The planned Penang undersea tunnel will be the largest privately-funded public works project in Penang.

The state government should be aware that the undersea tunnel project requires an exceptional financial capacity, in the same manner that building and operating such complex transportation assets require exceptional technical skills.

The financial capacity of contractor Zenith BUGC is essential for project acceptance by users and stakeholders. The state government must enter into contract with an entity that stakeholders believe has the capacity to deliver its obligations under the contract.

The level of responsibility of an agency operating such an essential piece of public infrastructure can only be assured if there is evidence that the vendor has the full financial capability to develop, finance and lead the project and manage it for the long-term.

It is generally accepted that tunnel construction costs more and is generally riskier than other kinds of construction. Therefore Zenith BUGC should be made to provide payment and performance bonds and all related bonds for the project in the form and in the amount that prove it has the financial capacity.

In no case shall the amount of the payment bond be less than the amount of the performance bond. Zenith BuGC should be required to obtain all liability insurance and errors and omissions insurance as well.

A performance bond is a guarantee a contractor will complete a project according to the contract. Performance bonds protect taxpayers' money, as they ensure public works projects will be completed properly and in full.

Payment bonds, supply bonds and maintenance bonds are usually required along with performance bonds. Payment bonds guarantee payment to all subcontractors and suppliers; supply bonds ensure that materials will be provided according to the contract; and maintenance bonds guarantee a contractor's work will be defect free for a specific time frame after it is completed.

Under the procurement rules of the Finance Ministry, performance bonds are required for a contract worth more than RM200,000.

Performance bonds may be given in the following form:

(a) Bank guarantee issued by banks licensed under the Banking and Financial Institutions Act 1989 which operates in Malaysia; or

(b) Insurance guarantee issued by insurance companies licensed under the Insurance Act 1996 which operates in Malaysia; or

(c) Finance company guarantee issued by finance companies licensed under the Banking and Financial Institutions Act 1989 which operates in Malaysia; or

(d) Bank guarantee issued by banks licensed under the Islamic Banking Act 1983 which operates in Malaysia; or

(e) Takaful guarantee issued by a takaful operator registered under the Takaful Act 984 which operates in Malaysia; or

(f) Guarantee issued by the Infrastructure Development Bank Malaysia Ltd (BPIMB); or

(g) Performance guarantee gund (for works only).

Performance bonds are, essentially contracts of guarantee and so fall within the purview of the Contracts Act 1950, Sections 79 to 81.

The Public Works Department requires a standard form of contract to be used and also for the contractor to either deposit with the government a performance bond in cash or, by way of a Treasury deposit or banker's draft or approved banker's or insurance guarantee a sum equal to five percent of the contract sum as a condition precedent to the commencement of work.

In other words, the contractor is not permitted to carry out any work under the contract unless and until the performance bond is given.

The failure of the contractor to give the performance bond may amount to a fundamental breach of contract and entitle the government to discharge the contract and sue the contractor for damages accordingly.

Failure by the Penang government to make this as a non-negotiable criteria in entering the construction contract for the undersea tunnel will tantamount to betrayal of the people and smack of corrupt practices.