Infrastructure Journal: Malaysian Government Ready to Extend PPP Programme

A pilot hospital PPP in Malaysia could presage a major bout of government spending on other infrastructure projects, according to an expert on the country's PFI programme. An SPV headed by construction group TSR Capital BHD is poised to DBFM a RM1.7 billion (US$466m) teaching hospital at the International Islamic University Malaysia (IIUM) in Nilai.

The scheme is still subject to a concession agreement being finalised, but if given the go ahead the project could prove to be a significant milestone in the development of the country's PPP market, despite not having a traditional project finance model.

The IIUM facility is the first of as many as 40 new hospitals PPPs to be launched in the coming months as part of the first phase of Malaysia's proposed RM7 billion (US$1.9b) PFI programme. With the government reportedly hoping to roll out these projects this year it would be impossible for the country to honour its infrastructure commitments without seeking private partnerships, according to Professor Kamarul Rashdan Bin Salleh of the Malaysian PFI advisory team.

Prof Salleh told IJ News that although the pilot scheme was at best a quasi-PPP, with a government agency forming part of the Medicalcity consortium that will build and finance the hospital, such a model would not be sustainable across all Malaysia's infrastructure needs. "It is not really a PFI because the government will loan to the consortium," explained Prof Salleh.

However, the scale of the proposed programme means that the traditionally parochial Malaysian market will have to look for investment from the private sector overseas. Prof Salleh added: "The main contractors will be local contractors but in terms of funding it they will need to partner with someone else."They do not have the capacity or expertise because thy have not processed PFI before and in this market it will be difficult for them."

The potential emergence of a new PPP market is likely to pique the interest of major players in the European market and Prof Salleh, who will visit Malaysia later this month to advise the government on the best way forward, believes the UK could be well positioned to profit. "If they are looking for a partner to deliver these projects then the UK would be the best one," he said.

(this article has been published in the Infrastructure Journal on 1 April 2009)

Malaysian PFI Approach - are we promoting rationalisation or pulverisation?

It's business not as usual for many PFI projects in the UK as it is in danger of grinding to a complete halt due to lack of finance. The current banking crisis and their reluctance to make long-term loans to investment consortia threatens to delay large scale PFI projects, many for schools and hospitals. This also means the readily available funds of recent years have now shrivelled up.

The British Government looks likely to have to step in and fill the breach, in short term at the very least, with some sort of bridging loan facility. They are about to bring forward a big-money rescue package for stalled PFI projects as long term banking finance dries up just to get the projects which are already in the pipeline for the next 18 months up and running. In response to questions from the Commons Liaison Committee, British Prime Minister, Gordon Brown sais that "the Treasury is working on measures by which existing PFI projects that some people think may be at risk can be secured."

Some prominent peoples had voiced their criticisms on this issue. For example, Phillip Hammond, shadow chief secretary to the Treasury, said "If the private sector cannot raise the finance, if the public sector cannot assume the risk, then the government needs to go back to more traditional forms of procurement." Furthermore, Stirling University's Professor Rob Ball, a published author on PFI, said "The whole justification of PFI is the transfer of risk - financial risks, spiralling costs - to the private sector. This move undermines the whole rationale for PFI."

There were some bad experiences as well. Outsourced public facilities and services provision should be seen as being in a key position to effectively manage cost and risk as well as reducing the internal head count and off balance sheet within the public sector, something useful in today's economic climate. However, poor supply chain performance and lack of influence had challenged the British Government to consider in bringing back those facilities and services in-house.

Although these continuous to be very challenging times, however, 2009 has started much more positively particularly for some PFI schemes like BSF, Procure21 and LIFT than many had predicted, with more than half a dozen banks indicating they are in the market to finance senior debt. But, why these schemes have been unaffected in the nature of the downturn is all pervasive? It is in my opinion that this is due to the schemes have been characterised by the following elements;

a. highly complex delivery arrangements requiring buy in from a whole host of public and private sector parties but through one stop shop project delivery.

b. programme that has to beset by realistic target since start and continuously in small bundle.

c. whole life cost of the programme offering efficiency through sampling and market testing.

d. strategic partnerships with government, investors, suppliers and stakeholders characterised by honesty, openness, mutual support and shared values, to help each other.

Managing these elements are the key risk and we are entering an era of high risk management. Hence we need the availability of strategic expertises with procurement, project management and whole life cost skills, which are in short supply at present in the UK and I believe also in Malaysia. Particularly in these tough times, where things can go badly wrong, no matter what aspect of PFI a person is involved. I would expect if we not guarded against, a blame culture can develop resulting in a downward spiral of innovation, motivation and trust.

Through PFI, the Government wants to cut corners to save money and in fact they would be gambling with their asset. But, what we need now is a more dynamic PFI approach through difficult times and I think it is important for the Government to understand the reality and promoting rationalisation, not pulverisation. It is one thing to re-visit those assumptions of best value for money in line with design quality and end-user aspirations. We may question about the solid need for a sustainability and carbon footprint in the business case and consider it a frivolous expense, a feel good spend. We also need to be careful about cutting costs too quickly as the Government would be left with the facilities or services that the public can't optimise when we are out of the recession.

That's just a couple of examples of the sort of revolutionary recession-think that we should consider and do. There's more, but I don't want to get too technical and I hope this recession is going to shake everything up, make us start doing things right.

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.