Malaysian PFI Implementation - are we ready yet?

Since 2005, the Malaysian Government’s ambitious policy in the 9th Malaysian Plan for implementing PFI has had mixed responds. The government has yet to make public the details of procurement strategy and framework process for the commission of PFI schemes. Also little is known about exactly how Malaysian PFI will be used to drive the Construction and Property Industry.

Questions may linger about the government’s level of comfort with its first stage investment in the public infrastructure and facilities through PFI, and the availability of private sector finance to support a long term project risk. In this case, I believe we should bring both public and private sectors together – planners, funders, developers and politicians – to establish a practical PFI model for Malaysia.

It is important for us to clearly understand the impact of large-scale investment and to ensure the PFI schemes would be able to raise aspirations and standards of public infrastructure and facilities as well as improve the quality of life.

There are some concerns about why some PFI schemes succeed and others fail and how PPP can offer the public to control over their affairs to create more sustainable PFI schemes. Also we need to look at how the government’s PFI policy can enhance the performance of public infrastructure and facilities? Is there anything we can learn from successful overseas PFI schemes i.e. UK and Australia?

Of course, with the current climate, the government does not want their PFI schemes grind to a halt mainly because of the Banks are not lending money or their PPP are struggling to raise the private capital needed to take part in the PFI schemes. I think the banks may be interested in lending for the PFI schemes if the government can guarantee its commitment on public spending for PFI schemes or provide an alternative source by providing direct funding to support the PFI schemes and avoiding problems with liquidity in the banking system.

However we need to review the much criticised planning and tendering processes, blamed by most of the PFI Bidders in the UK because it takes too long to reach the financial close on contracts and it costs the Client and the Bidder too much.

One must understand that PFI route is quite different than Privatisation route. As we know, most of the privatisation projects in Malaysia were awarded by the government to private sector companies or project consortia either on Build-Operate-Transfer (BOT), Build-Lease-Transfer (BLT) or Build-Lease-Maintain-Transfer (BLMT) basis. However, PFI will be delivered through PPP between government and private companies which normally selected in an open competition using two stage tendering process. It will be a joint SPC focused on delivering specific public infrastructure and facilities investment through Finance-Design-Build-Maintain-Transfer (FDBMT) linked with Payment Mechanism and Performance Index.

As such, PFI route is complex because of the general requirement for the government to transfer risk solely to the private sector through the terms of the contract. The determining factor with risk transfer is that the PPP best placed to manage the risk should be responsible for it. It should be noted that some risks are normally shared or capped so the deal remains affordable to the government and fundable by banks and other financial institutions.

A balance should be sought between ‘incentivising’ the PPP to perform and ‘sharing’ the burden of including the heightened risk that attached to the contract price. This is because the risks to be transferred not only affect the initial provision of assets and services, but also continue to affect payment streams throughout the contract period. This may create a lot of hassle on the particular issues pertinent to that contract which is not generic traditional contractual issues.

I think the government may need to challenge the entire industry to think differently about the practical way we approach the design, procurement, construction and maintenance of public infrastructure and facilities based on PFI model. Do we need to focus on risk or opportunity? Will PPP reform end the marginalisation of Architects and Designers within PFI schemes? Do they know what the public want or expect from our public infrastructure and facilities? Most ultimately whether or not our Construction and Property Industry is ready for PFI?

Malaysian Economic Recession - do we really have the right strategy?

Over the last 6 months, credit crisis headlines have dominated the industry press in the UK. There is no doubt the current global economic recession has been challenging the industry and this had pressed most of the businesses particularly the contracting companies to re-visit or re-thinking their strategy to ensure it is in good shape to ride out these conditions. Whatever it is, this strategy must protect their business and its future growth with healthy pipeline of work and commission over the next few years.

Let me share my view of the current downturn climate in the UK and how it is affecting its construction and property industry which can be summarised as follows;

1. The residential market has been hit hard but high-end residential and social housing markets haven't been too badly affected;

2. The retail sector had turned the tap off several months ago but schemes and capital are now starting to be released once more;

3. The commercial sector is just about holding up because there are several major schemes backed by sovereign wealth funds, financed by emerging markets or oil rich nations;

4. There are pockets of specialised activity that are thriving including data centre business, utilities ector and waste management.

One thing I learned from some of the businesses in the UK and also in Malaysia is that through their own diversification strategy implemented for almost 20 years ago, they have provided a broader service offer, across more sectors and geographical locations than ever before. We can easily see their dominance around the world and surely their global growth strategy has ensured they are not overly exposed or dependant on one particular area or market.

I have no surprise if some of the contracting companies in the UK have developed their strategy in line with my views above as they are currently putting more effort on securing government and public sector projects for both consultancy and construction works. There is a wealth of education spending through Learning Skills Council UK, across the Building School for the Future UK programme, in the higher education, academies and colleges sectors and in government-funded infrastructure projects such as Crossrail UK and Network Rail UK.

Assuming the UK Treasury doesn't pull the plug on government spending, the public sector work should help to support the inevitable fall in private sector work. My forecast is that the commercial sector work tailing off over the next three years and picking up slowly in 2012.

I would advise the contracting companies in Malaysia to consider the consolidation strategy within the construction and property industry. This can be done either as a result of competitors being bought out or general consolidation. There will be inevitably be opportunities for those contracting companies that have cash in the bank. I believe a more consolidated and better business with a clear vision to be the best at everything we do would place us in a strong position in the volatile and uncertain marketplace.

In addition to that, they should focus in meeting the needs of both Client and End User and take a brave decision to implement some structural changes to the fixed price subsidiary businesses in response to Client feedback.

From a supply chain perspective, although there are still a lot of projects around today, most of them do expect to work with tighter margins as the market hardens and highly competitive. I can see some material costs flattening off and even reducing in some areas if, for example, the emerging markets appetite for growth and raw materials slows down. However, it is interesting to see the steel, concrete, material and labour prices are still going up, albeit the rate of increase has slowed down.

The Malaysian Government need to re-emphasis that as our economic grows, it is good to invest in the emerging and resource led markets within the construction and property industry. We should continue our focus on service delivery, sustainability, quality products, iconic projects and partnering relationship in order to protect our industry. Hopefully, a step change in the growth and expansion of our economic portfolio can ultimately helps the Malaysian Government to achieve its objective.

Malaysian Second Economic Stimulus Package - is it time to implement PFI?

It is expected that in 2009, the Malaysian economic growth to be slower than previously. As such the Government is in a real need to redouble their efforts to work harder. As we all know, in this downturn climate, only the correct Government policies and strategies will overcome the pressure of the global economic recession and recover the country's good growth.

The Deputy Prime Minister, Dato' Sri Mohd Najib Tun Abdul Razak, who is also the Minister of Finance, had promised recently to further boost public sector spending by introducing the second economic stimulus package. He felt this package is necessary to help creates more economic activities apart from overcoming the consequences i.e. decline of economy, huge potential job losses or losing capacity to help build for the upturn.

As the current financial turmoil is a worrying development, his commitment is welcome news to many Malaysians as public sector contracts will play a vital role in this downturn climate. While billions will be poured into the industry, more and more injection of direct investment and centralised funding required into the construction and property industry. We are in danger if the collapse of construction and maintenance works will be the main driver for an increase in unemployment figures. It's a depressing picture to see city centres are awash with abandoned sites, incomplete roadworks and half-built office blocks. With a knock on effect to supply chain, small medium enterprises and construction professionals, the industry definitely will be in long term suffering. Access to finance, therefore, is vital and prudent.

I think the time is now to implement private finance initiative (PFI) in Malaysia based on the partnering procurement. This is because most of the Contractors in Malaysia often reliant on credit management due to the unpredictable timescales of finishing jobs, rising supply costs, gaps between work and delayed payments, especially in today's downturn climate.

Although there will be no shortage of Contractor wanting to be involved in normal PFI bids, however, I suspect there will be a number of those are struggling to raise the private capital they require because of the problems with liquidity we may have in the banking system.

One solution is for the second economic stimulus package to be channelled by the Government as industry's survival package and tailored PFI policies and strategies are ideally positioned as a tools for distribution. This package would be a key to the Government to offer some sort of guarantee on private investments or loans for PFI schemes as the financial turmoil has made finance bonds, often a component of PFI deals, harder to come by because the necessary insurance to boost the credit rating of PFI schemes is expected to be virtually non-existence.

Although PFI was originally designed to transfer the risk involved in building and managing large-scale public sector projects to the private sector but the current financial turmoil will stall this process as that carries with it a price. Fewer banks are prepared to risk 25 to 30 year loans as spreading the risk will become the name of the game. Even in the UK, funding PFI schemes on 7 year loans instead of 30 year loans is being mooted by some banks in the UK but this would bring its own problems.

I would suggest the Government to look at ways where the tailored PFI policies and strategies would be able to share the risk between public and private sectors. Based on my experience on PFI schemes in the UK, I found by transferring the risk to the private sector is not always the best value for money for the public purse. I believe we need to re-visit this approach and consider sharing the risk as the most beneficial approach in some cases. It means there will be more access to finance as it guaranteed by the Government, the PFI schemes aren't being delayed and some level of control can be imposed by the Government.

In addition, the current tendering process and timescales require too many resources to respond effectively and there is too much red tape at one point. So by introducing PFI, the Government will give greater focus to creating PFI Consortia based on partnering procurement and utilising these as a catalyst for innovative design and service delivery. Of course, the important role of this PFI Consortia would be to split larger contracts into smaller pieces, encouraging small medium enterprise involvement and develop innovative partnerships and solutions together with the Government.

About Kamarul Rashdan Bin Salleh - Part 2

Below are some of the PFI projects I had involved since 1999. Therefore, I can be considered qualified to provide my opinion on Malaysian Private Finance Initiative.

Sample of Education Projects:

Building Schools for the Future – Wave 4 Phase 1 (New Build and Refurbishment), UK - now
Hertfordshire County Council (£200m)

Francis Combe Academy (New Build and Refurbishment), UK - now
Hertfordshire County Council (£23m)

Dubai Centre of Sports Excellence Outline Business Case (D&B), UAE - 2007
Al-Maktoum Foundation (£30m)

Manchester Hulme Academy (Refurbishment), UK - 2006
United Learning Trust (£7m)

Stockport Academy (New Build), UK - 2006
United Learning Trust (£27m)

Sheffield Myrtle Springs Academy (New Build), UK - 2005
United Learning Trust (£27m)

Sheffield Waltheof Park Academy (New Build), UK - 2005
United Learning Trust (£30m)

Salford Academy (New Build), UK - 2004
United Learning Trust (£15m)

Bassetlaw Grouped Schools Project (New Build and Refurbishment), UK - 2004
Nottinghamshire County Council (£110m)

Building Schools for the Future Technical Advisory Framework, UK - 2003
Partnership for Schools (£110m)

DfES and Church of England Grouped VA Schools Programme (New Build and Refurbishment), UK - 2001
Partnership for Schools (between £30,000 to £1m)

DfES and Salford Diocese Grouped VA Schools Programme (New Build and Refurbishment), UK - 1999
Partnership for Schools (between £25,000 to £1.5m)

Previous Healthcare Projects:

Hospital Modernisation Programme (New Build and Refurbishment), UK - 2008
Nuffield Hospital (£500,000 to £30m)

National PACS/RIS Installation Programme (Pre & Post Contract), UK - 2008
Nuffield Diagnostics (£5m)

Poole Hospital Development Control Plan (PFI – Trust), Poole - 2008
Poole Hospital NHS Foundation Trust (£105m)

Grand Union Healthcare Centre (LIFT Pre-Contract), Middlesex - 2008
Building Better Health (£6m)

Jubilee Gardens Primary Care Centre (LIFT Pre-Contract), Battersea - 2007
Building Better Health (£5m)

Aldershot Care Facility (LIFT Post-Contract), Aldershot - 2007
Wilky Healthcare (£7m)

Aldershot Centre for Health Pharmacy Fit-Out (LIFT Pre & Post-Contract), Aldershot - 2007
Wilky Healthcare (£700,000)

Dubai Centre of Sports Excellence Outline Business Case (D&B), UAE - 2007
Al-Maktoum Foundation (£30m)

St Johns Therapy Centre (LIFT Pre & Post-Contract), Ealing - 2007
Building Better Health (£5m)

Benenden Hospital Outline Business Case, Kent - 2006
Benenden Trust (£105m)

Redbridge Treatment Centre (LIFT Pre & Post-Contract), Essex - 2006
Partnership Health Group (£9m)

Castlehill Hospital (Procure21 - PSCP), Hull - 2005
Kier Construction (£31m)

Broadgreen Hospital (Procure21 - PSCP), Liverpool - 2003
Norwest Holst (£55m)

Queenspark Single Acute Hospital (PFI - SPC), Blackburn - 2001
Balfour Beatty (£81m)

North Durham Acute Hospital (PFI - SPC), Durham - 2000
Balfour Beatty (£70m)

Other Projects:

Domestic Building Insurance Claims Framework, UK Wide - 2004
Zurich Financial Services (£11m)

Conwy Estuary Strategic Route Project, North Wales - 2003
Conwy (£5.9m)

About Kamarul Rashdan Bin Salleh - Part 1

Since 1997, I had attached to the School of the Built Environment, University of Salford and now responsible for overseeing the Malaysian PFI Advisory Team. My expertise mainly on ppp/pfi, facilities management and whole life cost. I had published a few articles on the key issues of ppp/pfi and gave a presentation in the National Asset and Facility Management Convention on “Best Practices and Success Stories in Asset and Facility Management – Sharing of Experiences” in 2007.

I am also Associate Director of the Mace Group and at the forefront in advising, developing and managing both capital and lifecycle project investments as well as key cost and risk drivers that influence construction process, long term vision, social inclusion, external affairs sensitivity, sustainability and relationships between partnering organisations and stakeholders. I am now a leading Cost Consultant for Hertfordshire County Council and London Borough of Croydon responsible for cost modelling, planning and controlling as well as procuring the Local Education Partnership through competitive dialogue for the Building Schools for the Future, valued at £5 billion over the next 15 years.

I hold Diploma in Quantity Surveying (ITM), BSc (Hons) in Quantity Surveying (Glasgow), MPhil in Facilities Management (Strathclyde) and PhD in Construction Economics (Salford). Also a member of the Royal Institution of Chartered Surveyors and British Institute of Facilities Management.

With over 10 years of hands on experience in education, healthcare and residential sector, I had involved in pre and post contract delivering best value at every level of project cycle. My scope of works include investment appraisals, feasibility studies, OBC and FBC, capital and operational expenditure models, building and lifecycle cost plans, payment mechanism, output specification, service level agreement, performance standard, administering procurement and supply chain framework, monitoring claims and drawdowns, cost control involving valuation, change management and early warning notice, final account, due diligence on commercial and contractual issues, best value review, DQI process, public sector comparator and benchmarking performance linked to payment mechanism. I am familiar with JCT, IFC, NEC, ECC and bespoke conditions of contract for both new build and refurbishment projects under traditional, design and build or ppp/pfi procurement routes.

It is in these sort of responsibilities that I have meticulously developed my knowledge on the following aspects: create multi faceted cost competencies than can integrate with the overall vision, strategy and functionality; establish procurement process that can deliver an appropriate balance between investment and cost; and maximise negotiation strategies that can increase value and deliver savings on resources competition. I believe by considering these aspects would result in competitive advantage and best value investment.