MRT Corporation (MRT Corp) revealed additional information on the Mass Rapid Transit 3 (MRT3) project i.e., i) MRT Corp involvement as the project developer and asset owner, ii) the project consists of 5 main packages comprising 2 turnkey contractors for elevated works, 1 turnkey contractor for underground works, 1 for integrated rail systems and 1 project management consultant (PMC), and iii) implementation of hybrid financing model which would see a public and private partnership (PPP) with contractors of the project contributing to the upfront construction cost, though the distinctive private funding initiative (PFI) requirements have yet to be announced. In our opinion, the proposed model is reasonable as it provides the Government flexibility in managing its financial constraint while the upfront construction cost as well as the execution risks are to be shared by all parties involved in the five main packages. MMC-Gamuda will be the prime beneficiary for underground package while contractors involved in MRT 1 and 2 would have to compete for the 2 packages for elevated works, which we believe contractor with healthy balance sheet will have an added advantage. We maintain Neutral on the sector at this juncture.

• The Mass Rapid Transit 3 (MRT3) will see a different model against the previous MRT line i.e., MRT1 and MRT2. While MRT1 and MRT2 adopted Project Delivery Partner (PDP) and turnkey contract model which saw MMC-Gamuda having control the whole projects process, execution, and cost, MRT3 will see MRT Corp bigger involvement as the project developer and asset owner. This means that the construction activities for the whole project will be monitored directly by MRT Corp and will be assisted by a project management consultant (PMC). MRT 3 will also see the implementation of hybrid financing model which would see a public and private partnership (PPP) with contractors of the project contributing to the upfront construction cost and receiving deferred payments as the project progresses. Every work package, especially a system work package, will have its distinctive private funding initiative requirements. Details of the requirements will be announced by MRT Corp once it is finalised.

• Five main packages up for grab. MRT3 which is estimated to cost around RM31bn will be fully operational by 2030 and will have a circular alignment spanning along the perimeter of Kuala Lumpur City at about 51km in length, split between 40km of elevated tracks and 11km of underground tunnels. The current proposed alignment of MRT3 will have 31 stations including 10 interchange stations with the eight existing rail lines in the Klang Valley. The tender for construction works will be opened in May through an open tender process and expected to be awarded in the 4Q this year. The project consists of 5 main packages comprising 2 turnkey contractors for elevated works, 1 turnkey contractor for underground works, 1 for integrated rail systems and 1 PMC to work alongside MRT Corp as the project developer.

• Our view. While the distinctive PFI for each of main packages and its implementation have yet to be announced, we view the proposed model to be reasonable as it provides the Government flexibility in managing its financial constraint as contractors are expected to contribute the upfront construction cost. Meanwhile, since the project is split into 5 main packages, the responsibility of the upfront construction cost as well as the execution risks are to be shared by all parties involved. Assuming a 30% upfront cost, the amount to be contributed and shared will be RM9.3bn. Unlike the PDP and a turnkey contract model implemented in MRT1 and 2 (in this case just MMC-Gamuda), the use of PFI structure would stretch the burden solely to just 1 contractor.

• MMC-Gamuda as a prime beneficiary for underground package. This project will put MMC-Gamuda in the limelight for the underground package given its track record as the contractor for the tunnelling works for MRT1 and 2 projects. MRT 1 runs underground for a distance of 9.5km with 7 stations worth RM8.2bn while MRT2 has 13.5km running through underground tunnels with 9 stations worth RM13.1bn. Assuming the same pricing per km from the MRT2, MRT3’s underground package could cost around RM10.7bn. 
  Unlike in MRT 1 and 2 where the elevated works were broken down into many contracts, MRT 3 will only have 2 packages. This means contractors like IJM Corporation, Sunway Construction, TRC Synergy, Gadang MRCB and Muhibbah would have to compete for the jobs. Given the implementation of PFI structure in this MRT3 project, contractors with healthy balance sheet will have an added advantage.

Source: PublicInvest Research - 16 Mar 2022