Private Finance Initiatives in Malaysia

This article attempts to explore the purported benefits of PFI schemes. I argue PFI schemes is unnecessary , and in fact lead to wastage.

PFI basically means a private company will finance construction of public infrastructure such as public university , hospitals etc. In return, it will obtain a concession whereby govt pays a fixed amount of lease on annual basics throughout the term of the concession which is usually between 20 to 30 years. Conventional financing methods involve govt financing it directly through public debt.

Examples of recent & notable PFIs in Malaysia includes among others, some of UITM campuses & IIUM Medical Center. So far govt have opted for PFI scheme for 13 UITM campuses , IIUM Medical center.

Allegation of cronyism in awarding PFI concessions aside, the merit of PFI deserve serious consideration. Firstly, cost public debt is substantially lower than private debt.

For instance when UITM Puncak Alam(Satelite C) campus concession was given. Govt's 20 year yield in 2012 hovered at 3.9%. Yet, the concession agreement appeared to effectively locked interest at 10% (annual lease at RM39million. If RM13mil is sequestered for debt principle, than RM26mil is effectively annual interest). Govt could have saved RM15mil annually here if it chosen the conventional way of financing it via public debt.

In fact,govt provides soft loan via govt owned Bank Pembangunan ,access to facilitation grant & govt grant for land acquisition. So much for "Private Finance". This indicates that PFI in Malaysia is not abt optimizing cost but to keep debt away from govt balance sheet & to enrich political cronies.

Beside the annual lease (availability charge), the gross profit margin on the maintenance charges could be as high 30%. It be lot cheaper for UITM Puncak Alam to do it in-house & save approx RM2.6million a year

When Rafizi Ramli, did the expose on the alleged wastage due to cronyism to build some of those UITM campuses using PFI method, govt responded claiming the aforementioned PFI scheme actually lowered construction cost by RM100mil per campus. That is rather absurd, how does using private finance as oppose to public finance per se lowers construction cost esp at RM100mil per campus or 25%. original cost.

Even if construction cost is lower due to PFI, govt could opt for shorter financing contract that only covers construction to achieve the same cost reduction.

Construction cost is not necessarily lower under PFI. Private sector usually charges govt for unforeseen cost.

The IIUM Medical Center in Kuantan(right) cost wasn't exactly in the lower end.It cost RM1.18million per bed compare to multi-specialty KPJ Pahang (left) apparently cost RM550k per bed.

This is how cost of higher education in govt institutions have increased by whopping 8% btwn 2004 to 2014. In fact, we spend almost the same level as UK in PPP terms.

Yet, when funding for public university is cut, it hits areas such as research, academia, number of student enrolment as opposed to potentially inflated lease on PFI campuses such as this.