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Concession

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INTRODUCTION

Concession could bring different definition to different country. It is also has been described with a list of different wording and acronyms worldwide. The terms such as privatization, divestiture, lease, affermage, PPP, PFI, Build-Own-Operate (BOO), Build-Own-Operate-Transfer (BOOT), Build-Operate-Lease-Transfer (BOLT), Build-Lease-Operate-Transfer (BLOT), Build-Transfer-Operate (BTO), Build-Operate-Renewal (BOR), Build-Rent/Lease-Transfer (BRT or BLT), Design-Build-Finance-Operate (DBFO) and Rehabilitate-Operate-Transfer (ROT), outsourcing, delegation of services, management contract, operation and maintenance contract, service contract, operating contract, performance contract and others. However, the terms of PPP and concession will be using interchangeably throughout the entire topic.

Basically all those terms refer to one common purpose. The purpose is to establish a method of procurement that brings together the public and the private sectors in a long-term partnership for mutual benefit. The vital feature is that it is intended to achieve both social and commercial goals. When it serve as a long-term solution for offering infrastructure within a country, it would indirectly support sufficient growth and economic benefits for the public. The broader execution of concession can be done to fund transport infrastructure such as highways, tunnels, railway, ports, bridges, railroads, airports and canals transport systems. They are also often used to finance projects in water supply, power generation, sewerage, dams, irrigation and drainage, and to a lesser extent, telecommunications and solid waste management infrastructure.

In the case of Malaysia, the Government officially revealed the execution of public projects using the Public Private Partnership (PPP) or Private Finance Initiative (PFI) scheme under the 9th Malaysia Plan. In 2009, a new unit under the Prime Minister’s Department identified as Privatisation and Private Finance Initiative Unit –PFI (presently known as Public Private Partnership - 3PU) was founded. It is designed to coordinate the Privatisation and the Public-Private Partnership (PPP) projects. At present, 52 projects in the construction stage is undertaking by the Government with an estimated value of RM62.7b. The Government is supporting the private sector to endow in development project whether through PPP or through direct investment of the private sector in the country’s development programme in formation with the Government’s new method based on the new economic model in the 10th Malaysia Plan. The key themes of the current 10th Malaysia Plan PPP initiative revolve around:
• Improvement of basic infrastructure
• Upgrading of public transportation in Greater KL

STORMWATER MANAGEMENT AND ROAD TUNNEL (SMART) BY GAMUDA BERHAD

There are a lot of PPP projects which has been scheduled out by the Government started from 2011 and expected to be completed in 2015. The completed projects namely Plus Expressway, Stormwater Management and Road Tunnel (SMART), Westport, Privatisation of Penang Port and KLIA Express and KLIA Transit. Those projects which still under construction are Mass Rapid Transit (MRT), Electrified Double Track Ipoh – Padang Besar Project, Perdana University, International Islamic University Malaysia (IIUM) teaching hospital and combined-cycle gas power plant in Kimanis, Sabah (cari ref dari www.pwc.com). From the many, there are two project which has been carried out by the a leading turnkey contractor Gamuda Berhad with Build-Operate Transfer (BOT) expertise and capability that is Gamuda Berhad and MMC Corp Berhad. Those two projects are Stormwater Management and Road Tunnel (SMART) and Electrified Double Track Ipoh – Padang Besar Project. However, under this topic, we will be discussing about the completed one that is the SMART project.

Figure 1: Recent and upcoming PPP projects (2100 – 2015) (cari ref dari www.pwc.com) The initial idea of Stormwater Management and Road Tunnel (SMART) was for a tunnel to divert and gather the storm water, but the idea developed into the mixed-use tunnel model that would permit traffic stream when the tunnel was clear from water. The liability reasons was the factor in this evolution that the tunnel had to run below government-owned land. This factor has led planners to consider positioning the tunnel underneath a road, which later led to the concept of incorporating a tolled traffic into the project. Subsequently, private sector involvement in a Public-Private Partnership (PPP) could be protected thus decreasing the expenditures of the project for the Malaysian Government as a result of permitting a part of the tunnel to be tolled for motorway (http://ncppp.org/undp/kualalumpur.html) SMART project was developed as a concession, commenced by the project proponent, namely MMC Engineering Group –Gamuda Joint Venture which also as acted as the turnkey contractor. Together, they formed the Syarikat Mengurus Air Banjir & Terowong Sdn Bhd (or SMART Sdn Bhd) company as the concessionaire operating the toll plazas. Their scope of works including design, construction, maintenance, supervision and commissioning (http://www.gamuda.com.my/smart.html). The project is implemented under secure supervision of the Government as the client, namely the Drainage and Irrigation Department of Malaysia and the Malaysia Highway Authority. Specialized engineering consultant support to the PPP was rendered by local consultant Sepakat Setia Perunding (Sdn) Bhd in association with Mott MacDonald, a subcontractor headquartered in the United Kingdom. (http://www.smarttunnel.com.my/construction/about_proponents.htm)

KEY FEATURES
The rationale of partnership between government and private sector is to create an added value through innovation. The private sector obtains new prospects in a rising market and can add its own construction resume and contribute commercially to attractive project while the government can deliver end product at a better quality for the same amount of money spent and the same time make a huge saving. To have a practical and workable project, a PPP contract must have the key features as o be considered as per outlined by Public-Private Partnership Unit Prime Minister Department PUTRAJAYA, 2009:

i. Relationship between public and private sectors is based on partnership; ii. Private sector determines the required inputs to achieve the specified output and the private sector is given latitude to introduce innovation into their designs and development to reduce overall costs; iii. Public sector procures specified outputs or outcomes of a service for a concession period, for this case is 40 years long; iv. Payment for services is based on pre-determined standards and performance;
v. Promotes ‘maintenance culture’ where the concessionaires will be responsible for the long term maintenance of the assets throughout the operational tenure agreed upon, Syarikat Mengurus Air Banjir & Terowong Sdn Bhd (or SMART Sdn Bhd) took up the duty; vi. Integration of finance, design, maintenance, construction, and operation – total package; vii. Optimal sharing of risks whereby risk is allocated to the party who is best able to administer it; viii. Transfer of assets at the end of the concession period becomes an option to the Government; and ix. Whole Life Cycle Costing (‘WLCC’) whereby PPP projects are normally awarded based on smallest total cost over the concession period compared to smallest construction costs under the conventional procurement technique-a paradigm change in the form of procurement purposes.

CONTRACTUAL STRUCTURE

Figure 2.1: Joint Venture Concession Contractual Structure

This concession contractual structure shows relationships among private sectors and also with the government sector. They are the participants who clearly committed to the defined tasks and risks of the project. The public sector can be denoted by a government agency, an important role may perfectly be played by local authorities, a public regulatory body or the government itself. On the private sector side, the participants are not limited to the private entity that contracts directly, but also include its creditors, shareholders, subcontractors and suppliers. The key participants as well as their respective definition and significant roles as per diagram would include: o Special Purpose Vehicle (SPV)/ Project company o financiers o construction contractor o commercial operator o the public sector (procuring authority)

Special Purpose Vehicle (SPV) / Project Company

The SPV or project company (Public-Private Partnership Unit Prime Minister Department PUTRAJAYA, 2009) is a legal entity created by the collaborating private sector organisations. The SPV is an empty vessel. It procures design, construction and operating expertise from the construction industry. It secures finance from funders and investors. It also distributes risks inherited from the client.

Financiers

These are the parties that provide finance to the project. The parties are classified according to what types of interest they hold in a project company. A sponsor or shareholder (Public-Private Partnership Unit Prime Minister Department PUTRAJAYA, 2009)holds equity interests in the project company while a lender provides loan or debt finance to the project company. A bondholder holds security in the company that is neither purely equity nor debt, but somewhere in between. For this project, Gamuda (http://www.roadtraffic-technology.com/projects/smart/) proposed a public–private funding initiative (PPFI) for the $514m project, with the government financing $342m and the remaining $163m being funded by Gamuda and its joint venture partner.
Construction contractors
In most PPP, contractor also act as subcontractor in a project company. Specialised subcontractors are being tools for the project company to deliver its obligations and responsibilities to the public procurer. The Malaysian Mining Corporation (MMC) Berhad–Gamuda Berhad joint venture acted as the turnkey contractor for SMART tunnel project. It subcontracted out functions (Public-Private Partnership As A Tool To Develop Infrastructure In Poland) as examples: o Construction o Equipment supply o Operation and maintenance

To oversee and supervise the designs and technical aspects of the project, the contractor will appoint an engineer. Similarly, to review and advise on the progress of the work to be done by the contractors, the project company also will engage a professional engineer. For SMART tunnel project, Mott MacDonald (http://www.roadtraffic-technology.com/projects/smart/) the tunnel specialist from UK was appointed to carry out the feasibility studies for the dual-purpose tunnel and then prepare specific design services to materialise the project from concept to construction. Local SSP Consultants were also co-operated in the tunnel’s design and supervising the construction. Supply and installation of distributed antenna system for high-speed wireless communication across the tunnel was done by Comba Telecom Systems Holdings Limited.
Commercial Operator
The project company (A Legal Perspective of Public Private Partnerships Transport Policy and Tourism Section Transport and Tourism Division United Nations Economic and Social Commission for Asia and the Pacific) will appoint an operator to manage and maintain the infrastructure on completion of the infrastructure project. Often, the operator is the contractor or the project company itself. Gamuda-MMC joint venture (has formed the Syarikat Mengurus Air Banjir & Terowong Sdn Bhd (or SMART Sdn Bhd) company as the concessionaire operating the toll plazas.

SMART Sdn Bhd signed a 40 year concession (http://ncppp.org/undp/kualalumpur.html) with the Malaysian government, with the Malaysian Highway Authority and the Department of Irrigation and Drainage serving as the public partners. The concession is to operate and maintain the motorway portion of the tunnel. The Malaysian government maintains ownership of the land and the tunnel itself.

Public Sector
The government is commonly refer to the public sector, how it is constituted or represented. The government may be an administrative entity, a state owned enterprise, a minister acting on behalf of the government, a division or department of the government, a municipality or a local government. The SMART project (http://ncppp.org/undp/kualalumpur.html) is realized under the close supervision of two government agencies, namely the Drainage and Irrigation Department of Malaysia and the Malaysia Highway Authority. The Malaysian Highway Authority was the government agency which endorsed the concession agreement and is accountable for the technical guideline of the project.
A government may have expertise constraint (A Legal Perspective of Public Private Partnerships Transport Policy and Tourism Section Transport and Tourism Division United Nations Economic and Social Commission for Asia and the Pacific) in certain features of a PPP contract. The government may choose to engage the expertise from in-house or outside the government. In addition, in areas where they have expertise constraint, the government may have to keep outside consultants for advisory services. Consultants are usually being keep to advise in the following extensive areas namely technical, financial and legal. Dr. Nik & Associates Sdn. Bhd (http://state.water.gov.my/scc/index.php/en/services) in association with Snowy Mountain Engineering Corporations (SMEC - Australia) are the consultants appointed by the government to advise on any considering issue related to those abovesaid three areas including pension, human resources, environmental and public relations depending on the requirement of the PPP project.

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