Mainstream
Construction clean-up
Emmanuel Samarathisa 
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The twin factors of government largesse for public contracts as well as political connections were oft-cited reasons for many construction counters taking a hit post the May 9 general election when Pakatan Harapan (PH) defeated Barisan Nasional for the first time in history.

This was primarily because PH campaigned against political patronage and the coalition made good on its promise. Just weeks after coming into power, Prime Minister Tun Dr Mahathir Mohamad announced a slew of project reviews with the most notable being the Light Rail Transit 3 (LRT3) and Mass Rapid Transit 2 (MRT2), the China-linked East Coast Rail Link (ECRL), and the Pan Borneo Highway.

However, while there were expectations that these projects would be shelved due to cost overruns, the government decided to greenlight them, albeit scaled down. All eyes are certainly on the government, including Mahathir and Finance Minister Lim Guan Eng, to deliver these projects at the best value for money for the people.

But the proper execution and administration of some of these projects rest on the shoulders of Works Minister Baru Bian, who also happens to be the only federal minister from Sarawak on Team Mahathir, a fact that does not perturb him. “There are some people who raised the fact that I’m the only minister from Sarawak. But numbers do not really matter much here. The previous administration had a larger representation from Sarawak yet we struggled with so many issues till today, such as the lack of infrastructure in rural areas. This is more of a question of general policy on a federal level and that to me is what matters,” Baru tells FocusM.

 

Ending cronyism for mega projects

This year will be a challenging one, he notes. But among the initiatives or reforms he would like to introduce in 2019 are ensuring that open tenders are applied to all government procurement calls, the improved connectivity of the peninsula as well as Sabah and Sarawak, including the Pan Borneo Highway, and the review of tolled highways (see Q&A on P.10).

But first on Baru’s list is ending the “cronyism” that has marred the sector for decades. The answer, according to him, lies in the open tender system, which he has pledged to use extensively especially for large-scale government projects.

The e-Works system, an online and digitalised procurement system for government contracts, will be the game-changer that Baru’s team will be relying on to deliver that promise. It is expected to be implemented in 2020 and mirrors the Finance Ministry’s ePerolehan, thus ensuring transparency in the procurement process, notes Baru.

“The e-Works system will certainly reduce interference of third parties because once the documents have been forwarded, you can’t pull them back or amend them,” he says. This would significantly improve workflow, he adds, because “at the end of the day, the tender committee will find out that the application is incomplete and therefore lacking relevant documents. So this procurement system reduces interference or abuse. You have submitted the documents, they are all there and online. You can’t pull them back.”

There would be exemptions to the open tender system, says Baru. They include procurements involving national security and time-sensitive projects during emergencies such as floods as time is of the essence and works would be limited to certain people and prices fixed at a certain mark.

The problem, Baru notes, is the voluminous amount of documents that need to be uploaded. But these could be whittled down to the “more relevant or important documents needed,” he says, adding that his ministry is running trials on the system. “I hope that this system will be implemented soon,” he adds. “I understand that before I came into office, the idea had been mooted and they had already started with the idea.” So it’s now a matter of meeting that 2020 deadline for Baru.

How does the e-Works system rank among analysts covering the sector? MIDF analyst Muhammad Danial Abd Razak believes it’s a step in the right direction. “Its implementation will not only expedite the current contractual procurement process, but will likely enable cost savings and greater transparency,” he tells FocusM.

“At this juncture, we have yet to quantify the impact as it is a relatively new concept. Nonetheless, should the system achieve its ideal economic scale, we could expect some improvement, both qualitatively and quantitatively.”

Tushar Mohata, head of Malaysia equity research at Nomura, notes the system is “a small positive” as it boosts transparency. “But at the same time it increases competition, which can keep margins low,” he says.

As it is, certain companies have taken a hit due to the government’s infrastructure revision exercise. Take LRT3 and MRT2 which involved joint ventures between George Kent (Malaysia) Bhd and Malaysian Resources Corp Bhd as well as between MMC Corporation Bhd and Gamuda Bhd, respectively.

Patronage games

The government noted that both projects had cost overruns. In the case of LRT3, project delivery partner, George Kent-MRCB, was found to have blown its initial budget of RM10 bil (RM9 bil for construction and RM1 bil for land acquisitions) to RM31.5 bil after failing to take into account miscellaneous costs such as PDP fees of 6%, consultation fees, operational and overhead costs as well as interest payments during construction.

Due to its high cost structure, the project, spanning 37km from Klang to Bandar Utama in Petaling Jaya, was expected to be cancelled. But the government decided to continue with it, albeit on a smaller scale and with an extended deadline from 2020 to 2024. But more importantly, the construction of LRT3 will be done at RM16.63 bil, a steep cost reduction of 47%.

As for MRT2, what followed after the review announcement were negotiations between the Finance Ministry and MMC-Gamuda where the latter agreed to cost reductions for both above and underground portions of the project of 22.4% to RM30.53 bil from RM39.35 bil.

Cost reductions aside, these revisions have not been pretty on the financials of companies such as George Kent, which did not seem to get back its footing after the election. Firstly, it hit limit down on May 15 due to the alleged close links between the company’s chairman Tan Sri Tan Kay Hock and former prime minister Datuk Seri Najib Razak. Tan has been dubbed Najib’s “golfing buddy”.

Secondly, after the revisions to LRT3, George Kent posted a decline in net profit of 28.35% year-on-year (yoy) to RM20.55 mil for the third quarter ended Oct 31, 2018 due to the absence of contributions from LRT3. The drop was due to a decline in profit at its engineering arm which saw a 23% trim yoy to RM24.83 mil.

But, it is not only the nexus of business and politics that has plagued the construction sector. What might also test Baru’s performance is the very nature of the ministry itself where the works minister has always been deemed to be a patsy to the prime minister or the ruling coalition of the day.

 

A new kind of Works Ministry

Consider his predecessors Tun Samy Vellu and Datuk Seri Fadillah Yusof. Samy Vellu, the works minister from 1997 to 2008, was often seen as a source of patronage and this was best encapsulated during the 1999 general election where an assemblyman told the audience during a political rally at Samy Vellu’s constituency of Sungei Siput. “What we want, Samy Vellu gets it for us. We have development, good roads, bridges, flyovers. He only needs to bisik (whisper) to (then) prime minister Datuk Seri Dr Mahathir Mohamad and we’ve got it,” the anonymous assemblyman was quoted in a Nov 24, 1999, article in The Star titled “Sungei Siput’s tireless rep”. Samy Vellu subsequently lost his seat in that election.

A works minister from 2013 to 2018, Fadillah surfaces when his brother Tan Sri Bustari is being discussed. A 2017 Straits Times article titled “Bustari Yusof: the man who quietly guides Najib’s hand” speculated that due to the influential role Bustari wields over politics and business, he would either snap up contracts awarded for the Pan Borneo Highway or be the pointman for construction industry executives to secure a tender or two.

Baru highlights that roughly RM100 bil a year is spent on procurements through various projects and contracts. “Preventing wastage is of paramount importance,” he says.” Also, as a federal minister, my main priorities are the welfare and needs of the people of Malaysia. Any decisions made are based on careful analyses and taking into account the needs on the ground in getting the best value of investment.”

The Works Ministry is also exploring various implementation and financing alternatives for the private-public partnership (PPP) model. “Further deliberations with all stakeholders will be carried out to achieve the overall objectives in minimising government and private sector exposure,” he says.

 

Strengthening investor confidence

Baru stresses that the government is committed to uplifting the performance and standards of the construction industry. “We do this by engaging the right stakeholders to meet our goals in transforming the sector to be world class by 2020.” He points to the midterm review of the Construction Industry Transformation Programme 2016-2020 (CITP) which was conducted to take stock of how industry players could contribute to the CITP in a more impactful manner. “Key government agencies are working together with the private sector as well as in strengthening investor confidence,” he adds.

Certainly, market participants are looking to a few catalysts this year for the construction sector. Nomura’s Mohata sees positive catalysts in the form of the revival of one or two large infrastructure projects to stimulate slowing gross domestic product growth. “A recovery in the property sector can also be positive as large-cap contractors have property development businesses as well,” he says, adding that new project awards would remain slow as the government would focus on “keeping a lid on contingent liabilities” or government guaranteed infrastructure funding.

“So 2019's awards are likely to be driven more by building jobs along with small-scale infra projects (like smaller roads). These might mean lower margins for the contractors. However, the current orderbook for large contractors can support them through 2020 in our view,” he says.

MIDF’s Danial sees the RM54.7 bil development expenditure in Budget 2019 as significant and a positive towards near-term development projects. “Despite the recent cancellation and deferment of mega projects, the anticipated drag on the sector was less than initially thought,” he says. “While certain review exercise on mega projects has put a strain on sentiment, we believe the sector’s long-term outlook will be driven by sustainable measures. These are positive for the long term.” This new course may seem “conservative”, he notes, but it is “precautionary and reasonable” as Malaysia faces internal and external risks.

 

Negatives have been priced in

Vincent Lau, vice-president of research at Rakuten Trade Sdn Bhd, also puts on a bullish cap in analysing the sector. “The major infrastructure projects that have been reviewed or postponed would likely be back, albeit at reduced cost or value for money. The negatives have been priced in and very much oversold, so any whiff of news on the comeback of such projects will see the construction sector bounce off,” he says.

But regardless of how the market pans out for the construction sector, Baru remains optimistic. “In Buku Harapan, the government believes that infrastructure like roads and highways are its responsibility. Therefore, the government aims to provide infrastructure which is the best value for money for the people,” he says, referring to the PH election manifesto booklet.

Indeed, a lot is riding on Baru’s shoulders to shore up confidence in the construction sector. “It will be my priority to always support the transformation of the construction industry to optimise development of infrastructure without compromising the wellbeing of the people,” he says.

His hope for this year is that the ministry’s initiative “Digitalising the Construction Industry” will be well received. He believes this would speed up implementation for a “sustainable” construction industry. “With this, I believe we can be a model for the emerging world, (we can) more than double the productivity of the industry, matched by higher wages in 2020.” FocusM



This article first appeared in Focus Malaysia Issue 316.