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Building an airport with no market for it

July 5, 2014

We have failed to realise that the problems associated with government projects is one of 'moral hazard'.


By Chua Tong Ka

melaka_airport_400The new Transport Minister, Liow Tiong Lai, is now tasked with solving the lack of commercial flights at the Melaka International Airport (MIA).

Am I the only one who finds this task strange?

We created a problem where there was none in the first place. Now, we have to find the time and most likely invest more money to solve a problem we created ourselves.

This boils down to the concept of ‘moral hazard’ of which the World Bank and International Monetary Fund, have written many papers on.

‘Moral hazard’ occurs when a party takes excessive and reckless risk because they do not have to face the consequences of the potential cost or burden associated with the risk undertaken.

In other words, it is about doing business using another’s money and without having to account for the business’ feasibility and profitability.

The Malaysian government has used diverse corporate models to spearhead its economic and business agenda. We have statutory bodies, public enterprises, government-owned corporations, privatised entities and public-private partnerships.

At different times, different models have been emphasised, with the rationale that one was better than the other. However we failed to realise that the mother of all problems associated with government related-corporations or projects was the issue of moral hazard.

The RM240 million MIA was built at a time when the government could ill afford it. This still would have been acceptable if the airport was able to generate income and finance its own upkeep. Sadly, this is not the case.

Therein lies the crux of the matter. If the money for the airport had come from one’s own pocket, a proper feasibility study as well as costings and revenue projections would definitely have been conducted prior to undertaking the project.

As it stands, the government built the airport first without studying if there was a market for it. This could only have happened if the airport was built with ‘free’ money.

The same goes with other public enterprises and GLCs where there is no cost of capital involved hence no risk-return trade-off to be concerned with.

Many projects are carried out with unrestrained government funding or guarantees while those entrusted to undertake or manage the project are sheltered from personal loss and accountability.

In Malaysia, even privatised entities enjoy these same privileges. When the government guarantees revenue and profit of a privatised project or concession, the need for viability studies is tossed out the window.

In this regard, the current debate over the Kidex highway is the most appropriate example to illustrate the pitfalls of moral hazard.

Rightly, Kidex should be evaluated based on the assumption of ‘no government guarantee of revenue or profit’.

The concessionaire should undertake its own investment, source its own financing and carry out its own revenue and profit projection without the government as loan guarantor.

If the project is viable on these terms, then by all means, go ahead. Otherwise don’t argue that Kidex is a necessity.

Ultimately, it is how we deal with projects that come with a moral hazard.


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