AllianceDBS: Govt needs PFIs for future big projects

PETALING JAYA: Given the current state of government finances, it will have to resort to private financing initiatives (PFIs) or foreign-based funding for future big projects such as those in the infrastructure or construction space, said AllianceDBS Research in a report.

Citing official statistics, the research house noted that Malaysia’s Government debt-to-gross domestic product (GDP) ratio reduced to around 53.3% in 2016, while the official threshold limit is 55% to GDP. The guidance in 2017 is for it to stabilise at around 53%.

“Assuming a 53%-55% Government debt-to-GDP ratio in 2017, the Government can incur an additional RM45.6bil to RM72.1bil net debt this year before breaching the threshold. The guaranteed debt was already at around 15.5% to GDP in 2016 (or RM191.1bil),” it said.

Given this, it does not provide the Government with a great amount of flexibility to finance other large-scale projects.

It also noted that there has been more participation from China contractors of late in the Malaysian construction and infrastructure space either directly or through joint ventures with local contractors.

“In our view, we think the edge that Mainland Chinese contractors have over other foreign contractors, as well as our local ones, is access to funding, cheaper labour, access to materials and fast turnaround construction periods,” AllianceDBS Research said.

The report noted that the China contractors enjoy strong support from China’s government through cheaper sources of funding, largely from China’s lenders and the Export-Import Bank of China.

“They are also supported by the China Export and Credit Insurance Corp – China’s policy-oriented insurance company that provides export credit insurance,” it noted.

Malaysia is not alone in this trend, as AllianceDBS noted that China-based contractors are increasingly becoming more aggressive and dominant in the wider Asean infrastructure landscape.

Checks also showed that China infrastructure companies are very keen on Asean markets since they already have a sizeable presence in Africa and the Middle East.

Recently, two more projects that were awarded to China contractors were in the infrastructure space and rail-based, the research house said.

These projects are the Gemas-Johor Baru double-tracking project and the East Coast Rail Link (ECRL) project.

Both of these projects are part of the Asean Master Plan of Connectivity and will be integral for bridging trade in and out of Asia, it added.

AllianceDBS said that while this creates more competition for local contractors, it also noted that these mega-projects are unlikely to take off without the associate funding from China, but would still provide orderbook growth via subcontracting roles to local players.

“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 Baru double tracking, ECRL and eventually the KL-Singapore high-speed rail project,” it said.