Public-Private Partnerships in Malaysia

Introduction

The concept of Public-Private Partnership (PPP) was first introduced to Malaysia in the 1980s with the implementation of the Malaysia Incorporated Policy to encourage cooperation between the public and private sectors. Successful PPP developments include the longest expressway in Malaysia i.e. the North-South Expressway (PLUS), the Light Rail Transit (LRT) and the Kuala Lumpur International Airport (KLIA).[1]

The PPP model is applied in a wide range of sectors, including transportation, healthcare, education, waste, water, wastewater and telecommunications through various implementation models, such as build-own-operate (BOO), build-operate-transfer (BOT), build-lease-maintain-transfer (BLMT), lease[2], and the Private Finance Initiative (PFI) approach.[3] Traditionally, the infrastructure sector (e.g. roads, power plants) is where the PPP model is most used. A new area where PPPs might see increasing application is in the green energy and carbon reduction space, as the Malaysian government will likely need to leverage private sector resources to help it achieve its carbon reduction goals.

Whilst enthusiasm for the PPP sector in Malaysia may have been dampened in the few years due to the combined impact of COVID-19 and government policy changes, we might soon see a renewal of activity in this sector, as a number of upcoming new policies and legislation are expected to come into effect soon to improve the PPP procurement process and the economic case for private sector participation in Malaysia’s post COVID economic recovery becomes ever more cogent.

Regulatory Framework

There is currently no dedicated legislative framework in Malaysia which governs PPP projects. Instead, the procurement process for PPPs is regulated through a combination of general public finance legislation (e.g. the Financial Procedure Act 1957) and policies and guidelines issued by Malaysian government authorities relating specifically to PPPs. The policies and guidelines are not strictly law but will need to be followed in practice during a PPP procurement process.

To facilitate public procurement through the PPP model, a PPP unit (“UKAS”) was specifically set up in 2009 under the Prime Minister’s Department to act as a central coordinating agency.

UKAS has issued several guidelines, including the Public-Private Partnership Guidelines (“PPP Guidelines”) as a reference for potential investors. It outlines the general principles and key features of PPP and the process flow of implementing a PPP project. All PPP proposals are required to be submitted directly to the procuring ministries or agencies based on the PPP Guidelines and this has led to a degree of streamlining in the PPP procurement process.

A typical PPP procurement process will require Government approval at multiple stages, which is summarised below:[4]

Step 1 – submission of project proposal to the procuring ministry/agency for initial screening and feasibility assessment;

Step 2 – if initial screening is successful, the proposal is submitted to the Public-Private Partnership Committee (JKAS) for decision;

Step 3 – if JKAS decides to accept the proposal, the recommendation is made to the Cabinet for approval in principle;

Step 4 – the procuring Government agency proceeds to tender the PPP project, which entails the preparation of RFP documents, invitation to bidders and evaluation of submissions;

Step 5 – following evaluation of tender submissions, the procuring Government agency recommends the preferred bidder to JKAS;

Step 6 – JKAS recommends the preferred bidder to the Cabinet for approval;

Step 7 – inform the successful bidder and then finalise terms and conditions of the agreement;

Step 8 – recommend the finalised terms and conditions to the Cabinet for final approval; and

Step 9 – contract signing.

Market Snapshot

Track Record (as of 18 January 2023):[5]

Malaysian PPP investments since 1990 stood at USD 53.718 billion across 126 projects. The electricity sector outpaced the other sectors, followed by the road sector and the water and sewerage sector. Currently, there are 101 active PPP projects with an investment value of USD 40.573 billion.

The charts below illustrate the investment value breakdown of each of the PPP sub-sectors:

PPP in Malaysia by Sector (since 1990)

Current Landscape

COVID-19 has had a noticeable dampening effect on infrastructure development in Malaysia, including PPP projects. Recent changes in the Government and the consequential reshuffle in ministries and departments have also caused PPP project development in Malaysia to take a back seat and resulted in the need to obtain fresh Government mandates for the continuation of certain policies and projects.

Nonetheless, an uptick in PPP projects is anticipated as the country moves towards the recovery phase and the need to kick start the economy (particularly through infrastructure projects) become more prioritised. To better face the global and domestic challenges that lie ahead, the Government of Malaysia has developed a new PPP framework, referred to as PPP 3.0[6], under which new projects would be approved. An implementation guide to PPP 3.0 was published on 9 June 2022 but to date, there has not been any public announcements on any PPP project approved under this new framework.

Key Issues for International Investors

Below are some issues which have historically impacted the viability and appeal of PPP projects in Malaysia for international investors. It is envisioned that the PPP 3.0 framework would help to address some of these issues and facilitate greater confidence and trust in Malaysia’s PPP investment regime.

(a) Insufficient government guidelines and procedures[7]

While the PPP Guidelines have helped to streamline the PPP procurement process, it lacks sufficient detail on how PPP projects in Malaysia should be identified, assessed, selected, budgeted, monitored, and accounted for. Evaluation criteria of technical, commercial, financial and equity requirements in the end depend on the quality of the RFP that has been produced and the lack of clarity often requires an investor to rely on customary practice and previous experience with the authorities when responses to clarifications are still unclear. These uncertainties have tended to reduce the pool of potential investors willing to invest in Malaysian PPP projects, which ultimately affect the delivery and quality of services.

The policy under the PPP 3.0 Framework[8] appears to be geared towards the implementation of PPP projects which meet the accessibility and equity objectives on all aspects of Malaysian society, environmental sustainability, the replicability and effectiveness of the project as well as stakeholder engagement. The evaluation and consideration of PPP projects will take into account the following new criteria:

improving and promoting equality of user access to the services offered and, in particular, access to essential services such as water and sanitation, energy and others with a particular focus given to the socially and economically vulnerable people of Malaysia. Additionally, the elements of PPP implementation will take into account terms which prioritise Malaysian citizens such as providing access to its services without any restriction;
improving environmental sustainability with the implementation of projects which can reduce carbon dioxide emissions and help the transition to a green economy;
increasing the effectiveness of project implementation from an economic perspective by ensuring achievements which have achieve value for money and have a measurable outcome;
particular emphasis is put on an effective and efficient implementation model as well as the replicability of the project for future use; and
implementation planning of the projects which take into account feedback from all stakeholders, both those that are engaged directly with the project or those that may be indirectly affected in the short and long term.

(b) Allocating risks between the public and private sectors can be difficult

A key feature of a PPP project is the optimal sharing of risks between the public and the private sectors.[9] A proper distribution of project risk is one of the main ways a PPP can achieve better value for money. Historically, however, there tended to be an over-allocation of risks to the private sector, even when the Government may arguably be in a better position to manage some of the risks pushed onto the private sector. For example, in waste-to-energy projects in Malaysia, the Government does not guarantee the volume and composition of municipal waste supply. Instead, the concession company must bear the risk of municipal waste shortage and any changes in the waste composition and characteristics.

The private sector and their lenders will be increasingly cautious about accepting significant risks beyond their control, especially when they result in uncertainty in revenue flows or erode the project’s affordability and return of investment.

One of the notable approaches under the PPP 3.0 framework[10] is that in the short term, the Government will prioritise the implementation model based on the User Pay concept, on the rationale that the most efficient allocation of resources occurs when consumers pay the full cost of the goods that they consume. Such a model will better balance between the elements of financial viability of the private sector as well as the affordability of the end user.

(c) Restrictions on foreign involvement and minimum local participation

Depending on the sector involved, there may be restrictions on foreign equity ownership as well as minimum requirements for local or Bumiputera[11] participation. Foreign equity limits are not always published officially but would be prescribed in the request for proposal issued by the relevant regulatory authority.

Foreign equity shareholding tends to be capped at not more than 49% and local or Bumiputera participation is further achieved through conditions such as 30% of the value of the contract sum must be awarded to local or Bumiputera subcontractors. In certain projects, there will be conditions to maximise local content in the construction, supply and procurement of equipment, labour and material for the PPP project, particularly when these can be sourced locally.

(d) Administrative hurdles in implementing projects

There is limited coordination and collaboration within and across the different Government authorities responsible for issuing the relevant approvals for the implementation of a project. Such administrative hurdles have substantially increased the lead times for obtaining authorisations required to implement the PPP projects and have often posed a significant risk in achieving project financial close on time.

Based on the PPP 3.0 framework[12], coordination will be carried out at the national level to optimise the delivery of services and the financial position of the Government. The Government envisages that any proposed new PPP project will be scrutinised at an early stage by a single committee (single window) consisting of the Ministry of Finance, the Economic Planning Unit (EPU), Prime Minister’s Department (PMD) and UKAS. In the short-term, the single window platform which comprises of officials from the Ministry of Finance, UKAS, PMD, and EPU will be established to review and approve development projects either using the development expenditure or PPP approach. The single window platform is also responsible for reviewing projects with allocations under the existing Development Expenditure for the potential to be implemented on a PPP basis using the new model under the PPP 3.0 framework.

The Way Forward

While the PPP sector has been affected by COVID-19 and recent government changes in Malaysia, upcoming policy announcements and the implementation of the PPP 3.0 framework indicate that we might soon see an uptick in the sector.

Pursuant to the PPP 3.0 framework, a special PPP committee will be established to examine issues in the implementation of PPP projects (as discussed above). While it was announced that the project implementation model will not involve any financial commitment from the Government and will adopt the request for proposal approach, we expect to see some form of Government support mechanisms to increase the resilience of infrastructure PPP projects. In addition, it was disclosed under the PPP 3.0 framework that a specific facilitation fund for high impact infrastructure projects will be established to reduce the cost of these projects and ensure the charges payable by the consumers are affordable.[13]

The Government is currently formulating the Fiscal Responsibility Act (FRA) and the Government Procurement Act (GPA). The FRA was slated to be tabled in Parliament at the end of 2022 and is intended to be a dedicated piece of legislation that will support the Government in enhancing fiscal risk management while improving Malaysia’s fiscal policy formulation by international standards and global best practices[14] The FRA is expected to strengthen rules for fiscal treatment and budgeting of PPP projects when it comes into play. The GPA is intended to provide a legal framework for the public procurement process, from planning, calling for participation and awarding of contracts, including for PPP projects. The GPA is expected to refine the current public procurement approaches and principles and address the shortcomings in the regime.

Against the backdrop of the COVID-19 pandemic, Malaysia, like many countries worldwide, is revisiting and reprioritising project pipelines and sectors of particular relevance for PPP. Infrastructure development, which remains a focus in the Twelfth Malaysia Plan. Major infrastructure projects which are expected to achieve completion in the next five years include the Rapid Transit System (RTS) connecting Bukit Chagar, Johor Bahru, Malaysia, and Woodlands, Singapore, the East Coast Rail Link (ECRL) project connecting Kota Bharu, Kelantan in the south to Port Klang, Selangor in the north, the West Coast Expressway (WCE) running through Selangor and Perak, the Central Spine Road project from Bentong, Pahang to Kuala Krai, Kelantan, and the Kota Baru-Kuala Krai Expressway in Kelantan.

Another burgeoning sector worth monitoring is green energy and carbon reduction technologies. Malaysia is committed to becoming a carbon-neutral nation by the year 2050. The Government has implemented a series of efforts to accelerate the growth of the green economy and boost energy sustainability. As the Government lacks the resources needed to fully finance all efforts towards carbon-neutralisation, engaging the private sector is critical to closing the existing gaps. The PPP 3.0 framework has also encouragingly reflected that the Government has increasingly sought more accountability for environmental, social, and governance (ESG) and aims to apply ESG principles in implementing PPP projects, including reducing energy consumption and greenhouse gas emissions in implementing PPP projects. It is hopeful that the PPP sector will continue on an upwards trajectory as the upcoming policies unfold to support the nation’s navigation through the promising ESG journey.