An encroaching, aggressive presence

For local contractors and builders, the presence of these Chinese contractors in Malaysia has sparked mixed views.

AllianceDBS Research noted, the liberalisation of the construction sector through various channels such as General Agreement on Trade in Services (GATS) and Free Trade Agreements allows foreign companies intending to operate in Malaysia to own foreign equity holding in a local construction

company. “Malaysia allows the entry of foreign contractors through representative offices, regional offices or joint venture companies incorporated in Malaysia. This is subject to foreign equity not exceeding 30 per cent.

“This means that companies with foreign equity not exceeding 30 per cent will be treated as local contractors. Contractors that are incorporated abroad are also treated as foreign contractors,” it added.

“Some believe the competition is healthy and the associated financing these contractors bring are

crucial in order for the larger projects to take off.

“On the other hand, some are of the view the larger infrastructure projects should be earmarked for local players, citing the lower cost base of the Chinese players which are government-owned and are able tolerate lower margins,” AllianceDBS Research explained.

The two more recent projects awarded to Chinese parties have been in the infrastructure space and are rail- based, and these projects are the Gemas-JB double tracking (Consortium of CRCC, CREC and CCCC) and the ECRL.

Both are also part of the Asean Master Plan of Connectivity and will be integral for bridging trade in and out of Asia.

“While we acknowledge this creates more competition for local contractors, these projects are unlikely to take off without the associate funding from the Chinese and hence would still provide orderbook growth via subcontracting roles,” AllianceDBS Research opined.

It explained that this was due to Malaysia’s government debt to GDP ratio. While it has been reduced to circa 53.3 per cent in 2016 from 54.5 per cent in 2016, the official threshold limit is 55 per cent to GDP and the guidance in 2017 is for it to stabilise at around 53 per cent.

“Assuming 53 to 55 per cent government debt to GDP in 2017, the government can incur an additional RM45.6 billion to RM72.1 billion net debt this year before breaching the threshold. The guaranteed debt already is at circa 15.5 per cent to GDP in 2016 (RM191.1 billion).

“Hence, the current state of government finances does not provide it with a great amount of flexibility to finance other large-scale projects. It will have to resort to Private Financing Initiatives or foreign- based funding.

“Still, we do expect the government to be pragmatic in terms of allowing local contractors to participate via subcontracting roles.

“This will be the case for the Gemas-to-Johor Bahru double tracking, ECRL and the eventually the HSR,” it said, noting that for key projects such as MRT, there is the Swiss Challenge which would still allow the PDP to match the lowest bidder.