Malaysia’s renewed focus on infrastructure development-
As the global economy continues to struggle to recover from the economic slowdown that began in 2008, Malaysia’s stable growth trajectory has made it a preferred investment destination in the Southeast Asian region. After posting a GDP growth rate of 4.7 per cent in 2013, the economy gained further traction, and grew by 6.2 per cent during the first quarter of 2014, the highest growth rate recorded since October 2012. This robust economic performance was driven largely by sound domestic private sector demand and a rise in exports at a time when the global markets were continuing to recover.
Malaysia’s strong economic fundamentals are reflected in the state of its infrastructure. “Malaysia has a well-developed and efficient network of ports, roads, and airports,” observes Thiam Hee Ng, Senior Economist at the Office of Regional Economic Integration, Asian Development Bank (ADB). “In a number of international surveys, the country usually leads the region’s economies in the ranking of its infrastructure quality.”
The World Economic Forum’s (WEF) Global Competitiveness Report (2013–2014) ranks Malaysia 25th among 148 economies for the overall quality of its infrastructure. The country ranks even higher on some specific parameters, such as the quality of railroads (18th), airports (20th), roads (23rd), and ports (24th).
There is still significant scope to improve the quality of Malaysian infrastructure to further push up the country’s standing vis-à-vis its developed counterparts. “There is more that needs to be done to bring the quality of Malaysia’s infrastructure up to the level of that in advanced countries,” says Thiam. “There is also a need to invest more in the infrastructure in Sabah and Sarawak to bring it up to the level of peninsular Malaysia.”
Malaysia has come a long way in providing a supportive policy framework for infrastructure development. “The Malaysian regulatory framework has been conducive to infrastructure investment. While Malaysia has successfully developed the necessary regulatory environment to raise funds and to initiate infrastructure projects, further actions are needed to strengthen the implementation and maintenance of infrastructure,” adds Thiam.
Malaysia’s Economic Transformation Programme (ETP), which began in 2010, has brought in much-needed private sector investment in identified national key economic areas (NKEAs) such as oil and gas. The country has seen a steady flow of investments since the launch of the programme, with private investment in NKEAs growing at a compound annual growth rate of 15.3 per cent during 2010–13, up sharply from the 4.7 per cent during 2008–10.
The government has played an active role in the country’s infrastructure development. Over the years, significant budgetary financing has supported key infrastructure projects. In his budget speech this year, the Finance Minister for the Budget 2014 reiterated the pressing need to move ahead with a slew of infrastructure projects.
Ease in securing finance for infrastructure projects has been one of the most important factors that has facilitated Malaysia’s infrastructure development. The government’s attempts to promote investments in the sector by ensuring investor-friendly policies and stringent guidelines to protect investor interest have aided in attracting the needed finance.
The country has also cornered the largest share in the global market for sukuk, the Islamic equivalent of bonds. In 2013, Malaysia continued to be a global leader in the international sukuk market, accounting for over MYR 266 billion ($82.4 billion), or over 60 per cent, of the total international sukuk issuances in 2013. While Malaysia is already tapping sukuk financing for several infrastructure projects, the practice is yet to gain popularity elsewhere in the region. “The continued development of the Islamic financial system in Malaysia allows it to tap the demand for Shariah-compliant investment by Islamic investors,” Thiam notes. “We have already seen sukuk being used increasingly in financing infrastructure projects in Malaysia.”
Malaysia’s infrastructure: Buoyed by mega projects
Malaysia’s growth trajectory has been well supported by its infrastructure thus far. However, sustaining growth will mean building new infrastructure and maintaining existing infrastructure.
Energy
The oil and gas sector is one of the key areas of focus. Malaysia is the second largest oil and natural gas producer in Southeast Asia, and the world’s second largest exporter of liquefied natural gas (LNG). The government aims to increase aggregate production capacity by 5 per cent per year up to 2020 in order to meet the growth in domestic demand and to sustain LNG exports. In addition, Malaysia intends to become a regional gas trading hub by taking advantage of its strategic location at the centre of the Asia-Pacific region. Malaysia’s western coast runs alongside the Strait of Malacca that connects the Indian and Pacific Oceans and is an important route for the seaborne energy trade. However, Malaysia’s geographical location in the South China Sea also makes it a party that is involved in various disputes among neighbouring countries over competing claims to the sea’s resources.
Malaysia is unveiling several major upstream and downstream oil and natural gas projects as part of its strategy to increase output from existing oil and natural gas fields and to step up exploration in deep-water areas. Malaysia is projected to spend about MYR 198 billion in capital expenditure over the next five years on the upstream oil and gas sector. State-owned firm Petronas is implementing a mega oil and gas project, the MYR 61 billion Refinery and Petrochemical Integrated Development (RAPID) projects, in the state of Johor. As of April 2014, the tendering process for various construction works had started. RAPID’s first refinery plant is set to begin operation by early 2019.
In the power sector, the Energy Commission is preparing the tender documents for the construction and commissioning of two 1,000 MW gas-fired power plants. The process is expected to take about 10 months, with the request for proposal and bidding process scheduled to take place by January 2015. Sarawak Energy Berhad has a few more power plants in the pipeline to support and drive the growth of heavy industries in the Sarawak Corridor of Renewable Energy. The pre-qualification process for one of the dam projects has already started.
Transportation
The transportation sector is also quite well developed, although more needs to be done. Ports, for instance, play a crucial role in supporting the country’s export-oriented growth.
“Malaysia remains a very open economy that is reliant on trade. With developed economies gradually moving out of crisis, exports are expected to pick up further,” says Thiam. “This will require further improvements in the port sector to ensure that the necessary capacity is available. The drive to ensure that growth remains sustainable will also mean that increasing emphasis will be put on improving the public transportation network.”
A major project under implementation is the expansion of Kuantan port. The project started in September 2013 and is being carried out by Consortium Sendirian Berhad in collaboration with the Malaysian government. The port is expected to be operational by 2016. It is projected to serve as the logistics hub for the special economic zone, which is being promoted by the East Coast Economic Region Development Council.
The airport sector, too, is witnessing significant expansion. An airport dedicated to low-cost travel, the Kuala Lumpur International Airport 2 (KLIA2), opened in May. The $1.2 billion facility is touted to be the world’s largest no-frills airport. An upgradation project is under way at Sandakan airport in Sabah. The project started in May and is expected to be completed by November. It will increase the airport’s capacity to 1.5 million passengers per year from the current 800,000.
In the urban transportation space, Malaysia is moving ahead with a number of projects. The MYR 25 billion Klang Valley mass rapid transit Line 2 was approved by the cabinet in May. Another mega project in the pipeline is the proposed high speed rail linking Singapore and Kuala Lumpur. While the two governments are in the process of finalising the project, it has been reiterated that the project will be completed by 2020. Meanwhile, work on the extension of the Ampang and Kelana Jaya lines (as a part of the light rail transit extension project in the Klang Valley) is ongoing, and both lines are expected to be completed by 2016.
In the road sector, construction of the 233 km West Coast Expressway will begin this year. The MYR 6 billion project will connect Banting to Taiping. Meanwhile, the Kapit–Kanowit Road in the central region of Sarawak is expected to be completed by 2018. About 23 km of road has been built, and work is progressing on the remaining 78.2 km. Other notable expressway projects are at various stages of development. In addition, the development of the MYR 1.5 billion Kuala Lumpur Outer Ring Road is slated to take place this year, while that of the Kinrara–Damansara Expressway project will start in 2015.
Telecommunications
The prospects for the information and communications sector are also positive. About MYR 3.4 billion has been allocated to the second phase of the national high speed broadband project. The project aims to increase Internet coverage in rural areas through 1,000 telecommunication transmission towers in the next three years, as well as laying new underwater cables within the same period.
Water supply
Selangor state faces a critical water supply shortage. The award of contractual works for the Langat 2 water treatment plant (WTP) in April promises some respite. The MYR 1 billion contract for the first phase involves building a 1,130 million litre per day WTP and a water reticulation system for the state.
Outlook
“The outlook for Malaysia’s infrastructure sector remains bright,” says Thiam, but adds a word of caution: “The country still relies mostly on fossil fuel for its electricity generation. Going forward, more investments in renewable energy can be expected. Besides, the availability of high speed Internet connections is good in urban areas, but it lags in rural areas. So further investments are needed there.”
The government’s role will be instrumental in Malaysia’s continued infrastructure development. As the country embarks upon fiscal consolidation, it is likely that trimming budgetary support to key infrastructure projects will become inevitable. However, according to the International Monetary Fund, Malaysia has limited scope to cut investment in infrastructure if it is to achieve its growth and development goals by 2020. The role of the private sector will therefore be decisive. The easy availability of funds through the sukuk route, a strong project pipeline, and a conducive policy framework are expected to rev up private sector investment, helping the Malaysian economy to build a robust foundation for infrastructure development and to sustain its high-growth trajectory.
