PICC and the risks of BOT

It is good to hear that the Penang government plans to stay put at its present offices in Komtar instead of building a “mini-Putrajaya’ (one of the hare-brained ideas of the previous administration). This, we are told, will save us RM1 billion in public funds.
We are also told the government will try to maximise its resources, to get more money so that it can continue its development and social programmes which are consistent with a people-centric government.
In the same spirit, I hope the state government will think along the same lines when it comes to the Penang International Convention Centre.
One good thing is that the state government appears to have abandoned plans to fund the PICC using RM50 million of the Penang Island Municipal Council’s (MPPP’s) precious funds. (The MPPP raises just over RM200 million a year from its operations.)
The state government is now looking at the Build-Operate-Transfer (BOT) model for the PICC – presumably with the MPPP remaining as the ultimate owner of the project?
What is BOT? Under a BOT, a private firm or investors receive a contract to finance, build, and operate infrastructure for a set number of years. In return, they get to charge the users for the use of the infrastructure at a rate which makes the project financially viable for them. At the end of the agreed number of years, the project is handed over to the state.
Theoretically, the BOT option has several advantages:

• It frees the state government from looking for financing for infrastructure it thinks is important. Whoever is selected as the private company will have to secure its own financing.
• The state government/MPPP can set its minimum specifications for the construction, which the private company will have to comply with. The state can then monitor the work.
• The private company will be discouraged from carrying out slipshod work or cutting corners in the construction as it will eventually have to maintain and operate the venue for a number of years.

The disadvantages of BOT in this case should be cause for concern:

• The private company selected may have the expertise for construction, but it may not have the required expertise to operate and maintain the place.
• If the contract is to run the place for X number of years, and if the private company is not able to operate or maintain the place, the state government/MPPP may not have the option to terminate the company and appoint someone else who can do a better job.
• One of the components of BOT is the user-pay principle. But what if there are not enough users and the PICC is underutilised and the private company ends up making losses – will the state government end up having to subsidise the company? Under the BOT model, it is possible that the private company could get the land on the cheap or for next to nothing; so that is already a form of subsidy.
• Will the MPPP still have to stump out expenses for major repairs and maintenance as it is now doing in the case of the Penang International Sports Arena.
• Will financial institutions provide the required financing to the private company without the state government assuming some of the risks or providing guarantees?

These are some of the factors and risks the state government will have to consider before it uses the BOT model. Personally, I still think the risks are too high for this project.