One very strong theme is emerging, warranting a more focused approach by foreign institutional investors to investing in Malaysia — that is, the public transport megatrend. I cannot stress enough that this is the megatrend on which investors should be focused.
The significant emphasis on public transport spending under the 10th Malaysia Plan (10MP) and the resulting acceleration in news flow on infrastructure projects will drive interest in the market in the second half of 2010, benefiting a range of companies, including Gamuda Bhd and IJM Corp Bhd.
The most significant project with regard to infrastructure is the proposed new MRT system for Greater Kuala Lumpur which, with its supporting infrastructure, is expected to cost in the range of RM37 billion-RM50 billion over the next eight to 10 years.
The 10MP is Prime Minister Datuk Seri Najib Razak’s roadmap for Malaysia under his premiership. It is Malaysia’s new economic chapter — a master plan to push Malaysia towards becoming a high-income society by 2020.
The report says Malaysia’s early stage of ‘lazy’ growth was driven by relatively abundant capital, cheap (foreign unskilled) labour and cheap fuel. The economic overhaul this time is no doubt ambitious, in my opinion, but not unrealistic if implementation is swift.
Sceptics would argue that Malaysia has never been short on economic initiatives, but policy implementation has tended to be disappointing. This is the biggest challenge for the government, especially when previous track records of policy implementation have been mixed.
The 10MP report, however, appears realistic and well thought out. It encompasses a significant change in multiple segments of the economy, including the comprehensive overhaul of public transport, especially in Greater Kuala Lumpur.
The report recognises that 70% of the population is likely to be living in urban areas by 2020. To support growth and to enhance the quality of life, the government plans to increase investment in transport capacity to keep pace with this new urban growth.
In addition to the new MRT line in Kuala Lumpur, there are plans to upgrade the existing airport and build extensive covered walkways in the city.
Among its key infrastructure initiatives, the 10MP intends to:
• extend the existing LRT lines by 34km
• increase the capacity of the Kelana Jaya LRT line to 98,000 passengers per hour from 24,000 currently by the full delivery of the 35 sets of new four-car trains
• improve connectivity between the KTM commuter, LRT and monorail systems
• extend the monorail system
• construct a high-capacity MRT system that is 156km in system length and serves a 20km radius of coverage from the city centre
• construct the 197km extension of the electrified double-track project from Gemas to Johor Bahru
• upgrade 14 city centre bus hubs and construct two inter-urban transport terminals (ITT)
• the ITT in Bandar Tasik Selatan is scheduled to be completed in 2010, while construction of an additional ITT in Gambak is expected to commence during the plan period
Under the 10MP, the government has allocated RM230 billion in development expenditure, similar to that under the 9th Malaysia Plan. However, while there appears to be no net increase in public development spending, the government has identified RM62.7 billion worth of projects as potential privatisations or as public-private partnership projects.
To increase private sector participation in the economy, the government has identified 52 projects worth a total of RM62.7 billion as potential privatisation and/or public-private partnerships. This is a sharp increase compared with only RM12 billion worth of privatisation and PPP projects under the 9MP.
Therefore, in totality, we believe there should be more construction-related spending implemented under the 10MP compared with the previous Malaysia Plan.
A RM20 billion fund would also be established to facilitate private-sector investments in projects with high strategic value to the nation and multiplier effects.
The Facilitation Fund would be designed to bridge the viability gap for private investment in priority areas such as infrastructure, education, tourism and health projects.
Projects currently under consideration for this fund include the Senai Hi-Tech Park and the Raw Water Supply for Industrial Complex in Tanjung Langsat.
The private sector would be required to finance the project and government funding would only be used to improve viability of the project. This fund would be provided to finance land cost and basic infrastructure.
The new wave of infrastructure project initiatives should naturally favour large construction companies. Companies such as Gamuda and IJM, given their emphasis on financial strength, track record and project management excellence, stand out as potential contenders.
We believe Gamuda/MMC would be keen on the higher-margin parts of the project, notably tunnelling, an area of expertise only it has domestically after completing the SMART tunnel project.
It is not inconceivable for the rest of the project to be parcelled out to a wide range of domestic contractors. We believe this may be the government’s preferred structure — allowing the positive knock-on effect to filter into the economy in a more broad-based manner.
While the Malaysian market continues to be overshadowed by other emerging markets, such as Indonesia, it continues to hold up surprisingly well, and unbeknown to many, there are strong themes — especially the public transport megatrend — leading into the second half.
Written by Commentary by Teoh Su-Yin
Su-Yin Teoh is strategist and managing director, Deutsche Bank AG, Malaysia
This article appeared in The Edge Financial Daily, August 2, 2010.
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