Re-constructing the industry
With these reforms, the industry will be more efficient and transparent and will benefit the companies with the ‘know how’ rather than the ‘know who’. And earnings for the industry will remain reasonable as the layers of sub-contracting would be reduced. Vincent Lau, vice-president of Research at Rakuten Trade Sdn Bhd
For the longest time, Malaysia’s construction industry is considered by investors to be a safe bet. After all, literally being the pillars of the economy, infrastructure has been around since prehistoric times and will continue to do so as the human race continues to exist.
But while it is clear that there will always be a demand for civil engineering, there is no denying that our industry is and has been fraught with a multitude of issues: From favoritism and bribery in project awards to unsafe work conditions and questionable workmanship, it is an open secret that the construction industry needs to be enhanced.
Thus, when the Pakatan Harapan (PH) party made it clear in their election manifesto that they would be targeting a reform of practices and regulations in the construction industry, many rejoiced at the idea of a more transparent and effective industry.
Since coming into power after a shock victory in the 14th General Elections ( GE14), the new government has stuck to their promise with the review of several mega infrastructure projects and the promise to enforce and advocate for newer and better practices in the industry such as open tenders, safe and equitable work practices and the implementation of advanced design software and systems.
According to Vincent Lau, vice- president of Research at Rakuten Trade Sdn Bhd, these changes are only part of the ongoing institutional reform and will prove to be beneficial to the entire industry and the entire country.
“With these reforms, the industry will be more efficient and transparent and will benefit the companies with the ‘know how’ rather than the ‘know who’. And earnings for the industry will remain reasonable as the layers of sub-contracting would be reduced.”
But with change there is always uncertainty and it was evident that this was clearly the case as our construction index on Bursa Malaysia tumbled sharply from 287 points post G14 to a low of 194 points in early July.
Lau commented that the sharp drop were knee jerk reactions and saw massive sell-downs of construction stocks post GE14 as investors feared that the promised review of mega infrastructure projects may cause players to lose their awards and increase overall competition within the industry.
By far, the biggest loser during this whole debacle was George Kent (Malaysia) Bhd (Gkent) who saw its stock price plunging by 74.8 per cent from RM3.94 on May 8 to a shocking year low of 99 sen on July 11.
The rumored front- runner for RM45 billion MRT3 project through the MMC- GamudaGkent joint- venture ( JV) and the project delivery partner for the RM31 billion LRT3 project through the MRCB-Gkent JV was hit with bad news as the MRT3 and LRT3 projects were among the first to come under review.
According to the Ministry of Works (MoW), only projects which have been issued with letter of awards and have undergone more than 15 per cent of performance will be carried out whereas projects with 15 per cent of performance and below will be reviewed and determined by their priority.
The review of these projects and initial cancellation of the LRT3 has caused some initial pandemonium for construction stocks but the selling pressure soon alleviated as the LRT3 was reviewed and given the greenlight after some downsizing in its cost and size – returning some confidence back into the market.
To date, the RM80.92 billion East Coast Rail Line (ECRL), the RM45 billion MRT3 and the RM100 billion KL- Singapore High Speed Rail (HSR) are all currently under review.
The MRT3 has been postponed while negotiations for ECRL and HSR are still underway.
“Construction stocks have since recovered some lost grounds but is still down 28 per cent year- to- date ( YTD). The major infrastructure projects which were initially thought to be cancelled are slowly coming back on stream with lower project numbers.
“Construction will continue to remain a key sector of growth for our country as we continue to develop sustainable growth going forward,” commented Lau.
But while confidence has been slowly but surely returning into our construction sector, the other pending changes to its landscape still leaves some questions unanswered on how they will affect local players and the industry on the whole.