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.