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COMMENTARY
BLOGS & OPINION | Contributed Content, Malaysia
Published: 24 Sep 10
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Sidrah Arif

A news era for PPPs in Malaysia?

BY SIDRAH ARIF

In June Prime Minister Datuk Seri Najib Razak, presented the fourth and final pillar of the Vision 2020 implementing framework: the 10th Malaysia Plan. The five year development plan, with a total expected investment of RM230 billion (approximately USD 70 billion), aims among other things to increase private sector participation in the Malaysian economy through a variety of means including public-private partnerships.

What are public-private partnerships?
In its broadest sense, the term "public-private partnership" (PPP) is used to describe a partnership between the public sector (the government through central or local bodies) and one or more private companies. Goods and services (for example, education and healthcare facilities) traditionally provided by the public sector are instead purchased by the public sector from private companies. The private companies design, construct, operate and maintain the relevant infrastructure.

The PPP structure originated in the United Kingdom as a way for the government to economically and quickly deliver services in public sectors which required urgent and large investment (initially, roads and prisons and later, education and health care). Today, the PPP model (in various forms) has been applied across the globe as policy makers have realized that infrastructure development is key to economic growth and that infrastructure development can be accelerated through the use of the PPP model.

The 10th Malaysia Plan places "supporting effective and smart partnerships" at the heart of the economic and social reform required in order to propel Malaysia from a middle income to high income economy. In order to stimulate and catalyze private sector participation in the Malaysian economy, the government has set out three major initiatives:
•    increasing privatizations and PPPs;
•    establishing a "facilitation fund" to provide support to private sector projects of high strategic importance; and
•    achieving an appropriate balance between the government and the private sector

Increasing Privatizations and PPPs
The concepts of privatizations and PPP projects are not new to Malaysia. In fact from as early as 1981 Malaysia's policy, as evidenced by the Malaysia Incorporated Policy, has been to encourage co-operation between the  public and private sectors.

Since the introduction of a privatization policy in 1983, approximately 500 privatization projects have been approved and implemented in Malaysia (for example, the development of the Light Rail Transit, the creation of local conglomerate companies such as Telekom Malaysia Berhad and the development of the Kuala Lumpur International Airport). The government estimates, as a direct result of such privatization projects, it has made savings in the form of capital expenditure amounting to RM161 billion.

In the decade preceding the Asia Financial Crisis, Malaysia implemented a number of PPP infrastructure projects. However, the urgency for infrastructure development also led to shortcomings in the way that the PPP model was applied. For example, methods for awarding concessions entailed little or no competition which in turn led to inefficiencies in the way that projects were implemented and the government undertook significant contingent liabilities which came to the forefront once the Asia Finance Crisis hit as the risk of those contingent liabilities actually being realized significantly increased.

In 2006, under the 9th Malaysia Plan, the government took a step forward by introducing private finance initiatives as one of the key approaches in procurement for public infrastructure.  In addition, the government started taking a more long term and holistic view to evaluating PPP proposals.  The Public Private Partnership (PPP) Guidelines published in November 2009 by the Public-Private Partnership Unit of the Prime Minister's Department state that a PPP proposal will only be considered if there is "a need on the part of the Government for the project" and in making this decision the government will take into account the benefits of the project such as: socio-economic impacts, value for money and cost savings to the government, quick delivery of the project and service enhancement and increased level of accountability, efficiency and effectiveness.

Under the 9th Malaysia Plan the government undertook 22 privatization and PPP projects with an estimated value of RM12 billion. In 2010, the government has set an ambitious target of implementing a new and larger wave of privatizations and PPPs in order to increase private sector investment in the economy and improve efficiency in the delivery of public sector services at a cost effective price for the government. The 10th Malaysia Plan states that there are already 52 privatization and PPP projects under consideration, with an estimated total value of RM63 billion. The scope of projects under consideration is varied: seven toll highways (including the West Coast expressway, Guthrie- Damansara expressway, Sungai Juru Expressway and the Paroi- Senawang KLIA expressway), an Integrated Public Transport Terminal in Gombak, five Universiti Tecknologi Mara branch campuses, privatisation of the Penang Port, redevelopment of the Angkasapuri Complex and the development of Kuala Lumpur as Media City.

Facilitation Fund
In addition to simplifying the current regulatory framework (particularly the insolvency regime in Malaysia), the government has shown a recognition that it will need to provide some form of financial support to projects in the short term in order to encourage private sector investment.

The government's response: the creation of a RM20 billion (approximately USD 6 billion) "facilitation fund" to encourage private sector investment in nationally strategic areas such as infrastructure, education, healthcare and tourism. The facilitation fund will provide support to finance land costs and basic infrastructure (for example, the construction of access roads, bridges and the provision of water supply) essential to the success of the qualifying project.

Whilst the exact criteria for a project to qualify for assistance from the facilitation fund are not clear, the 10th Malaysia Plan indicates that the facilitation fund will provide support to  private sector projects:
- which offer high economic spin-offs and accelerate Malaysia's transformation to a high income economy;
- with a minimum capital cost or private sector investment of RM100 million; and
- where applicants can demonstrate that they have secured financing for the project before amounts are disbursed from the facilitation fund.

Through the mechanism of the facilitation fund, the government expects to attract private sector investments worth at least RM200 billion. Among the projects that are currently being considered for support from the facilitation fund are: a land reclamation project in Westport in Port Klang, Malaysia Truly Asia Centre in Kuala Lumpur and the  Senai High Technology Park in Iskandar Malaysia, Johor.

A new era for PPP projects in Malaysia?
The commitment to encourage and support private sector investment in the 10th Malaysia Plan, in particular through the increase in the number of privatizations and PPP projects, is a positive step towards achieving the goals set out in Vision 2020.

However, whether this will translate into an active and evolving PPP market in Malaysia will depend upon  how the initiatives outlined in the 10th Malaysian Plan are put into practice and the government's approach in working with the private sector to attract global finance into Malaysia and away from other regional competitors such as China, India and Indonesia.

The views expressed in this column are the author's own and do not necessarily reflect this publication's view, and this article is not edited by Asian Banking & Finance. The author was not remunerated for this article.

Sidrah Arif

Sidrah Arif

Sidrah Arif is a Senior Associate at Allen & Overy LLP.
 

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    Tags: Allen & Overy, PPP, Public-Private Partnership, Vision 2020

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