THE ACCEPTABILITY OF THE PRIVATE FINANCE INITIATIVE (PFl) IN MALAYSIAN CONSTRUCTION INDUSTRY

Shamsida Hj Saidan Khaderi School of Housing, Building and Planning

University Sains Malaysia,Penan& Malaysia E-mail: Shams524@salam.uitm.edu.m~

Abdul Rashid Abdul Aziu School of Housing, Building and Planning

University Sains Malaysia,Penang, Malaysia E-mail: arashid@usm.my

ABSTRACT

The aim of introducing the PFI in Malaysia was to achieve closer partnership between the public and private sectors at both central government and local authority levels. Despite PFI having been tested for more than a decade in developed countries, the idea is just beginning to germinate in Malaysia In all likelihood, Malaysia is coming up with its own version of PFI, which deviates somewhat from the ideal PFIprinciple. This is to take into account the business and political reality of the country. This is noticeably so in tlrejirstphase of the PFI, involving aboutRM20 billion worth ofprojects under the Ninth Malaysia Plan (9MP).

Empirical research was undertaken based on a questionnaire survey to constr~rction companies in Malaysia to identijE their concerns and barriers in PH. Among the concerns of PFI implementations in Malaysia were that the government was not doing enough to promote PFI understanding and there were arguments that PFI in Malaysia may not be successful. Anrong the indentcped barriers of PFI to constr~rction companies are the high cost of bid or proposal, and that thejinancial institutions are not prepared to give their commitment. Among the barriers of transparency in the concession project is the government's tendency to select pre- determined constrrrction companies and the government's socio-political agenda to help bumiputera companies. PFI will benejit construction companies mostly tlrrouglt transfers of skills and technology. Finding from this researcl~ may provide new insight on the theoretical perspectives on PFI implementation from the contractors' perception.

Keywords: Private Finance Initiative, implementation, public andprivate sector.

1.0 INTRODUCTION

PFI is a privatisation scheme developed initially by the UK government, to provide financial support for partnership between the public and private sector. PFI has become an integral part of national government' policy of the UK in the delivery of public facilities and services (HM Treasury, 2000). PFI also refers to a strictly defined legal contract for involving private companies in the provision of public services which are internationally practised by various countries such United Kingdom, Singapore, Japan and Australia for the provision of inftastructure, prison, school and hospitals.

In the Malaysia context, the Ninth Malaysia Plan (9MP) defines PFI as involving the transfer of the responsibility of financing and managing capital investment and services in relation to public sector assets to private sector (Economic Planning Unit, 2006). The private sector is responsible for financing, constructing, managing, maintaining and operating the facility in order to deliver the

..- . -- .. . ~- . . - ~ ~~. ~- . .- ~ . ~. ~. .. . ~ . . ~. ~ . - ~- ..

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service to the public sector throughout the concession period. In return, the public sector pays the private sector in the form of lease rental charges which commensurate with the quality of the services provided.

The area of study was especially chosen based on the initiative of Malaysia government to implement PFI as a new procurement strategy. It serves to further enhance our understanding of the concept as PFI was only introduced during the Ninth Malaysia Plan (9MP). The scheme, when introduced, was widely anticipated by the public, yet implementation was slow to get off the mark. The best example of Malaysia PFI variant is the Build-Lease-Maintain-Transfer (BLMT). The aim of these studies is therefore to investigate the key issues and challenges in implementing Private Finance Initiative (FFI) in the Malaysian construction industry under the Ninth Malaysia Plan. The objectives are:

To provide a general overview of the implementation of Private Finance Initiative (PFI) in Malaysian construction industry; To identify barriers to PFI implementation in Malaysia.

2.0 PRIVATE FINANCE INITIATIVE (PPI)

The PFI schemes, according to NAO (2003) and supported by Broadbent & Laughlin (2003), are implemented differently f?om country to country. The nature of the PFI implementation differs due to varying national regulations, purpose of adopting the scheme and availability of experts in the field (Li & Akintoye et.al2005). By the same token, the PFI arrangement in Malaysia is dserent from the one implemented in the UK because of different governing policy and purpose of adopting the scheme (Kadir, 2007). According to Netto (2006), PFI in Malaysia is unique as it is funded by Employee Provident Fund (EPF) via a government-owned investment vehicle, PFI Sdn Bhd, which acts as a 'conduit' for the initial implementation of PFI scheme in Malaysia. PFI Sdn Bhd was set up by Ministry of Finance (MoF) to provide the necessary financial arrangements to fund for selected PFI projects under the N i Malaysian plan (9MF'). The Malaysian PFI therefore contrasts with the UK's model in terms of project tinancing.

Public private pahership (FPP) is also sometimes known as private finance initiative (PFI) or design, build, finance and operate (DBFO). There is confusion between PPP and PFI; the former involves a business contract between public and private sectors with sharing of risks and hopefully rewards as well, whereas the latter may be regarded as a subset, as it involves long-term private sector financing as illustrated in the matrix shown in Figure 1.

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3.0 MALAYSIAN PFI

PFI/F'PP offers a viable alternative to the traditional procurement methods whereby the public and private sectors conduct their business together in an open and trustworthy manner delivering solutions to fund new roads, improve public transportations, modernise hospitals, and build new schools and social housing quickly and efficiently (Master Builders, 2007).

According to Yong (2007), PFI is not new in Malaysia Malaysia has been adopting it since 1983 in the form of privatisation programmes whereby either the users pay for economic inhistructure projects such as toll roads, ports, and independent power producers (IPPs), water, etc., or the government pays for social infrastructure such as universities, hospitals, schools, rail networks, transportation, etc.

Figwe 1: Extension of privatisation programmes

Build Operate Transfer (BOT) (IPPs, toll roads) Build Operate (00) Build LeaseTransfer (BLTJ (Teachers Quarters) Build Transfer (BT) (?-deferred payment) Land Swap (army camps, schools)

Privatization Program PFI o r PPP Program

EXISTING PROJECTS I

1983

Outright Sale (SOE o r SOA] IPO Lease (LOA] (Govt Vehicles) Management Buy Out (MBO] Management Contract (MC) [Hospital Supplies) Corporatization (Penang Water, TNB, Telekom)

22 years 9m Malaysia Plan

2006 t

Malaysia has been doing build-operate-transfer (BOT) since 1983. The new PFI programme (2006) is an extension of the privatisation programmes, but supposedly more akin to the UK's PPP Programme as illuslrated in Figure 1. PFI is meant to improve on the shortcomings of the previous programme to ensure that the government gets better value for money through more stringent control over projects.

According to Tay & Partner (2006), PFI is seemingly no different from the previous privatisation models. Both involve the public sector tapping the expertise and efficiency of the private sector. But under PFI, the private sector's revenue must commensurate with the quality of services it provides. While this may seem to be a statement of the obvious (or at the very least should have been implicit), it was unfortunately not always the case in past privatisation projects in Malaysia. Hence, the clear elucidation of accountability as a key principle in PFI represents a paradigm shift in Malaysia's privatisation landscape.

Chew and Ismail (2006) explain that under privatisation, the government hands over full responsibility of the infrastructure and the related services delivery to the private sector. The public sector is disengaged from the business or entity. The government plays the role of the regulator. In contrast, under PPP (which includes PFI), certain services provided by the government are performed by the private sector. The government continues to be responsible for providing senice to the public.

Hence on the face of it, PFI is not very different from some of the projects implemented under the privatisation programme. The private sector in Malaysia is used to financing the construction of infrastructure Iike highways, water treatment plants and schools for the government. For example, the privatisation of teachers' quarters to Encorp Systemblit Sdn Bhd and the construction and financing of a new Public Works Department building in Kuda Lumpur by IJM Corp Bhd about 10 years ago had some broad elements of PFI. Both involved the creation of assets held by special purpose vehicles, financing by the private sector through a bond issue and the repayment through lease rentals made by the government throughout the concession period. The lease rental was assigned to bondholders.

4.0 METHODOLOGY

The adopted research method was divided into two parts. The first part was desk research of reports, dissertations, books, on-line forum and publications, articles, relevant journals, research paper, seminar papers, etc. pertaining to Malaysia's PFI. Armed with the information, a questionnaire was designed so that the second part of the research method, questionnaire survey, could be carried out. Questionnaires were posted to main contractors who have been involved in past privatisationprojects. The survey hoped to capture the understanding of the respondents about PFI. Main contractors in the Klang Valley (i.e. Kuala Lumpur and Selangor) were also included in the survey on the basis of their likely PFI involvement in the future. The questionnaire survey was to capture the respondents' understanding of PFI. The compiled data was analysed using relative indices (RI) to enhance our understanding on the subject matter and expose the important findings.

5.0 RESULT AND DISCUSSION

A total of 60 questionnaires were distributed to various organisations that were deemed likely to get involved in PFI. Out of these 60 questionnaires only 25 responses were received. This equated to 42% response rate. The sampled organisations differ from one another in terms of the number of personnel with privatisation experience and their willingness to respond to the questionnaire survey. These individual were mainly from the business development, project and contracts

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departments which had the most howledge on privatisation and the most suitable persons to get involved in PFI procurement in the event that their organisations opted to venture into such a scheme.

5.1 Working Experience

Figure 2 shows the respondents' years of working experience. It shows that 76% of the respondent hadbeen working for more than 10 years whereas only 8 % of them between 3 to 5 years. The remainder (i.e. 16%) had between 5 to 10 years of experience. None of the respondents had less than 3 years experience.

E 1-3yn w 3-5 yrs 5-10 yrs more than 10 yrs

Figure 2: Respondents experience

5.2 Involvement in Privatization Project

AU of the respondents had personal experience of privatisation projects in Malaysia.

5.3 Acquire information about PFI

On sources of information about PFI, the most common sources were workshops and seminars (23 respondents), followed by published material (ZO), experienced personnel (18) and internet or electronic sources (13).

Mworkshops/seminars/co~~es 8e~e~ronlcsources Opublished materlal Dexperienced personnel in PFI

Figure 3: Sources of PFI information

5.4 Level of understanding of PFI

Figure 4 below shows the overall understanding of the respondents' organisations about PFI in Malaysia. Most respondents had a comfortable level of understanding of PFI. This probably stemmed from their past knowledge about Malaysia's privatisation schemes.

E least understand .less understand Ofalrly understand

Dundemand .most understand

Figure 4: Overall understanding of PFI

5.5 The Respondents View on PFl: Methodology Can Provide Good solution' for the Government Procurement Delivery.

It was found that only 10% of respondents were very optimist that PFI can provide good solution for the government procurement delivery. 60% of the respondents were quite optimist and 30% not very optimist. 10% of the respondents stated their opinion that PFI contracts were likely to be awarded to bumiputera companies without much competition. Without competition, perform is likely to be affected.

Quite optimist

Figure 5: The Composition of Respondents View on Whether PFI Methodology Can Provide Good Solution for the Government Procurement Delivery

5.6 The Respondents Concern in PFI Procurement

The highest RI rating shows the respondents's concern that PFI projects were likely to be awarded to government linked companies (GLC) and bumiputera concerns (RP0.82) (refer Table 2). The next highest RI rating shows that only big players in construction industry would be able to appreciate PFI (RI=0.80). The respondents' next concern was the likely lengthy and complex PFI process from bid to financial closure, just like previous concession projects, and the potential of corruption in the process (RI=0.78). There was lack of information &om the government which conveys the impression that it is not being transparent (R=0.74). The respondents agreed that PFI

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projects need long commitment from SPVtProject Company during the concession period (RF0.72). The lack of credit worthiness may deter interested parties from raising capital (RI=0.68). Other statements recorded average RI ratings from 0.60 to 0.66.

Table 2: RI Rating of the Concerns in PFI Procurement

Respondents' Concern in PIT Procurement

Lack of transparency in ~overnment 1 0 1 8 1 4 1 0.74 1 Hi&*

Lack of bidder's credit worthiness

Risk allocation failure

Conu~tion

5.7 The Respondents' View regarding the Barriers of PFI Procurement to Their Organization

The greatest barrier of PFI procurement was the high cost of bidding (RI=0.76) (see Table 3). The respondents were next concern about the lack of personnel availability and expertise for this type of projects (RI=0.74). The PFI project is a long term project, just like other concession project (RI=0.73). Next, the respondents were concerned about the ability to raise capital, and their companies not investing enough in human capital and research and development for this type of procurement (RI=0.72). Average rating was accorded to management likely to focus on conventional procurement routes which are straightforward and certain (RI=0.62).

0

0

0

0

4

2

12

10

4

8

6

8

0

0

6

0.68

0.62

0.78

High*

Average

Hieh'

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Respondents' View Regarding th Barriers of PFI Procurement t

5.8 The Respondents' View regarding the Barriers to Gain High Level of Transparency in Concession Project.

On barriers to transparency, the respondents felt the greatest barrier is the government's tendency to select pre-determined bidders (RI=0.82) (see Table 4). The government's socio-political agenda to help bumiputera companies was the next greatest hurdle (FU=0.80). Furthermore, there is concern about corruption in both the private and public sectors in privatised project, and the government's aversion to public scrutiny of classified government document by exercising the Official Secret Acts 1972 (RI=0.78). Unnecessary bureaucracy (red tape) in the procedures implemented by government agency and its officers is seen as the next barrier, followed by the low awareness of citizens to know their right pertaining to government action and the non-collaborative nature of officials in government agency (RP0.68).

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Tendency of government to select pre- determined bidder 1 0 1 2 1 2 1 8 1 8 10.82 1High

Table 4: RI Rating Regarding Barriers to Gain High Level of Transparency in Concession Project

Socio-political agenda to help bumiputera comoanies ( 0 ( 2 1 2 110 ( 6 (0 .80 1High

Respondents' View Regarding Barriers to Gain High Level of Transparency In Concession Project

RI

Official Secret Acts 1972 prevent the public to have access to government document

Unnecessary bureaucracy (red tape) process of government agency and its officers

Awnreness of citizen to h o w their right is low pertaining to government action

6.0 CONCLUSION

Rating

Frequency Analysis (FA)

Non-collaboralive nature of officinls in govemment agency Cormotion

Based on the analysis done, it can concluded that most of the respondents had knowledge about PFI infrastructure projects. But to implement PFI in Malaysia, the improvement and readiness of every participant involved must be taken into consideration because PFI is very complicated involving many parties and requires a very long time period.

Even though there are several issues of PFI which are not yet finalised yet due to its newness, the key issues and challenges were addressed in this research by investigating several aspects. It is believed that the PFI will be the panacea to the shortage of government h d s and poor maintenance culture if PFI is executed in an efficient and transparent manner.

The government should initiate more seminars, conventions and publish guidelines as done by the UK government. This will help disseminate information about the PFI methodology and procedure that will be undertaken. The private sector, especially construction companies, feel that PFI implementation in Malaysia is not clear enough as the procedures needed are not in place. The procedures relating to bidding, project financing, performance measurement and bid evaluation should be emphasised. This is important because interested participant will appreciate the composition procedures and be prepared.

If properly implemented, the government has a unique and timely opportunity to use the PFI Programme under the 9MP to tackle many of the weaknesses in the existing implementation of privatised projects. The government should no longer have to hear the financial and political costs of failed projects undertaken by the private sector, which are intended to benefit the public. The risks should be passed on to those in the private sector who can rise to the challenges of undertaking projects to provide public services under the PFI.

1

Very LOW

0

0

0

2

Low

0

0

2

4

0

3

Neubal

4

8

14

8

8

4 ' 5

High

14

8

2

gz

4

6

2

4

2

4

6

0.78

0.76

0.68

High

High

High

0.68

0.78

High

Hieh

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Auihor's Biography

She is currently a lecturer and has been working on a quantity surveying department, faculty of architecture, planning and surveying, university technology mara shah alum. At the same time. She is studyingprivatefinance initiative (jfi) while registered as aphd student at school of housing, building andplanning, university sains maloysia under supervision Of Professor Abd Rashid AbdAziz.

. . . , . - . . _ -a

p ~ ~ ~ ~ p

Prof: Sr Dr. Abdul RashidAbdrrlAziz B.Sc. Hon (Quantity Surveyor) (Readin@ MSc. (Const Mgmt) @runel) Ph. D. (Reading) Regd QS (Maioysia)

~'ecialisation: Quantity Surveying: Labour Migrating & Construction, Globaiisation and Construction & Project Management -