Malaysia on the road to infrastructure boom

The country is attempting to boost its economy with bold spending on roads, bridges and other transport links.

Malaysia is on the way to becoming a developed nation by 2020 but to reach its goal the government needs to prop up its flagging economic growth rate. One avenue is by ramping up infrastructure spending.

Prime Minister Najib Razak’s said in a budget speech on October 10 that the nation would start work on projects such as highways and railways worth at least M$75 billion ($23 billion).

Najib is trying to mitigate the impact on the economy of his efforts to narrow Malaysia’s budget deficit through subsidy cuts and new taxes which have left Malaysian companies and consumers grappling with higher costs. Malaysia’s annual GDP growth rate moderated to 5.6% in the third quarter from 6.5% in the second quarter.

“Growth may face headwinds from fiscal consolidation and the implementation of [a] goods and service tax in April 2015,” said Jeff Ng,  economist at Standard Chartered.

Although the Malaysian economy is not in a dire state just yet — with GDP growth well above the 10-year average of 5% — some form of stimulus seems warranted.

Infrastructure plans include a 1,663-kilometer highway between the states of Sabah and Sarawak on the island of Borneo worth some M$27 billion and rail projects around the Malaysian capital.

“The fact that the government has addressed Malaysia’s infrastructure needs is commendable because they’ve got to compete against other nations in Southeast Asia for investments,” Michael Cooper, head of infrastructure in Asia-Pacific project finance at HSBC. “This will help support growth.”

Malaysia’s infrastructure investment rose from $6 billion to $16 billion between 2005 and 2013 according to Mohd Anwar Yahya, a senior executive director at PricewaterhouseCoopers in a June report. Infrastructure spending is expected to grow by around 9% a year between 2013 and 2025, which is consistent with other countries in the region but substantially faster than the sector’s global growth .

This is part and parcel of Najib’s Economic Transformation Programme, which was unveiled in 2010 to attract $444 billion of local and foreign private sector-led investment in Malaysia by 2020, ranging from oil storage to a subway in Kuala Lumpur.

Public versus private
While Malaysia’s plan to boost infrastructure investment is viewed positively by the market what continues to be a problem is the lack of collaboration between the government and private sector.

This needs to be enhanced especially given that the private sector is the largest contributor financially to the construction industry. Also given the massive infrastructure needs plus with budget constraints, the private sector’s involvement is an attractive option for governments.

Last year, overall contribution from the construction sector was M$120 billion, of which some M$100 billion was from the private sector, while M$20 billion was from projects funded by the government, according to Works Minister Fadillah Yusof in a press briefing in September.

The number of government companies linked to infrastructure work needs to be reduced said a Kuala Lumpur-based banker who specialises in infrastructure. “There’s a question to why the government competes with the private sector, which has proven expertise … and provides those services at a lower price than the government sector,” the banker said.

For example, the cost overruns and delays seen in the recent government-run construction of Malaysia’s new budget terminal, Kuala Lumpur International Airport 2 or KLIA2, were arguably due to a lack of private sector participation.

The first estimated cost in 2007 was M$1.7 billion, which increased to M$2 billion in 2009 and eventually to M$4 billion. The terminal, which was originally due to complete in April 2012, also only opened in May this year.

As a result of the rise in costs, government-owned Malaysia Airports Holdings was forced into a borrowing-spree to raise the necessary funds to finance the airport. In 2010 it raised a M$3.1 billion 15-year Islamic medium-term note and last year it sold another M$2.5 billion 20-year senior sukuk. All this fell onto the government’s books.

The mismanagement of certain projects suggests that better planning and project supervision is needed to improve efficiency, and perhaps more private sector participation.

“As economies move forward, governments need to step away from providing support for projects,” the infrastructure banker said. “When there is effective outsourcing to third parties, costs don’t accrue to the government and that’s the way forward.”

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