SINGAPORE, Jan. 14 (UPI) -- The new Malaysian Prime Minister is sending a clear signal to investors that the area of mega infrastructure projects is over. In the last couple of months, the government has backtracked on several projects, a move generally welcomed by analysts who point the government could no longer afford such grandiose projects.
Under former Prime Minister Mahathir Mohamad, ambitious mega-projects intended to reflect national pride and glory flourished. The world tallest building the Petronas Twin Towers were built along the cities of Cyberjaya (a private sector multimedia hub worth $600 million) and Putrajaya (the new and beautiful administrative capital built to the tune of $5.2 billion).
But Prime Minister Abudullah Ahmad Badawi has already announced the cancellation of mega-projects approved by the previous administration and more could be in offing. These decisions may signal a change in economic and political direction, economists said.
Last month, the government puts on ice indefinitely the controversial $3.8 billion North-South project, which involved building an electrified double-track rail line stretching the whole length of peninsular Malaysia. "There are many projects we have to give priority to," Abdullah explained, adding "these include health care, education, agriculture and other socio-economic projects to ensure the well-being of the people."
The project had been first floated by Mahathir in 1995, but the contract was only awarded on the eve of his retirement to the politically well-connected Syed Mokhtar Al-Bukhary's Malaysia Mining Corporation and partner Gamuda after letter of intent had already been issued to state-backed Indian Railway Construction Co and China Railway Engineering Corp as part of an oil palm barter deal.
Mahathir explained that MCM greatly undercut the foreign firms, yet there was a general feeling in the investment community that the contract had been awarded without an open competitive bidding process.
"The new PM wants to promote an image of more transparency in granting public contracts and dispell public perceptions that political connections are used to secure unfair economic advantage," notes Dominique Dwor-Frecaut, analyst at Barclays Capital.
Last week, the government also terminated an agreement between the Minister of Finance and GIIG Capital (another a firm linked to Syed) related to the sale of a 60 percent stake in Sarawak Hidro, the owner and promoter of the massive Bakun hydroelectric dam project.
Now there are talks that this huge 2,400 megawatt dam could itself be scaled down, though the project would still go ahead because construction work had already begun.
The $2.4 billion project plans to cater for eight turbines generating 300 MW each, but according to local press report these could be reduced to just four turbines, effectively halving the power-generating capacity to 1,200 MW.
Last week, Abdullah also hinted that the planned $2 billion aluminum plant in east Malaysia's Sarawak state may be called off. One of CIIG Capital subsidiary in a joint venture with an Arab businessman is building the 500,000-tonne-a-year aluminum smelter in Sarawak due for completion in 2007. The plant is earmarked as the main customer for power from the dam.
Now with the failure of CIIC to buy a controlling stake in the Bakun dam, the smelter's backer may not proceed without guarantees about the power cost.
Finally, Abdullah is expected to change the Causeway bridge project, which links Malaysian and Singapore, and possibly try to seek a contribution from Singapore to the cost.
Though investors on the stock market have reacted negatively to all those changes, economic believe the cutback in spending is a positive development which will help the government to rein in its fiscal deficit.
The fiscal gap has widened in recent years as the government seek to prop up the economy to 5.6 percent of GDP last year. The target for this year is to narrow the deficit to 3.3 percent of GDP.
"I think it's a good thing for the fiscal situation, though it might not be as good in term of pushing the economy. But Abdullah is probably taking the view that there will be strong external demand to help the deficit this year, which is the right thing to do," notes CSFB economist Tse Chern Chia.
"Since the Asian financial crisis, the growth rate has moderated and the reality is the government can't afford as much in term of infrastructure funding," adds Dominique Dwor-Frecaut, economist at Barclays Capital. "If you keep on financing those big projects and running a high public debt you risk loosing credibility," she says.