With GST exemption, toxic China connection begins to show

A QUESTION OF BUSINESS | Let’s start by examining who exactly benefits from the GST exemption for that China company. It does not reduce the cost of the RM55 billion project but we will show without any doubt that the benefit all goes to that China company - as much as RM3.3 billion.

This project will become more toxic in future simply because it is unviable and too expensive, and there may be more such projects in the pipeline if this government stays in power. And that may give enormous undue advantage to China companies and it will work against Malaysian interests. 

On Monday, Amanah vice-president Husam Musa discloseddocuments which purportedly showed that China Communications Construction Company (CCCC), the contractor for the East Coast Rail Link (ECRL), was granted a relief from paying goods and services tax (GST).

Yesterday, Customs director-general Subromaniam Tholasy confirmed that Putrajaya granted CCCC, through China Communications Construction (ECRL) Sdn Bhd or CCC (ECRL), a relief from paying the GST in its procurement for the massive rail project, as a method to reduce the cost of implementation.

Shortly after, BN strategic communications deputy director Eric See-To had a different spin - according to Malaysiakini, he said in his Facebook posting that the GST relief avoids unnecessary processes and expenses.

"For the ECRL project, the final customer is the government. If GST is collected, then the government has to pay GST to the government. How senseless is that? (It is, therefore) better to (grant an) exemption, which is provided for by the law so that unnecessary processes and expenses can be avoided."

Both Subromaniam and See-To are wrong - if there was GST, the net benefit would be neutral to the government because the tax would accrue to the government and therefore would defray the increased expenses of the ECRL, which is government-owned.

But an exemption now will mean that the government will lose 6% in GST, or RM3.3 billion, and the entity who will gain is CCCC because they are not giving back RM3.3 billion to the country.

Note that the award of the ECRL construction contract to CCCC was signed and sealedon Nov 1, 2016 - 19 months after the implementation of the GST on April 1, 2015. The contract price must have included the GST then. Also the documents that Husam revealed, indicate clearly that the Malaysian unit of CCCC, CCC (ECRL), obtained the exemption only in Feb 7 this year, over 15 months from that contract date.

The document is purportedly a letter by CCC (ECRL) to a local contractor, Permata Timur Resources Sdn Bhd, instructing the latter to insert the following on its tax invoices to the former: “Relief under Section 56(3)(a) of the GST Act 2014 claimed based on letter issued by the Ministry of Finance No. (8.09)248/39/7-1460(69) dated 7 February 2018.”

That means the government forgoes GST of as much as 6% of the RM55 billion project cost of the ECRL or RM3.3 billion. This goes to the CCCC as a pure addition to whatever profit it is making from the construction of the ECRL.

Numbers don’t add up

To begin with, the ECRL project is already extremely unviable, relies on a heavy gamble where figures already do not add up, and whose cost may go up to as high as RM100 billion as I have explained here.

Can returns justify such an investment? No, not even close. The prime minister said at the launch of the ECRL in 2016 that cargo (mainly transhipment to and from China between Port Klang and Kuantan) is projected to reach an annual 53 million tonnes by 2030. Some 12 years from now, the cargo will be less than 10% of Singapore’s cargo throughput in 2016 of 593 million tonnes. Passengers carried are projected to be 5.4 million.

Currently KTM transports just six million tonnes per year and its revenue is estimated at no more than RM600 million last year, which gives an average transport charge, ignoring passengers, of RM100 a tonne. If we use this figure for ECRL, 53 million tonnes will give it a revenue of RM5.3 billion for freight or RM7.6 billion in total, assuming the given ratio of 70% freight to 30% passenger for revenue.

A 20% margin on this gives income of RM1.5 billion, only 15% of our calculated required return of RM10 billion on costs of RM100 billion (10%). Even if we use the given cost of RM55 billion and 10% return for a required income of RM5.5 billion, the RM1.5 billion figure is just 27% of that.

Will it at least pay for interest costs and repayment of loans? No. Our calculations indicate that at the end of seven years of grace period from repayment, the loan amount of 85% or RM46.75 billion would have gone up to RM58 billion at an annual interest rate of a compounded 3.25%. Thereafter, loan repayments on the RM58 billion over 20 years amount to almost RM4 billion a year. Income of RM1.5 billion is only 37.5% of repayment, short by RM2.5 billion a year when repayment starts.

Malaysia is a sure loser - of the order of billions. Is the public a winner? Some, because of easier transportation but anyone who rides the current highway from Kuala Lumpur to Kuantan - it takes only two and a half hours by the way - knows that it is considerably underutilised. The amount spent for that kind of dubious and small gain in convenience is ridiculously high.

That’s not all. There are other China projects in the pipeline as I have mentioned here. These include:

Proposed RM200 billion port development in Port Klang. China is supposedly in the running for this massive project if it does see the light of day. This is a long-term project which again may be unnecessary considering the number of ports being developed concurrently now.

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• The RM42 billion Melaka Gateway project in September 2016. This includes four islands - three man-made, in a RM30 billion deal with China companies - a port, a bulk-and-break terminal, shipbuilding and ship repair, mixed development, shopping complexes, ferry terminals, marina and so on. Where is the demand for these going to come from?
   
• The RM400 billion gross development value Forest City off Johor. This massive development on four man-made islands, which may eventually house 700,000 people, is being developed by a China company, effectively in a joint venture with the Johor sultan. Considering that it is a property development which local players could easily have undertaken, what is the rationale for bringing in yet a Chinese company into this?
   
• The RM40-80 billion Kuala Lumpur to Singapore High Speed Rail (HSR) project, the construction of which may involve China.

All these amount to as much as RM722 billion, a huge figure by any standards. Such contract awards need an incorruptible, efficient, clean and competent government to handle. It will be dangerous and perilous for Malaysia in the hands of one who condones kleptocracy, corruption, cronyism and patronage.

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P GUNASEGARAM says the bigger the project, the harder and heavier the fall. E-mail: t.p.guna@gmail.com. - Mkini