Project Re-Evaluation


Economic News

22 Jul 2010
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With the price of oil and construction building materials expected to continue their ascent, the government revealed that two high profile infrastructure projects will need to be reviewed while others will proceed as planned.

Under the current 9th Malaysia plan, which runs from 2006 to 2010, the government allocated RM200bn ($63bn) for building works and RM20bn ($6.3bn) for private finance initiatives (PFIs). However, Prime Minister Abdullah Badawi stated at a press conference last week that, "While we want to carry out what we have set out to do, we also have to consider that prices of things and building materials have risen, so we have to adjust our allocations."

Badawi stressed that when the plan came into effect in 2006, oil prices where well under the current level of close to $120 per barrel, and the cost of building materials such as steel and cement was not expected to rise to its current level. The forecast for 2008 shows the price of building materials in Malaysia could increase by as much as 15%.

In addition to the unforeseen escalating cost of building materials, another new factor now affecting the allocation of public funds has stemmed from concern over global food security. Indeed, soaring food prices on international markets combined with the curbing of exports from major staple food producing countries has forced the government to allocate more resources towards domestic food production. Furthermore, the government had planned to be saving funds through the reduction of subsidies on major consumer items such as petrol and cooking oil in the second half of 2008. However, the strain on consumers' wallets from rising food prices has led analysts to predict that these subsidy reductions will not take place.

Above all, big-ticket projects are being abandoned because of the ongoing
political battle. Stung by an election setback Badawi is facing an unexpected challenge from the ascendant opposition alliance and its iconic leader Anwar Ibrahim. To restore his public image and win back lost support, Badawi is forced to put the government projects on hold as a way to clean up the alleged corruption in government financed projects.

However, Badawi stated that any reduction in funds would affect only mega projects and infrastructure projects that are not urgently needed. The first casualty was the proposed high-speed train linking Kuala Lumpur and Singapore. It has been announced that plans for the $2.5bn bullet train, which would have been able to carry passengers between the two capitals in 90 minutes, have officially been cancelled.

Another delay has been announced in the construction of a second Penang bridge linking the northern industrial island of Penang to Peninsular Malaysia. The bridge was going to span 24km, making it the longest in South East Asia and third longest in the world. While the price tag for its construction was originally estimated at RM3.5bn ($1.1bn), rising materials costs have led to a re-estimation at RM4.3bn ($1.35bn), 22% higher than originally planned. The bridge was set to be completed by 2011, and at present, no indication has been given as to how long the delay will be.

These announcements are a set back for the local construction sector which was intended to grow in excess of 3.5% year-on-year until 2010, a large part of which was to be driven by the government's ambitious spending programme. Patrick Wong, the president of Master Builders Association of Malaysia (MBAM), told the local press that despite uncertainties and possible delays over certain projects, industry players remain upbeat. "Currently, we are going through a political re-engineering phase. Once we have gone through this phase, the construction sector should be alright," Wong was reported as saying.

Analysts believe that companies that are well managed and focused on improving internal inefficiencies, especially those with a good share of overseas contracts, should be able to weather any potential storm. For example, PLUS Expressway Group, which has emerged as the largest private toll expressway operator in South-east Asia and is ranked as 10th-largest in the world in terms of market capitalisation, has a substantial portion of its revenues coming through their management of the north-south expressway linking Malaysia with Singapore and Thailand. In this respect, it stands to benefit from the proposed high-speed train project being abandoned.

Overall, while some are expressing concern over projects being delayed or reviewed, Badawi has assured the public that the government will not sacrifice "people-centred' projects allocated under the 9th Malaysia Plan, irrespective of whether there will be a shortfall in the funds available or not. In particular, he referred to development and infrastructure projects in rural areas and cited the Eastern states of Sabah and Sarawak as examples where allocation will continue to be provided in order to address the lack of water and electricity supplies as quickly as possible.

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