EPF) and Retired Fund Incorporated (KWAP), were used to obtain loans totalling RM30bn to implement PFI projects.

The collateral for these loans was a huge number of government land parcels that had been leased by a government agency, the Federal Lands Commissioner, to Pembinaan PFI for a mere RM10 – though later increased to RM5.7bn, which were then subleased to the government for a massive RM29bn!

These PFI projects were implemented through off-budget government loans and awarded without open tenders to companies that did not cover any costs on their own.

Pembinaan PFI awarded these contracts to government-linked companies and well-connected individuals and companies which were later found to be those that were not PFI-type projects.

Pembinaan PFI and the Federal Lands Commissioner were tools abused by the government to covertly channel contracts to the well-connected without public disclosure, even though they were paid for with funds from two pension-based agencies.

Explaining this scandal

The projects implemented through Pembinaan PFI provide important insights into the structure of the state, that is, how it has been constructed to facilitate abuse of power through a well-publicised public policy, PFI.

This extremely complex structure encompasses control of the bureaucratic and financial arms of the state, as well as monitoring agencies.

Even after reports were published of government misconduct through Pembinaan PFI, it was difficult to comprehend how this abuse of power was executed.

Abusing government apparatus

Within this state structure, with the introduction of PFI, government leaders (politicians and bureaucrats) moved to link an ensemble of key public institutions to implement projects under the policy’s name.

EPF and KWAP were used to obtain loans amounting to RM30bn – with government land parcels used as collateral – to fund public projects awarded in a non-transparent manner to well-connected people and government-linked companies.

The leasing of a huge number of land parcels to Pembinaan PFI by an obscure but important government-linked company, Federal Lands Commissioner – for a mere sum of RM10, though subsequently increased to RM5.7bn – who then subleased them back to the government for RM29bn, was a flagrant abuse of power.

The government was paying Pembinaan PFI high rental fees for parcels of land it previously used at zero cost.

Enabling institutions and bureaucrats’ subservience to politicians

The institutions involved in the PFI scandal – Pembinaan PFI EPF, and KWAP – are ultimately controlled by the Ministry of Finance (MoF).

Pembinaan PFI is owned by two statutory bodies, MoF Inc and the Federal Lands Commissioner.

Since there is little public knowledge of MoF Inc and the Federal Lands Commissioner nor of the volume of assets they each own, politicians have been able to abuse them at will.

The people responsible for ensuring that this well-assembled patronage machinery functions properly are ultimately bureaucrats, under the dictate of politicians in the cabinet, though primarily the MoF.

Interestingly, no politician was listed as a director of Pembinaan PFI. No member of the EPF sits on the board of Pembinaan PFI, though this pension-based institution is the primary source of funds for this obscure government-linked company.

What is of concern is that serious abuse of fiduciary duties had occurred by bureaucrats who served as directors of Pembinaan PFI. However, there was clear subservience of bureaucrats to politicians in power.

Patronage, beneficiaries and covert funding

The beneficiaries of Pembinaan PFI’s projects were determined by cabinet members.

The Public Accounts Committee disclosed that 864 projects were issued by 16 ministries through Pembinaan PFI. Since all ministries are able to implement projects through Pembinaan PFI, cabinet ministers can use this government-linked company for the practice of patronage.

However, the ultimate decision-making power is with the finance minister. Umno members clearly benefited from Pembinaan PFI projects.

The other beneficiaries were well-connected companies, such as Bina Puri which was owned by an MCA member, prominent government-linked companies like Sime Darby, and individuals who have persistently been privy to government patronages such as Syed Mokhtar Al-Bukhary and the Shamsudin Abdul Kadir family.

Other contentious government practices, long of public concern, feature in this scandal.

The off-budget system, frequently critiqued for being persistently abused, was used to shield from the public how Pembinaan PFI’s projects were funded.

The use of direct negotiations when awarding contracts, where there is no transparency, is another long-critiqued government practice. There is little knowledge of these projects as they are awarded through the procurement process, which falls under the Official Secrets Act (OSA).

However, as this C4 report indicates, when contracts are awarded through direct negotiations, the government does not get the best private concessionaires. This has resulted in projects that are unsatisfactorily completed, which then require more money to rectify, leading to budget overruns.

The new players!

All PFI-type projects must be implemented by the Public Private Partnership Unit (Ukas), a public agency in the Prime Minister’s Department.

Ukas ensures that private firms awarded PFI-based projects first shoulder the cost to implement them.

However, the funds from the EPF and KWAP were used by Pembinaan PFI, a covert government-linked company. Although named Pembinaan PFI, the projects awarded by this government-linked company are not along the lines dictated by the PFI policy.

What is not known by the Malaysian public is that projects monitored by Ukas are actual PFI-type ventures, while those awarded by Pembinaan PFI are not.

Of concern too is that this scandal brings to light the role of the Federal Lands Commissioner. This one public institution owns a substantial volume of land, while the practice of leasing these properties has been employed by the government since the 1950s.

This scandal reveals how government land has been covertly exposed to much abuse, including serving as collateral to obtain loans from pension funds, while the government is paying Pembinaan PFI high rental fees for parcels of land it previously used at zero cost.

Abusing pension funds!

This Pembinaan PFI controversy raises another question: how can pension funds be used to finance government projects covertly channelled to well-connected people and companies?

Even if the financial risk is guaranteed by the government and collateral is provided by the Federal Lands Commissioner, the payment of Pembinaan PFI’s projects will ultimately be paid using taxpayers’ money.

Impotent oversight institutions

The impotence of oversight institutions is demonstrably obvious in this scandal.

The Public Accounts Committee investigated this matter and issued a report clearly stating that the PFI policy had not been correctly implemented.

The government paid no heed to this PAC report, with the implementation of Pembinaan PFI’s projects still proceeding in an inappropriate manner.

The auditor general has repeatedly stressed the problems with PFI-based projects, including that Pembinaan PFI had accumulated a huge volume of liabilities.

The Malaysian Anti-Corruption Commission (MACC) began an investigation into Pembinaan PFI in 2018 after interviewing MP Ong Kian Ming, who had been speaking on this matter.

Four years on, the MACC has not released any information about its investigation into Pembinaan PFI, suggesting also the limited ability of its officers to undertake the investigation of complex cases.

This scandal highlights extensive abuse of power to practise selective patronage.

The dominance of the executive arm of government over public institutions and monitoring bodies is patently discernible, indicating that there are insufficient checks and balances in the governance system.

Indeed, although the PAC exposed serious transgressions during PFI’s implementation, parliamentarians did not actively debate this report – a reason why no change has occurred.

Why is this a concern for Malaysians?

The sophisticated manner through which a public policy was used to covertly channel funds for projects awarded to the well-connected is an issue we must be aware of to hold the government accountable.

Drawing funds from the EPF and KWAP for government infrastructure projects and putting pensioners’ money at risk must stop.

What is even more disconcerting is how this policy can be further abused to fund party members through off-budget expenditure in preparation for the coming general election, which will be held soon.

Since the government has decided to go ahead with the construction of the Mass Rapid Transit Circle Line (MRT3) project within the Klang Valley, worth close to RM40bn, using PFI as a possible mechanism for funding it, the matters raised in this report must immediately draw our attention and scrutiny.

The talk of hybrid funding, including issuing sukuk bonds, further complicates this issue.

Will this PFI project be regulated by Ukas or implemented through Pembinaan PFI? Will there be transparency in how this PFI project is funded and how subcontractors are appointed?

These are some important questions that this report highlights. – C4 Center

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    Adri Wing
    Adri Wing
    9 Aug 2022 2.59am

    EPF contributors must question EPF Board on this matter.

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