The state government stands to profit from the interest and also obtain international financial recognition, Chief Minister Lim Guan Eng said today.
Penang announced plans to take up a loan from a Chinese government bank to kickstart the RM27 billion Penang Transport Master Plan (PTMP) project.
PTMP includes roads, light-rail transit and other modes of transport crisscrossing the state. The project is to be funded by the creation of reclaimed islands south of Penang Island.
Lim said after borrowing the money from China, the state intends to offer a “small bridging loan” to the project delivery partner of the PTMP, SRS Consortium.
Lim said Penang would likely be borrowing from China at a low interest rate, “likely to be at 1% to 2%”.
He said Penang could make a profit by charging the consortium in turn “maybe 1% or 2% more” in interest on the bridging loan.
“We can expect to make money from the interest differential.”
Lim said the money borrowed from China would not be big, “not even RM1 billion”, as the federal government would only allow a five-year repayment period for loans taken by state governments.
“This will also enhance our international reputation because you are getting (the China loan) at a low interest rate.
“If this is not good, you think the prime minister will reply to me?”
Prime Minister Najib Razak had written to Lim on May 31 last year, saying it will allow Penang to take loans from China only if the National Finance Council, which is chaired by him in his capacity as finance minister, gives consent to the loan.
Najib advised Penang to pass a law at its assembly to allow it to take loans from banks or other financial institutions. The law was passed last Thursday and is similar to one that exists in Pahang.
The Penang government had signed a memorandum of understanding with China Exim Bank on Dec 16, 2014 to let Penang borrow money from them.
Lim said taking up the loan was a financially sound decision for Penang, as it was “optimising its financial mix”.
He said in corporate finance, companies wanted a gearing ratio. Penang’s gearing ratio, he said, was at “0%”, as the state had the lowest debts in the country at RM64 million.
“If you have no loans, just equity, then you are not maximising or optimising your financial mix.
“Because when you borrow money you can have capital and at the same time you can claim tax deductions.
“If you look at the state as a company, we are a zero gearing ratio state. That means we are not optimising our financial resources.
“So it makes good financial sense. You do not have to be an accountant; when a country like China gives you a loan, people will notice you and give you an AAA rating.
“That will put Penang in good stead,” he said.