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Revitalising Affected Sectors

National Economic Recovery Plan
Chapter 7

Contents




Construction

The construction industry, particularly those activities in the residential, commercial and civil engineering sub-sectors, expanded strongly in the 1990s as reflected in the high growth of output value, total employment, and salaries and wages of the industry. The expansion of the industry was supported by the strong growth in bank lending to the sector.

In 1997, the industry contributed some 4.8 per cent to GDP and employed about 9.2 per cent of total workforce. The industry has strong linkages with other industries in the economy such as sawmills, distributive trades, and construction-related manufacturing. For RM1 billion worth of output from the building and construction industry, about RM505 million of input will be generated from domestic industries. Imports constituted about one-fifth of the industryís output.

Presently, the industry faces the following issues: over-supply of commercial space, lack of financing facilities, and rising cost of imported construction materials due to the weak ringgit. The crash in the KLSE reduced the industryís market capitalisation by 75.7 per cent in the period January 1997-January 1998.

In the Klang Valley, an additional 34 million square feet of office space is scheduled to come on-stream during the next three years. Glut in commercial buildings and lack of financing facilities will lead to increased number of stalled projects, including privatised large projects. The classification of certain construction sub-sectors as ëunproductiveí gives rise to the financing problem. High cost of imported materials has burdened some projects, such as the monorail project. Contractors are being burdened with a lump sum levy payment to the CIDB.

In the present environment, contractors are forced to cut cost by reducing salaries and retrenching workers. Performance in the construction-related industries such as building materials, distributors, machinery and equipment suppliers, and consulting engineering etc. is significantly affected.

The cost arising from stalled projects is high. Winding up of experienced contractors will destroy valuable human capital and will create a vacuum in the industry.

To resolve the issues, the paper makes the following recommendations:

  • Public Expenditure
  1. In view of the sharp contraction anticipated by the sector, the Government should continue to invest in civil works and infrastructure development, especially for social projects. This is to provide some measure of support to the construction sector as well as its multiplier economic effects, reduce the severity of unemployment and business losses, and increase the utilisation of surplus equipment and materials.

  2. Governments and public authorities at all levels should be prompt in making payments for goods and services delivered by contractors and suppliers in order to avoid becoming a source of their business difficulties and cash flow problems.

Financing

  1. Bank Negara should be more flexible in applying the credit plan. The classification of the construction industry or housing industry as ënon-productiveí has affected other sectors as well.

  2. Financial institutions should lend selectively to contractors and important projects that would have an adverse impact on economic growth, traffic, urban environment, and quality of life, if left uncompleted.

  3. Privatised infrastructure and toll road projects that would relieve traffic congestion in the Klang Valley should proceed as planned. There is a need to relook at all approved projects to find ways of reducing the cost of infrastructure development.

  4. The construction of essential and on-going public infrastructure and social amenities should proceed and be supported with budgetary allocations.

  • Cutting Costs
  1. Developers should use local heavy equipment and local products, such as cement, aluminium, steel, ceramics, etc. wherever possible. This measure is aimed at cutting the cost of imports.

  2. The cost of doing business should be cut, including salaries, perks, and operating costs. Subcontractors and suppliers should examine ways to reduce their cost and revise their original bids downwards.
  • Increasing Utilisation of Materials and Equipment
  1. Find other uses for locally produced construction materials. More than 3 million tonnes of cement and clinker were imported in 1996 and 1997. The industry responded to the increased demand by expanding capacity, which has now resulted in excess capacity in view of current decline in demand. In order to increase the utilisation of locally produced cement, they could be used for road construction, as was the case for the North South highway during the last recession.

  2. Purchases should be in local currencies. Coal and gypsum, which are presently purchased from Indonesia and Thailand, should be denominated in rupiah, baht or ringgit although the quotations by suppliers are in USD as the international currency.
  • Assisting Local Contractors
  1. In order to enable contractors to survive the present situation, the government, quasi-government authorities and privatised companies should adopt the open tender for bidding to all contractors registered with CIDB. However, for implementation practicality this need not apply to Class F contractors.

  2. Government projects could also be apportioned into smaller packages to ensure a more even distribution among contractors who can benefit from participation in government projects tender.

  3. Adopt measures to improve the cash flow position of contractors.

The following measures are recommended to improve the cash flow position of contractors:

  1. expedite the processing of variation order and final account on the part the government so that payment could be made to contractors

  2. CIDB should adopt an easy payment term to collect the levy basing on monthly progress payment. It could also consider refunding part of the levy collected where projects could not be carried out further due to the current economic situation. CIDB should also consider reducing levy payment for medium-, low-medium and low-cost housing development project because the scope of cross-subsidisation at present is much reduced.

  • Priority to Local Workers and Services
  1. It is recommended that in the retrenchment of workers, construction companies should give priority to retain local workers as far as possible.

  2. All projects in the country, whether by the public or private sector, should utilise as much as possible local consultancy services in order to reduce the outflow of funds from the country.

  3. Continue with planning studies and design work during the downturn. During the period of downturn, planning studies and design work for essential infrastructure projects from the public sector should not be stopped or deferred. Such projects should be encouraged to proceed since the cost involved for undertaking such work is minimal compared to the overall project cost. This period should be fully utilised for getting such work done in order that projects can be implemented on a fast track basis when the downturn is over. In addition, this is to avoid wastage of professional workers, such as architects, valuers, quantity surveyors, and engineers.

  4. Restrict the award of contracts to foreign contractors to specialised work for which there are no local expertise.

  • Sale and Conversion of Heavy Machinery
  1. Avoid selling low and buying high the used heavy machinery for construction. In the last recession in the 1980s, heavy equipment were repossessed and auctioned off cheaply to foreign buyers for reconditioning and/or complete-knock-down in Japan for re-export to China and other countries. When the economy recovered, Malaysian contractors had to pay double the price for the same type of used heavy equipment. In order to prevent this from occurring again, the repayment of the loan/leasing should be restructured.

  2. Convert earth-moving equipment for agricultural use. Most of the earth moving equipment could be converted in agricultural machinery. The heavy machinery left idle from construction can be used for vegetable and aqua farming and help to reduce unemployment and increase productivity in the agricultural industry.
  • Other Measures
  1. CIDB could provide training of skilled workers in the construction industry, including operators of heavy equipment, at a reasonable fee. The CIDB currently collects an upfront levy of 0.25 per cent on the contract value from the contractors and can well afford to be responsible for all training of skilled workers in the construction industry.

  2. Local contractors will need to take advantage of opportunities overseas by going global. Malaysian embassies and MATRADE offices overseas should assist in identifying projects that could be taken up by Malaysian contractors. Fiscal incentives can also be considered to help the Malaysian contractors to be competitive overseas.

  3. Increase the export of locally produced construction materials.






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