Big plans: Strong sector growth coupled with an ambitious roadmap for development

Spurred on by massive capital expenditure projects by both the government and the private sector in response to Malaysia’s strategic economic development plans, growth in the country’s construction sector has been outpacing GDP expansion in recent years. The government’s Economic Transformation Programme (ETP) and public-private partnership (PPP) projects have spearheaded much of this growth in recent years, leading to a multiplier effect across the industry, although a downturn in public spending in 2013 due to elections has dampened construction prospects for the year. Public investment increased by 0.7% in 2013 compared to a 17.1% increase the previous year, according to data from Bank Negara Malaysia (BNM), the central bank, although this slowdown was offset by increased spending on public enterprises. Activity in the residential and civil engineering sectors underpins the construction industry, particularly in high-end residential subsectors in the Klang Valley, Penang and Johor, as well as in mass transportation and energy-related projects.

Leading Indicators

The sector has experienced consistently strong growth in the past four years as the industry expanded by 11.4%, 4.7%, 18.1% and 10.1% each year from 2010 to 2013, according to data from BNM. For 2013, the construction sector accounted for 4.14% of the country’s GDP compared to 5.6% in 2012 and 5.1% in 2011, according to data from the Construction Industry Development Board Malaysia (CIDB). The total value of construction projects in the country for 2013 was RM92.30bn ($28.81bn) spread over 5985 projects according to the CIDB, down significantly from the RM123.60bn ($38.58bn) over 7650 projects recorded in 2012, which followed three consecutive years of growth.

Non-residential projects led all categories in terms of the number of projects and value with 2266 builds valued at a combined RM38.74bn ($12.09bn) in 2013, down from the RM39.26bn ($12.25bn) spread over 2636 projects recorded the previous year, according to the CIDB. Residential builds have tailed off, dropping from 2206 projects valued at RM32.38bn ($10.11bn) in 2012 to 1636 worth RM27.69bn ($8.64bn) in 2013. Spending on infrastructure was reduced by more than 50% from RM44.47bn ($13.88bn) for 1914 projects in 2012 to RM18.82bn ($5.87bn) for 1543 projects the following year. Social amenity buildings dipped from RM7.49bn ($2.34bn) for 894 projects to RM7.05bn ($2.2bn) for 540 projects over the same period. The highly urbanised states of Johor and Selangor have remained a close first and second in terms of ongoing construction activity in 2013, with the former edging out the latter 1147 to 1117 in terms of the number of projects awarded in 2013, although Selangor easily outpaced all other states in terms of construction value with RM21.24bn ($6.63bn), while projects in Johor were worth RM15.53bn ($4.85bn). These were followed by the Federal Territories (Wilayah Persekutuan) comprised of Kuala Lumpur (KL), Putrajaya and Labuan with 511 projects valued at RM13.52bn ($4.22bn), Perak with 479 valued at RM3.07bn ($958.15m) and Pahang with 423 valued at RM3.28bn ($1.02bn). The Borneo province states of Sabah and Sarawak recorded construction projects totalling RM5.62bn ($1.75bn) and RM12.42bn ($3.88bn), respectively.

PPP

Malaysia’s rolling series of five-year development plans provide not only the roadmap for development which invariably includes public sector infrastructure builds, but also guidance as to how these capital expenditures are integrated into the private sector. Under the 9th Malaysia Plan in 2009, the government began incorporating more private participation in public projects under the PPP Guidelines and the Private Finance Initiative (PFI) scheme along with the PFI Unit, now known as the PPP Unit. Although PPPs have existed in Malaysia in one form or another since the 1980s – evolving from the Malaysian Incorporated Policy in 1981 to the Privatisation Policy in 1983 to the Guidelines on Privatisation in 1985 to the Privatisation Master Plan in 1991 – the most recent 3PU system greatly increased the private sector’s role in these projects. Under the current system, PPP projects must fulfil the following criteria: projects are in line with strategic needs and priority of the government; output specifications can be clearly identified and quantified; projects with technological obsolescence risk will not be considered; the sponsor must be financially strong and able to establish a special purpose vehicle to undertake PPP projects with a paid-up capital equivalent to 10% (minimum) of the project value; and for accommodation-based PPP projects, the economic life of the underlying assets must not be less than 20 years.

Going Private

This evolution has, in turn, had a considerable impact on the construction sector, resulting in the ratio of public to private construction projects becoming more tilted towards private developments. As recently as 2009, the expenditure gap between the two segments was as little as $2.3bn ($10.08bn for 3014 government projects and $12.38bn for 4004 private projects), but the recent surge in private investment has resulted in a dramatic skewing in the sector’s favour with a total of 5709 private construction projects cumulatively valued at RM105.3bn ($32.86bn) in 2012 compared to just 1941 projects worth RM18.26bn ($5.7bn) for the public sector, according to CIDB data. This drift has continued in 2013, with private sector project value nearly quadruple that of government projects at RM72.39bn ($22.59bn) with 4504 total projects, compared to RM19.92bn ($6.22bn) with 1481 projects. Much of this shift can be attributed to the substantial value of PPP projects carried over in the 10th Malaysian Plan (10MP, 2011-15) which focuses on the improvement of basic infrastructure and upgrading of public transportation in greater KL. These include six major highway projects worth an estimated RM19bn ($5.93bn), four rail and transport projects, three power generation projects, two education projects, the privatisation of Penang Port and various other projects. Some projects will be beneficiaries of the facilitation fund managed by the State Planning Unit for the purpose of bridging the viability gap in high impact private investment projects. Under the 10MP a total of RM20bn ($6.24bn) has been allocated to the fund, of which RM5bn ($1.56bn) is set aside to finance land acquisition for highway projects implemented via a PPP approach.

Mass Transit

In line with the key priorities of the 10MP, the transportation sector continues to be a driving force for the construction sector as the government looks to facilitate industrial development while easing congestion in its rapidly growing urban centres. Large-scale mass transit projects continue to account for a substantial portion of public expenditures, and include a $6.97bn mass rapid transit (MRT) line extension, $2.18bn light rail transit (LRT) extension and six separate highway projects with a combined $5.76bn price tag included in the 10MP. Work on the extensive three-line Klang Valley MRT project continues in earnest, with work ongoing to complete the initial phase of development as of April 2014. Approved by the government in December 2010 at an estimated total cost of RM50bn ($15.61bn) to RM70bn ($21.85bn), the construction of the initial 51-km Sungai Buloh-Kajang line was launched in July 2011 by a joint venture of construction giant Gamuda, and local utilities and infrastructure firm MMC. The plan for this initial line includes a 9.5-km stretch of underground tunnel traversing the KL city centre from the north at Semantan Portal at Jalan Duta to the southern end of the tunnel at the Maluri Portalalnong with seven underground stations: KL Sentral, Pasar Seni, Merdeka, Bukit Bintang Sentral, Pasar Rakyat, Cochrane and Maluri. Phase one of this line (from Sungai Buloh to Semantan) is scheduled to be running by the end of 2016, while the second phase connecting Semantan to Kajang should become operational by July 2017. Each train will have four coaches having a total capacity of 1200 passengers and is projected to move around 400,000 passengers daily.

Alongside the LRT, monorail, KTM Komuter, KL International Airport Ekspres and KLIA Transit systems, the MRT forms the rail-based public transport backbone of the greater KL/Klang Valley region. The expansion of the LRT rail includes an RM7bn ($2.18bn) extension of the Ampang and Kelana Jaya lines expected to be completed by 2016 after the 2014 completion date was pushed back due to delays in issuing engineering, procurement and construction contracts.

Rail Links

Another ambitious project in an earlier stage of development is the highly anticipated KLSingapore high-speed rail (HSR) line which would link the two capitals. Construction costs for phase one of the RM40bn ($12.48bn) HSR project, which includes 330 km of rail lines along with seven intercity stops, is projected to be between $2.42bn and $4.24bn. Billed as a crucial link between the two economic centres, the HSR would operate at speeds of up to 300 km/h and provide a viable alternative to air travel, with express train journey times estimated at just 90 minutes. The project would also open up new geographical areas for development, with five intercity transit stops to be built at Seremban in Negeri Sembilan, Ayer Keroh in Malacca, Muar, Batu Pahat and Iskandar Malaysia in Johor. Construction for the rail line is targeted to begin in 2015 with completion slated for 2020. As of March 2014, the project was in the pre-tender second phase of the project which includes finalisation of contractual obligations between Singapore and Malaysia, and finalisation of project structure that will be the main input to the tender process. Major Malaysian infrastructure players such as YTL, MMC, Gamuda and UEM Group are all expected to compete for the lucrative project. The electrified double tracking of the 329-km northern segment of Malaysia’s primary rail line linking Ipoh in Perak to the northern end of the country at Padang Besar in Perlis is also underway after initial work on the RM12.5bn ($3.9bn) project was begun in 2008 and is projected by contractor Gamuda to be completed by November 2014. Work on the southern segment has gone less smoothly with only the Seremban to Gemas segment under construction under a $1bn contract with Indian contractor IRCON, leaving the remaining contract for the Gemas to Johor Bahru section unresolved as of April 2014. The country’s road network is also undergoing a substantial upgrade with a total of seven new highway systems planned to alleviate growing congestion on motorways. These include the West Coast Expressway, Guthrie-Damansara Expressway, Sungai Juru Expressway, Paroi-Senawang-KLIA Expressway, Ampang-Cheras-Pandan Elevated Highway and the proposed Kinrara Damansara Expressway (KIDEX).

Inputs

Malaysia’s strong economic growth in recent years has proven to be a double-edged sword that has both driven the building industry to new heights while simultaneously driving up construction costs by creating scarcity in the markets of both material and labour. While global demand for key materials such as steel and copper has softened in recent years leading to corresponding easing of global commodity prices, domestic demand remains strong due primarily to the continuation of large-scale building projects. Since the base year of 2005, the producer price index (PPI) for materials used in construction rose steadily until peaking during the height of building activity in 2012 at 139 (compared to the base level of 100), declining slightly since then to 134.8 in 2012 and 134.3 in January 2014, according to data from the Malaysian Department of Statistics (MDS).

Responding to this demand, production of building inputs has been steadily increasing. The BNM manufacturing production index for construction-related clusters increased rapidly from 133.7 in 2010 to 170.5 in 2012 (recording annual increases of 17.6% and 8.5%) before slowing in 2013 to 3% growth to 175.7. From 2011 to 2013, annual changes to the production index of construction-related non-metallic mineral products were 21.6%, 5% and -8.2%, while basic iron and steel and non-ferrous metals went from 1.4% to -5.8% to 5.0%, and fabricated metal products recorded changes of 23.8%, 18.0% and 9.9%.

Further to this, construction costs are likely to be impacted by an increase in fuel costs initiated in September 2013, adding a RM0.20 ($0.06)/ litre increase to RON 95 petrol diesel for a market price of RM2.10 ($0.66) and RM2.00 ($0.62), respectively. The prices of many construction-related materials, machinery and transportation costs will likely increase alongside any boost in cost passed on to developers. The Master Builders Association Malaysia (MBAM) has cited the “extremely high” landed cost of bringing in construction equipment of up to 30% import duty in addition to a 10% sales tax levied on equipment such as cranes, vibratory rollers, dump trucks and other heavy specialised vehicles as an impediment.

Labour

Like construction materials, strong demand for labour in the industry has put strain on the sector’s workforce, which has resulted in a heavy reliance on foreign workers to fill the void. As construction activity slowed in 2013, the number of registered contractors also dropped from 69,490 in 2012 to 66,672 in 2013, according to CIDB data. Selangor state hosted the largest number of contractors with 10,773 in 2013, followed by Sabah with 9674 and the Federal Territories with 7263. Despite this, retrenchment of construction workers fell from 1002 persons to 353 persons in the construction sector, according to the Ministry of Human Resources (MHR). Construction workers made up 9% of the domestic workforce, ranking fourth in total employment with 1.26m workers, behind the services sector at 60%, manufacturing (17%) and agriculture (13%), according to MHR data.

The sector also ranked highly in terms of the percentage of registered foreign workers, who accounted for 20% of the official 2.47m-strong expatriate workforce (estimated to be considerably higher when factoring in non-registered workers). This reliance on foreign workers became a serious hindrance to the sector in September 2013 when the government stepped up its efforts to locate and deport illegal workers. During the first phase of this operation, Malaysia’s Immigration Department announced plans to arrest and deport some 400,000 illegal immigrants and arrest 45,000 employers. The initiative started off strong with more than 1000 workers arrested in the first month of operations and has continued into 2014 when some 10,000 officers were deployed in January, resulting in the inspection of approximately 6000 workers of whom more than 1560 were arrested on charges ranging from travelling to Malaysia without documents, holding a fake working permit or visa overstays, according to Malaysia’s home ministry. The strategy has sent ripples throughout the construction industry as companies already hard-pressed to retain sufficient labour are stretched further as this segment of the labour pool thins.

“MBAM members have been seriously affected by the recent raids and most of the workers, whether legal and illegal, have fled the work site to avoid arrest,” Lenny Lim, senior manager at MBAM, told OBG. “It is our understanding that all the workers including the legal ones will be detained unless they can prove that they have proper documentations, which sometimes can be quite difficult as their documents can still be with their employer or immigration pending visa stickers to be affixed by the authorities. All in all, this could potentially lead to a repeat of the year 2002 when the construction industry was brought to a standstill. The impact of the labour shortage seriously affected the construction industry then, and industry players took a long time to recover. The implication of this increase is potential delays in the delivery of projects within the country.”

Residential

long with high-impact civil engineering projects, the second primary driver of the construction sector has been the residential subsector. Although the number of new residential contracts awarded declined in 2013 as the market has cooled, ongoing work continued to drive the sector forward, with investment in residential construction increasing 19.6% over 2012 levels, according to BNM data. Much of this growth is underpinned by the construction of high-end and high-rise properties in the Klang Valley, Penang and in Johor. A total of 13 high-end condominium projects were completed in the greater KL area in 2013, according to global property consultancy Frank Knight. These projects range in size from 40 to 480 units and were constructed in Mont Kiara, Ampang, KL City and Bangsar.

Spurred on by heavy investment in the Iskandar project, Johor experienced a range of new high-rise projects that were undertaken in 2013. After nine high-rise projects that combined had more than 4000 units were launched in the first half of the year, another 17 towers were started in the second semester of 2013. The largest of these by far was Country Garden @ Danga Bay which will encompass an impressive 9000 units by itself. Other substantial builds planned include the 1465 units housed within The Wave @ Marina Cove development being built in the city centre and the 944 units ranging in size from 1068 sq ft to 1100 sq ft within the M Condominium @ Larkin being developed by MB Builders.

Counterbalancing the interest shown in the more profitable high-end properties, the government has been mindful as well of developing more affordable options through various government programmes. One of the largest schemes is carried out via PR1MA Corporation, which develops low-cost alternative housing and is able to keep expenditures down in part through favourable deals for government-owned land. Most recently, PR1MA rolled out 20,000 homes across the country in August 2013. These 15 projects are part of the larger efforts of the programme to supply the 80,000 units specified in the 2013 budget and the 500,000 units planned by 2018.

Powering Up 

Spearheaded by powerful national energy champion Petroliam Nasional (Petronas), Malaysia is also in the midst of a substantial capital expenditure trend in the energy sector which has resulted in tens of billions of dollars of new infrastructure projects necessary to support increased output of the industry. These include oil and gas projects such as Petronas’ largest ever investment in the Refinery and Petrochemical Integrated Development (RAPID) project, along with the Malacca regasification plant (completed in 2013), Sabah Ammonia-Urea Plant (SAMUR), Sabah-Sarawak Gas Pipeline, Sabah Oil and Gas Terminal in Sipitang and the Kinabalu non-associated gas (NAG) upstream development as well as two large-scale power plants in the Tanjung Bin and Janamanjung facilities. The RM60bn ($18.73bn) RAPID endeavour planned for Pengerang represents a massive outlay by the government that should keep contractors occupied for years constructing a 300, 000-barrel-per-day oil refinery that will also supply naphtha and liquid petroleum gas feedstock for the associated petrochemical complex. Contracts to construct the supporting RM4.08bn ($1.27bn) Pengerang LNG Terminal were awarded to a consortium of Royal Vopak and the Dialog Group to construct the terminal in two stages by 2018. Work on the RAPID complex itself has been delayed multiple times due to ongoing negotiations with landowners and local governments regarding the relocation of residents from the 6000-ha site. The start-up date for the project has likewise been pushed back from 2016 to 2018.

Competition

Although still dominated by local firms, foreign construction companies (primarily from China) have been playing an increasing role in Malaysia in recent years. This new tendency began picking up momentum in 2010 when foreign contracts hit triple digits for the first time with 110 contracts, followed by 124 in 2011 and 130 contracts in 2012. In 2012 these contracts were almost exclusively for private sector work, accounting for 129 of the 130 projects with a total combined value of $3.7bn, according to CIDB statistics. By contrast, Malaysian construction companies are finding it difficult to compete abroad and have seen foreign projects decline to a trickle in recent years. The amount of work carried out by Malaysian contractors overseas has declined from a 2007 peak value of $5.91bn to around $1.2bn each in 2010 and 2011 down to just $88.48m in 2012.

India was the largest employer of Malaysian construction services, with $5.48bn in contracts from 1986 through the first quarter of 2013, followed by Saudi Arabia with $3.68bn, the UAE with $3.44bn, and Qatar and China rounding out the top five at $2.91bn and $1.99bn, respectively. Since Malaysian contractors undertook a combined 55 construction projects valued at RM9.47bn ($2.96bn) in 2008, opportunities have dwindled significantly to 28 projects in 2009, to 24 in 2010, nine in 2011, four in 2012 and five in 2013, according to CIDB data. Some of these losses have been attributed to a lack of large financing institutions that are more adept at assisting Malaysian conglomerates to better identify opportunities abroad and more accurately assess political risk, as well as Malaysian companies often taking a more risk-averse approach to emerging market projects than their competitors. During the industry’s peak participation in foreign markets, the Middle East was the primary region of activity and accounted for RM5.61bn ($1.75bn) of the RM9.47bn ($2.96bn) in value for 2008 followed by ASEAN countries with seven projects worth RM1.47bn ($458.79m). In 2013 Malaysian contractors were awarded projects in Bahrain worth RM1.04bn ($324.58m), in the UAE worth RM325m ($101.43m), in Thailand worth RM80.88m ($25.24m), in the UK worth RM84.16m ($26.27m), and in Brunei Darussalam worth RM12.82m ($4m).

Outlook

A resumption in government expenditure for major projects should push the sector back into the black. Mixed-use mega projects in KL and Iskandar will also produce stable demand for construction services. This activity is projected to boost the construction sector’s GDP contribution to RM32.37bn ($10.1bn) on an estimated 10.1% growth rate, according to BNM forecasts.

Although the construction of high-end residential projects is expected to cool, investment in the residential property segment is expected to remain firm with support from mid-range properties, in line with efforts to meet rising demand for affordable housing by low- and middle-income earners. Indeed, with loans disbursed by the banking system to the construction sector swelling by 20.5% in 2012 and another 14.4% in 2013, building is also expected to remain on a trajectory of sector growth within the short term.