2010 > 2019: Decade of Disruption - Construction sector propelled by debt bingeing

TheEdge Mon, Jan 06, 2020 05:00pm - 4 years View Original


ONE positive that emerged from the administration of Datuk Seri Najib Razak between 2009 and 2018 was the push for infrastructure development in the country.

Infrastructure spending, from the extension of the light rail transit (LRT) in the Klang Valley to the Second Penang Bridge, helped churn the economy and benefited a host of construction and construction-related companies, but on the flip side, it also saddled Malaysia with a mountain of debt, given the massive funding they require.

In any event, the construction boom came to an abrupt halt after the 14th general election (GE14) when the new Pakatan Harapan government reviewed and downsized a number of big-ticket infrastructure projects.

Looking back at the past decade, Malaysia’s infrastructure binge began after Najib mooted his signature Economic Transformation Programme (ETP), under which some US$444 billion of investments from both the public and private sectors were required.

Several huge infrastructure projects were promoted as part of the ETP, which was launched in September 2010 with the aim of doubling Malaysia’s per capita income to US$15,000 by 2020 and achieving a high-income nation status.

Infrastructure projects that were prioritised over the decade included the extension of the LRT line to Putra Heights at a cost of RM10 billion, the RM23 billion Sungai Buloh-Kajang mass rapid transit (MRT1) and the RM4.5 billion Second Penang Bridge.

Najib’s Barisan Nasional (BN) coalition government also built the Kuala Lumpur International Airport 2 (klia2), whose cost ballooned to RM4 billion from the initial budget of RM1.6 billion. Billions of ringgit for the development of affordable housing under the Perumahan Rakyat 1Malaysia (PR1MA) scheme were also set aside, spurring further investor interest in construction companies.

One such company was Gamuda Bhd, which was involved in both the MRT1 and the ongoing Sungai Buloh-Serdang-Putrajaya MRT (MRT2) projects and also a contender for the Kuala Lumpur–Singapore high speed rail (HSR) and East Coast Rail Link (ECRL) tunnelling job.

The share price of Gamuda, probably the biggest winner in the infrastructure binge, spiked 187.5% between Dec 23, 2010, and June 29, 2017 — the peak of RM5.52 gave it a market capitalisation of RM13 billion.

Gamuda’s net profit more than doubled during the past decade to RM706.1 million as at the financial year ended July 31, 2019 (FY2019) while revenue increased 82.8% to RM4.57 billion. Its share price is now hovering at RM3.92.

Under the Najib administration, large public infrastructure developments were awarded on a project delivery partner (PDP) basis, with the PDP overseeing implementation based on a fixed percentage of the project.

Responsible for the entire project, the PDP has to ensure the quality of the contractors and construction materials used, as well as manage any inevitability, such as fluctuation in material and labour costs, as well as any potential delays.

Gamuda, together with its partner MMC Corp Bhd, was appointed as the PDP for both MRT lines and assured at least 4% of total construction costs.

Other players also benefited from the boom. While George Kent (M) Bhd had undertaken construction jobs, especially for water supply and treatment plant projects, the LRT extension project was the company’s first in the transport sector.

This led to other prized jobs and George Kent was also awarded the PDP job for the Bandar Utama–Johan Setia LRT (LRT3) link, which it won together with Malaysian Resources Corp Bhd (MRCB) in September 2015.

Attracted to its earnings growth potential, investors piled into George Kent, which rocketed 289.65% between March 25, 2014, and Aug 7, 2017, to hit a high of RM4.52, giving it a market capitalisation of RM2.54 billion. The share price has since tumbled to about 93 sen.

The past decade also saw the emergence of Chinese state-owned companies in the domestic infrastructure development scene, particularly under China’s Belt and Road Initiative (BRI). The scheme offers soft loans for such projects contingent on its companies being given a significant percentage of development works.

China Communications Construction Company Ltd (CCCC), China Railway Construction Corporation and China Railway Engineering Company (CREC) are some of the Chinese state-owned enterprises involved in Malaysian infrastructure projects.

CCCC was awarded a RM1 billion contract for MRT2’s system work package through a joint venture (JV) with George Kent, as well as the turnkey contractor job for the ECRL.

A JV between Iskandar Waterfront Holdings Sdn Bhd and CREC acquired a 60% stake in TRX City Sdn Bhd, the master developer of the Bandar Malaysia project, for RM7.41 billion.

Meanwhile, China Petroleum Pipeline Engineering Company (CPPE) and Huanqiu Project Management (Beijing) Co Ltd were involved in the RM10.4 billion Trans-Sabah Gas Pipeline (TSGP) and Multi-Product Pipeline (MPP) projects in Sabah.

 

Review

The new government decided to postpone the HSR project until May 2020, reduce the scale of LRT3 as well as renegotiate contracts for MRT2 with MMC-Gamuda. The cost of the ECRL was also reduced from the original RM65.5 billion as the link was realigned.

The reviews also unveiled payment irregularities in the TSGP and MPP projects, as RM8.3 billion or 88% of the RM9.4 billion contract value had been paid out, even though only 13% of the work had been completed.

The projects have since been scrapped, although negotiations are still ongoing between the government and the parties involved.

Critics continue to question the viability of some of the infrastructure projects and their benefit to Malaysia. For instance, Economic Action Council member Prof Dr Jomo Kwame Sundaram has voiced concern that the costly ECRL is not viable for Malaysia, especially when the government is short of funds at present.

Others contend that Malaysia’s reputation as a stable and attractive investment destination is at stake and that the government ought not lightly terminate contracts that have already been awarded by the previous administration.

 

 

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