Sarawak's construction industry targets various investments

Steady economic growth, increased industrialisation, rapid urbanisation and one of the highest foreign investment rates in the country are all contributing to fuel a strong performance in Sarawak’s construction industry, though there are signs of an impending slowdown. Both the public and private sectors are doing their part to fill up the order books – the former has committed to massive civil engineering projects to shore up the state's infrastructure, while the latter has been commissioning a steady stream of major manufacturing plants in the state’s burgeoning industrial parks.

BREAKING IT DOWN: As a result, the construction industry has seen a significant increase in activity over the five-year span of 2009-13, during which the annual value of completed projects rose from RM4.88bn ($1.5bn) to RM8.04bn ($2.4bn), according to data from the Department of Statistics Malaysia (DOSM). This increase has plateaued in the past two years: quarterly output averaged RM1.9bn ($578m) from the first quarter of 2013 to the third quarter of 2014, with a high of RM2.3bn ($700m) and a low of RM1.7bn ($517m). Over the same period, Sarawak’s construction sector accounted for an average of 8% of nationwide builds. In 2012 the industry’s contribution to state GDP was 3.2%, slightly below the national average of 3.85%.

Unlike the national construction trend, which relies more heavily on private sector spending, construction in Sarawak is split relatively evenly between publicly and privately funded projects. Of the RM1.90bn ($578m) of construction carried out in Sarawak in the third quarter of 2014, some RM929.55m ($282.8m) was spent on public civil engineering projects, compared to RM899.67m ($273.7m) spent on residential and nonresidential builds, according to DOSM data.

This momentum looks set to be sustained going forward, with 476 new construction projects totalling RM15.28bn ($4.6bn) approved in 2013, including one in excess of RM1bn ($304.2m), according to the Construction Industry Development Board (CIDB). This compared to 514 builds worth RM9.58bn ($2.9bn) approved in 2012. In the first half of 2014, a further 110 projects totalling RM2.03bn ($617.5m) were approved.

SCORE: By far the state’s largest driver of construction at present, the Sarawak Corridor For Renewable Energy (SCORE), a large industrial development, has employed an army of construction workers to build new townships and manufacturing centres. A slew of heavy industrial projects are already under way in Samalaju, with more on the way (see analysis). Designated “growth nodes” are also in the midst of major overhauls at Tanjung Manis (halal foods, ship-building, resource-based industries), Mukah (smart city, services, research and development [R&D], human capital), Baram (electricity, eco-tourism, biomass, agriculture) and Tunoh (oil palm, food production, timber, tourism).

From its inception in 2008 through November 2013, SCORE has attracted over RM29.1bn ($8.9bn) in private investment, 32% of which has been realised, according to Maybank. Of the 16 private investments approved by the end of 2013, 12 are located in the Samalaju area, three in Tanjung Manis and one in Mukah. SCORE has also received RM2bn ($608m) in public funding for capital expenditures, with another estimated RM14.5bn ($4.4bn) allocated for three completed power plants – in Bakun, Murum and Mukah – and the new Samalaju Port, now under construction (see analysis).

With much of SCORE’s early focus centred on Samalaju, the government is pushing hard to bring the state’s infrastructure on par with the world-class industrial projects being built there. Besides the new port, Samalaju is in the midst of a substantial expansion of its land-based transport network. Ongoing road-building projects initiated in 2006 under the Ninth Malaysia Plan, which were still under way as of January 2015, include the RM642m ($195.3m), 66-km Murum Hydroelectric Project (HEP) Road; the RM823m ($250.4m), 127-km Baram HEP Road; the RM1.81bn ($550.6m), 159-km Samarakan-Sangan-Kapit Road; the RM1.48bn ($450.2m), 73-km Baleh HEP Road; the RM171m ($52m), 22-km Limbang HEP Road; and the RM561m ($170.7m) Tunoh Road. Construction continued under the 10th Malaysia Plan with the RM450m ($136.9m) Tanjung Manis Halal Hub road project and the RM77m ($23.4m) Mile 23 Bintulu overpass project.

TANJUNG MANIS: The second-most-developed growth node after Samalaju, Tanjung Manis is still largely in the infrastructure development stage and has awarded a number of large construction contracts to lay the groundwork for future growth. Hock Seng Lee, a locally based construction and marine engineering group, has won a number of tenders in Tanjung Manis in recent years, including a RM452m ($137.5m) project to boost water-supply capacity from 7m litres a day to 107m, which was finished in 2014 – a second upgrade is planned in the range of RM500m-1bn ($152. 1m-304.2m) and a RM80m ($24.3m) contract to build roughly five km of access roads within the halal hub. Naim Holdings, a local conglomerate, is also building a new 81-ha township, with 192 out of 2660 residential units completed as of April 2014.

MUKAH: Support infrastructure is also being built in the Mukah growth node of SCORE, which is slated to be the future host of Mukah Smart City and will incorporate, among other projects, a human resource skills development training centre, science park and R&D centre, as well as the proposed Matadeng Industrial Park. To accommodate the expected increase in traffic to the area, the Ministry of Finance (MoF) appointed Sarawakian contractor Hock Peng in early April 2014 to carry out the initial earthworks phase on a RM600m ($182.5m) upgrade to the antiquated Mukah airport, which is scheduled for completion in 2018.

Located about seven kilometres from the town centre, the Mukah airport will see planned upgrades that meet Code 3C requirements of the International Civil Aviation Organisation, meaning it would be capable of handling medium-sized aircraft such as ATR72 and Fokker 50 turboprops. This will require building a new runway at least 1500 metres long and 30 metres wide. The first works, to be tendered in the next phase of construction, include a terminal building with gross floor area of about 3500 sq metres; a control tower; a fire and rescue station; a meteorological station; and an aircraft parking apron capable of accommodating up to two ATR72 aeroplanes at a time. In March 2014, the MoF approved funding of RM133.3m ($40.5m) for the initial phase of construction. The entire airport is projected to cost RM500-600m ($152.1m-182.5m).

POWERING UP: Arguably the most crucial infrastructure component launched so far has been a series of hydroelectric power plants, which will provide the stable, inexpensive electricity necessary to supply SCORE tenants. As of early 2015, three hydroelectric dams had been completed: one in Bakun worth RM7bn ($2.1bn), one in Murum worth RM4.5bn ($1.4bn) and one in Mukah worth RM950m ($289m), in addition to supporting sub-stations and transmission lines totalling RM425m ($129.3m). Two other hydroelectric power plants, of 1200 MW at Baram and 1295 MW at Baleh, are expected to begin construction once the access roads to their building sites have been completed.

Complementing these projects is the state's largest coal-fired power plant, the RM3bn ($912.6m), 600-MW Balingian power plant, which began construction in 2014. Three packages worth a total of RM1.67bn ($508m) were awarded as of October 2014, the largest being a RM1.5bn ($456.3m) engineering, procurement and construction (EPC) contract won by Shanghai Electric, which later appointed Sarawak Cable as sub-contractor for a RM493m ($150m) EPC contract scheduled to finish in March 2018. The other two contracts tied to the Balingian project that have been awarded are the earthworks component, worth RM98.8m ($30m) and set for completion in early 2016, and an upgrade to a 23-km access road, worth RM75.5m ($23m). In all, some RM67bn ($20.4bn) in private investment is being steered into the power sector to supply SCORE with the vast amounts of electricity it will require.

MATERIALS: Growing demand for construction materials in recent years has been largely offset by increases in local production capacity. Some products, such as cement, have seen higher domestic output, while a global supply glut of steel, particularly in China, has depressed import prices. As a result, building costs have remained relatively stable over the past few years: the building materials cost index for single storey residential and commercial buildings increased only marginally from 2012 (the baseline year) to December 2014. Over this three-year period, Kuching’s index rose to 100.1 and Miri’s to 100.2, while Sibu’s declined a full point to 99.0, according to CIDB data.

Cement prices in Kuching stayed flat in 2013, with ordinary “ready-mix” Portland cement selling at RM16.95 ($5.16) per 50-lb bag before rising slightly to RM17-18.50 ($5.17-5.62) during the first 10 months of 2014. Cahya Mata Sarawak (CMS), a local construction giant and the state’s lone producer of cement and clinker, has recently invested RM190m ($57.8m) in a new cement plant in Mambong that will boost production by 1m tonnes per annum (tpa) when commissioned in 2016. CMS is also spending another RM12m ($3.65m) on four new mobile pre-mix plants. These investments will boost the company’s capacity by around 60% from its current 1.75m tpa, which is derived from its two existing plants in Kuching and Bintulu.

Prices of other inputs – including aggregates, sand and roofing materials – have also remained relatively stable over the past two or three years. The major exception to this has been imported steel products such as bars and wire, for which prices have softened as the dumping of cheap steel products onto global markets by Chinese mills increases in intensity. The price of 10-mm mild steel round bar in Kuching, for instance, has declined from RM2700 ($821) per tonne in January 2013 to RM2267 ($690) as of October 2014. While the new goods and services tax (GST) is expected to bump prices up slightly in the short term when it comes into force in April 2015, the long-term effect on construction costs are likely to be negligible.

GOING GREEN: While Sarawak has not traditionally employed environmentally friendly building practices, the creation of new townships virtually overnight has given planners the opportunity to incorporate “green building” components into construction at the earliest stages. One example is the boom town of Samalaju, built to support the industrial node developing at the site, which is pursuing the well-regarded Leadership in Energy and Environmental Design (LEED) certification devised by the US Green Building Council, a non-profit. By taking into account a new building’s potential impact on the environment – its electricity and water consumption, soil erosion, emissions and so on – LEED’s green building principles are incorporated at all stages of the projects it certifies, from planning and design to construction and operations. Once built, these highly efficient buildings will be able to offset some of the heavy carbon footprints created by the neighbouring energy-intensive industrial park.

If LEED certification is achieved, it would make Sarmalaju the first “green-certified” township in Malaysia. As such standards gradually catch on, a new wave of more efficient structures could take their place alongside the state’s first – for a time its only – green-certified building: the headquarters of Menara Sarawak Energy in Kuching, which earned a “silver” rating under the Green Building Index (GBI) in July 2013. The GBI, a system unique to Malaysia, rates buildings as silver, gold or platinum based on six criteria: energy efficiency, indoor environmental quality, sustainable site planning and management, material and resources, water efficiency, and innovation.

Construction on Sarawak’s second green building, a new branch of the capital’s Kuching North City Hall, was initiated in March 2014. A component of the city's “clean, beautiful, safe” campaign launched in 2013, in which the city incorporates energy-efficient technology into new municipal offices, the building is to be completed by June 2016. While the facility is not targeting official GBI certification, it will include a wide array of green features such as LED lighting and use of natural light. As of mid-2014, three of Malaysia’s 29 GBI-certified buildings were in Sarawak.

TURNING THE TAPS: As a result of Sarawak’s plentiful natural resources yet relatively underdeveloped infrastructure and underserved population, the state now finds itself squarely in the crosshairs of a number of well-funded national development programmes designed to boost income levels and improve quality of life. Much of the RM4.5bn ($1.4bn) which the 2015 national budget allocates to upgrade rural facilities and infrastructure is earmarked for East Malaysia. Besides the outlays for road improvements noted earlier, expenditures include RM1.1bn ($334.6m) to install electricity connections in 15,000 houses; RM394 ($119.9m) to improve rural clean water supply for 7500 houses; RM160m ($48.7m) to improve rural air services in Sabah and Sarawak by leasing new aircraft; RM26m ($7.9m) to install 10 new lamp posts in every village nationwide (about 22,000); and the construction of a health clinic in the town of Lubok Antu.

The 2015 budget also addressed Sarawak's limited telecommunications coverage, allocating RM2.7bn ($821.3m) for a three-year scheme to build 1000 telecoms towers and lay undersea cables. The first tender in this category, for the construction of 400 towers (including 149 in Sarawak), is expected in 2015, with telecoms contractors OCK Group, Instacom Group and Weida all expected to submit bids.

In addition to federal expenditures covered under the national development plans, the Public Works Department Sarawak allocated RM217m ($66m), or 6.1% of its 2015 budget, towards road and bridge works. This will be supplemented by another RM438m ($133.2m) allocated in 2014 by the Sarawak government for transport and communications projects.

INFRASTRUCTURE: The Malaysian government has been pouring billions of ringgit into infrastructure projects to provide an extensive and stable utility network, as well as an efficient and modern transport system. Substantial outlays from both federal and state agencies in recent years to install the infrastructure for the massive SCORE project have been a boon to the construction industry, and have included several big-ticket contracts for multi-billion-ringgit projects.

As a result, public building projects have been on par with private sector investments. The 167 infrastructure contracts approved in 2013 were worth RM4.22bn ($1.3bn), or about 27% of the industry that year, in addition to 67 approved social amenity projects worth RM1.37bn ($416.8m). These figures are roughly on par with allocations in 2012, when 81 infrastructure and 62 amenity contracts were approved, worth RM3.09bn ($940m) and RM567.8m ($172.7m), respectively. In the first half of 2014, a total of 37 infrastructure contracts worth RM1.17bn ($356m) and 13 social amenity builds worth RM132.3m ($40.2m) were approved.

Among the big-ticket contracts currently dominating the sector are upgrades to a large portion of the Trans-Borneo Highway. Work on the state's primary land route has been stepped up in recent years, with RM500m ($152.1m) allocated for improvements in 2014, including additional lanes in some sections. This figure ballooned in 2015 when the federal government announced it was accelerating work on the 1663 km under its purview (936 km in Sarawak and 727 km in Sabah) at a total cost of RM27bn ($8.2bn). Both local and national construction companies are expected to bid for a slice of the project in 2015, including Hock Seng Lee, IJM Corporation, WCT Holdings, Bina Puri Holdings, TRC Synergy, Naim Holdings and KKB Engineering. The 2015 budget also allocated RM943m ($286.9m) to build and upgrade 635 km of rural roads in East Malaysia, while dozens of contracts are being tendered for hundreds of kilometres of new and upgraded roads to support SCORE.

EMPLOYMENT: The steady supply of ongoing construction projects has left contractors scrambling to find enough workers to fill their ranks, often having to resort to importing labourers from Peninsular Malaysia or abroad. The shortage is particularly acute for trade workers such as welders, carpenters, engineers and other skilled technicians. As of 2014, the construction sector employed more than 10% of the state’s workforce despite contributing only around 3% of GDP, according to DOSM data, with 129,000 employees recorded in the third quarter of 2014 – down from 145,100 in the first quarter but well above the 116,800 on the books at the end of 2012. This ranked the construction sector as Sarawak’s third-largest employer (tied with manufacturing), behind agriculture, forestry and fisheries (281,200) and services (192,200).

The Workforce Development Unit (WDU) within the Chief Minister's Department estimates that SCORE investments created some 2500 direct permanent jobs in the first three quarters of 2014. Of these, 70-80% have gone to locals, although the construction industry as a whole is split about evenly between local and foreign workers. Direct employment aside, the WDU estimates that these investments added indirect jobs at a ratio of 1:4, which would put the total number of jobs created as high as 10,000. When the SCORE project is completed, the 11 major companies currently involved in its development are expected to have generated a total of 8711 direct jobs and up to 40,000 in total, not including those in the construction sector.

OUTLOOK: Buoyed by major public and private investments, Sarawak's construction sector is expected to maintain its current trajectory, with billions of dollars in long-term building projects still under way or on the books, including more than RM15bn ($4.6bn) in new projects approved in 2013 alone. A heavy proportion of these works will remain at SCORE’s epicentre in Samalaju, as hundreds of kilometres of roads await construction alongside the new port and other infrastructure upgrades. All of this is moving forward a steady pipeline of committed private industrial investment. Outside Samalaju, the other growth nodes at Tanjung Manis and Mukah should see continued expansion as more businesses are set up, while Kuching will benefit from increasing urbanisation as well as growth in manufacturing and support services. Last, the short-term demand for worker housing will drive growth in the residential subsector, evolving as projects finish and the focus shifts from temporary worker accommodation to long-term family units in the new townships.