Upgrading Malaysia’s construction sector

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Short to medium-term prospects for Malaysia’s construction sector remain promising, with state and private sector spending on the rise as the government launches initiatives to spur industry growth.

In mid-September the government issued a five-year blueprint to overhaul the nation’s construction sector. The scheme, known as the Construction Industry Transformation Programme (CITP), outlines measures to professionalise the industry, improve environmental sustainability at the design and construction stages, and increase overall productivity and competitiveness.

Stricter standards

According to Malaysia’s prime minister, Najib Razak, these goals are to be achieved through more stringent industrial standards, formalising professional training and promoting greater use of advanced technology.

Among the standards to be implemented is the Quality Assessment System in Construction, also known as QLASSIC, which will create a unified system for measuring the quality of construction workmanship.

“The CITP targets to make QLASSIC a mandatory element in all government projects by 2018,” Najib said.

During the launch, the prime minister emphasised the need for Malaysia to boost productivity in the sector and reduce the country’s dependence on low-skilled foreign labour. To achieve this, the plan’s 18 initiatives will focus on key productivity drivers, such as the workforce, technology and processes, with a specialist apprenticeship programme on the horizon to bolster local talent.

The new blueprint will also focus on effect multipliers such as building information modelling and industrialised building systems, which the country’s Construction Industry Development Board (CIDB) expects will keep sector growth in the double digits for a third consecutive year.

The construction industry is forecast to expand by 10.3% this year, according to the CIDB, after posting average annual growth of 13.5% over the last three years.

Infrastructure support

Medium-term prospects for the sector have been buoyed by a series of large-scale transport infrastructure projects rolled out by the government as part of the latest five-year development plan, the 11th Malaysia Plan (11MP). These include road, rail and port developments, as well as new affordable housing schemes, which could further accelerate the industry’s growth rate over the coming years.

According to Hong Leong Investment Bank (HLIB), “The current construction sector’s data on contract awards [shows] that the momentum of job wins remains strong for contractors. 11MP has witnessed a 13% allocation increase to RM260bn ($59bn).”

The industry’s strong project pipeline and state commitments to boost funding for infrastructure development prompted the research division of HLIB to issue an “overweight” outlook for Malaysia’s construction sector, noting that higher levels of spending under the latest five-year plan will result in a constant flow of new contracts for the industry.

As large construction firms reach capacity, smaller contractors are likely to benefit in the years ahead. “Given the fairly limited supply of capacity from some of the bigger players, we think that the smaller contractors should enjoy a much bigger spill-over effect compared to the last two to three years,” research firm CIMB Research predicted earlier this year. With the opportunity to broaden their bases, smaller firms could potentially gain capacity to bid on larger projects in the future.

Higher demand may also lead to a rise in technology and equipment purchases in the coming years, though, at least in the shorter term, any investment in imported equipment will be more costly due to the weaker ringgit.

Competition & costs

The industry as a whole is facing higher input costs, which could impact margins going forward. Like many of Malaysia’s import-dependant industries, the building sector has been affected by the declining ringgit, which slipped to a 17-year low against the US dollar in mid-August. This depreciation has eroded much of the positive impact of declining prices for steel and other dollar-denominated inputs.

According to the CIDB, another key area of concern is foreign competition, with the potential for global players to eat into the market share of local firms.

With the ASEAN Economic Community scheduled to launch in December, lower trade barriers across the 10-nation bloc could see an increase in competition as regional contractors enter the market, making government efforts to improve the local construction industry’s competitiveness all the more important.

Comment from Paulius Kuncinas, Oxford Business Group Managing Editor for Asia's, on the Ringgit can be read on the New Strait Times website.

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