Re-constructing the industry

For the longest time, ’s construction industry is considered by investors to be a safe bet. After all, literally being the pillars of the economy, infrastructure has been around since prehistoric times and will continue to do so as the human race continues to exist.

But while it is clear that there will always be a demand for civil engineering, there is no denying that our industry is and has been fraught with a multitude of issues: From favoritism and bribery in project awards to unsafe work conditions and questionable workmanship, it is an open secret that the construction industry needs to be enhanced.

Thus, when the Pakatan Harapan (PH) party made it clear in their election manifesto that they would be targeting a reform of practices and regulations in the construction industry, many rejoiced at the idea of a more transparent and effective industry.

Since coming into power after a shock victory in the 14th General Elections (GE14), the new government has stuck to their promise with the review of several mega infrastructure projects and the promise to enforce and advocate for newer and better practices in the industry such as open tenders, safe and equitable work practices and the implementation of advanced design software and systems.

According to Vincent Lau, vice-president of Research at Rakuten Trade Sdn Bhd, these changes are only part of the ongoing institutional reform and will prove to be beneficial to the entire industry and the entire country.

“With these reforms, the industry will be more efficient and transparent and will benefit the companies with the ‘know how’ rather than the ‘know who’. And earnings for the industry will remain reasonable as the layers of sub-contracting would be reduced.”

But with change there is always uncertainty and it was evident that this was clearly the case as our construction index on Bursa Malaysia tumbled sharply from 287 points post G14 to a low of 194 points in early July.

Lau commented that the sharp drop were knee jerk reactions and saw massive sell-downs of construction stocks post GE14 as investors feared that the promised review of mega infrastructure projects may cause players to lose their awards and increase overall competition within the industry.

By far, the biggest loser during this whole debacle was George Kent (Malaysia) Bhd (Gkent) who saw its stock price plunging by 74.8 per cent from RM3.94 on May 8 to a shocking year low of 99 sen on July 11.

The rumored front-runner for RM45 billion MRT3 project through the MMC-Gamuda-Gkent joint-venture (JV) and the project delivery partner for the RM31 billion LRT3 project through the MRCB-Gkent JV was hit with bad news as the MRT3 and LRT3 projects were among the first to come under review.

According to the Ministry of Works (MoW), only projects which have been issued with letter of awards and have undergone more than 15 per cent of performance will be carried out whereas projects with 15 per cent of performance and below will be reviewed and determined by their priority.

The review of these projects and initial cancellation of the LRT3 has caused some initial pandemonium for construction stocks but the selling pressure soon alleviated as the LRT3 was reviewed and given the greenlight after some downsizing in its cost and size – returning some confidence back into the market.

To date, the RM80.92 billion East Coast Rail Line (ECRL), the RM45 billion MRT3 and the RM100 billion KL- High Speed Rail (HSR) are all currently under review.

The MRT3 has been postponed while negotiations for ECRL and HSR are still underway.

“Construction stocks have since recovered some lost grounds but is still down 28 per cent year-to-date (YTD). The major infrastructure projects which were initially thought to be cancelled are slowly coming back on stream with lower project numbers.

“Construction will continue to remain a key sector of growth for our country as we continue to develop sustainable growth going forward,” commented Lau.

But while confidence has been slowly but surely returning into our construction sector, the other pending changes to its landscape still leaves some questions unanswered on how they will affect local players and the industry on the whole.

Snapshot of Malaysia’s construction sector

• The outlook for our construction sector is positive with growth projected to reach 5.3 per cent in 2018 with an expected total value of construction of RM140 billion. The value of construction work done in the first quarter 2018 recorded a moderate growth of 5.9per cent year-on-year (y-o-y) to record RM37.1 billion.

• The expansion in value of construction work done was driven by positive growth in the Civil engineering sub-sector with 19.5 per cent and Special trade’s activities sub-sector with 8.6 per cent. However, the non-residential and the residential buildings sub-sectors declined to 1.2 per cent and 3.4 per cent respectively.

• In terms of contribution, the Civil engineering sub-sector continues to dominate the performance of the value of construction work done with a 39.6 per cent share, followed by non-residential buildings with 28.8 per cent, residential buildings with 26.6 per cent and special trade’s activities with 5.0 per cent.

• The private sector continued to propel the construction activity with 60.9 per cent share at RM22.6 billion as compared to the public sector with 39.1 per cent share at RM14.5 billion.

(SOURCE: Department of Statistics Malaysia)

Revamping the open tender process

As Lau implied earlier, the process of successfully obtaining a tender in our sector has a rather unsavoury reputation as being based on ‘know who’ rather than ‘know how’.

For most countries, this issue is usually solved by employing open tenders where everyone who is of ability can tender for a project without discrimination and only the best offer will be selected.

Malaysia on the other hand, for whatever reasons has yet to follow suit perhaps due to a stubbornness to change, hidden agendas or the fear of increased procurement costs.

Industry experts have commented that this reluctance for more transparency in the tendering process has in turn driven up costs and lowered effectiveness of our construction and infrastructure projects as companies who might be better poised to deliver projects are often overlooked for those who have more political clout.

There have even been rumours of some entities who tender for a project with no intention of proceeding with it but instead attempting to ‘sell’ or subcontract it out to other companies while pocketing a neat percentage sum of the contract costs for themselves.

Such actions inevitably drive up the actual costs of the projects and in some instances even result in poor workmanship as the company who is actually proceeding with the project is forced to cut corners in order to maintain a sustainable profit margin for themselves after the original tenderer has taken a substantial cut of the costs.

Stages of open tender process under 1PP

However, the days of such practices are about to end as the Minister of Works Baru Bian, has guided that the PH government will be proceeding with open tenders moving forward and will even be legislating the necessity of it in government projects.

In a statement to BizHive Weekly, Baru stated that the government would be moving to utilising open tenders extensively and with transparency for all government projects.

“The use of open tenders is to ensure that public funds are well spent in compliance with the existing circular on procurement.

“It is crucial for us to optimise the usage of materials and resources and it is the obligation of the government to always ensure that this money is spent optimally,” he stressed.

“The government will improve its procurement and tendering system to ensure it is more competitive and thereby generate the best value for public funds by reviewing the existing government’s procurement procedures, and will come out with the new Government Procurement Act under 1 Pekeliling Perbendaharaan (1PP) from The Ministry of Finance,” he said.

Detailing the new open tender process, Baru said that the process will begin with the public work departments (PWD) providing the public or interested parties with all the detailed bills of quantity (BQ) for a particular project and bidders would be required to place their bids based on these BQ.

The bid documents and its bidders would then undergo evaluation stages to determine whether they would be suitable for the project in question and the project estimated value will be made known to help assist those involved in the evaluation process.

“Based on government circulars 1PP, several assessment criteria have been outlined to guide the evaluation of tenders. Each criterion has a minimum requirement for example the financial capability of the company needs to hold at least 3 per cent minimum capital over the estimated price of total cost of project as estimated in Anggaran Jabatan Kerja Pembina.”

After determining successful candidates, Baru guided that the final stage will be to tender the BQ amongst the companies that were successfully chosen during previous stage.

“This will ensure that we managed to secure a good company at a competitive price,” he commented.

Potential higher procurement costs

On the surface, it seems that the open tender process would be the most equitable and cost effective way of awarding a project.

However, the downside to an open tender is potentially higher procurement costs as a higher number of tenders would also mean increased efforts needed in the evaluation process.

To minimise this effect, Baru guided that the open tender process employed will not be completely ‘open’ per se as it will also have requirements that only contractors of a certain skill or in a certain expertise may tender projects.

“Under the existing government circular, the requirement of procurement is to invite certain experienced and skilled contractors in specific fields in bidding for relevant tenders for more realistic and competitive prices.

“With this practice, for any project, there will be a minimum set of criteria for companies wishing to participate. For instance, the ministry intends to limit the tender for building hospitals to experienced contractors and medical planners.”

This however raises the issue of potential small-cap contractors having a higher barrier in the participation of larger scale projects, to this, Baru guided that that there is currently a distribution of employment policy to Class G1 and G2 Bumiputera contractors under the MoW.

“This policy aims to increase the capability of Bumiputera Class G1 and G2 contractors to be more competitive, and highly skilled.

It is also exposes them to mega projects and systematic work execution and serves to build up their networks.”

Overall effect on the industry

In the short term, the open tender process is expected to drive up transaction and procurement costs due to its formality and strict adherence and compliance to procedures and requirements.

However, Baru opined that the cost will eventually be lowered once industry players begin to understand the flow of the system.

“In the long term, there will be more benefits that can be derived from the open tender system, including setting a benchmark for good governance, nurturing sound companies with competitive pricing, quality workmanship and timeliness in delivering public projects,” he declared.

Sharing the sentiment, Lau added that the more straight forward tender process would also help reduce the layers of sub-contracting within projects which in turn would help drive down costs and even help increase labour efficiency.

More specifically, Baru Bian on August 5 said he will personally follow up closely the ongoing Pan Borneo Highway construction.

“This is my commitment to ensure this mega project spanning and Sabah is successfully and timely constructed,” he said while officiating the Selangau District Teachers’ Day celebration.

“For a start, I am planning to visit the various construction sites from Telok Melano (Lundu), Kuching to Miri on the Sarawak side with ministry officers during the first phase of construction.

“Then we will visit the Sabah side beginning from Limbang (Sarawak). The schedules are now being worked out,” he said.

The 2,325-kilometre highway costing about RM29 billion is scheduled for completion by 2021. The cost is however still being reviewed.

Meanwhile, Baru said his position as Works Minister had increased his knowledge specially on road network system and government buildings nationwide.

“But as far as Sarawak is concerned, it is still lagging far behind.

“It is the agenda of the new PH government under Prime Minister Tun Dr. Mahathir Mohamad ‘s leadership to improve on this despite the financial constraint,” he said.

Sector sees RM35.6 bln of works in 2Q18

To note, the Malaysian construction sector recorded RM35.6 billion worth of construction works in the second quarter of 2018 (2Q18), a moderate 5.3 per cent year-on-year growth.

The Statistics Department in a statement said the sector’s performance was driven by the positive growth in the civil engineering and special trade activities sub-sectors, which grew by 23.6 per cent and 12.6 per cent, respectively.

“However, the residential buildings and non-residential sub- declined to 7.6 per cent and 4.8 per cent respectively,” said Chief Statistician Datuk Seri Dr Mohd Uzir Mahidin.

During the second quarter, the civil engineering sub-sector continued to dominate the construction sector with a 41.7 per cent share of construction works, followed by non-residential buildings (28.2 per cent), residential buildings (25 per cent) and special trades activities (5.1 per cent).

The department also stated that the private sector continued to lead construction activities, accounting for 56.4 per cent (RM20.1 billion) of works compared with the public sector’s share of 43.6 per cent (RM15.5 billion).

The ongoing issue of safety

In time, we expect most things in our lives to get better.

For example, over the years, our food and nutrition quality has increased with better farming practices, our healthcare quality has increased with new discoveries and advances in medicine, our educational quality has increased with better materials and resources and our quality of living has increased as technology continues to make our lives more convenient.

“Top reasons why our construction industry’s fatality rates are increasing”

Unfortunately, this trend isn’t seen in the safety in our construction industry as the fatality rate has seen a rather steep increase over the years.

According to the Construction Industry Development Board (CIDB), the fatality rate in our construction industry has risen to 12.9 persons per 100,000 workers in 2017 from 6.9 per 100,000 workers five years ago in 2013.

CIDB’s recent commissioned study on ‘Securing Improvement in the Health & Safety Performance of Malaysia’s Construction Industry’, identified that this alarming increase in fatality rates were caused by a lack of focus in safety procedures, unskilled workers, and a lack of accountability for all parties involved in a project.

Master Builders Association Malaysia (MBAM) president Foo Chek Lee recently provided similar figures and opinions that conferred with the rising trend of construction related fatalities in the country.

“In 2014, the fatality rate was 7.26 per 100,000 workers. In 2015, it went up 10.74, in 2016 it went further up to 12.78 and in 2017 it shot up to 14.94 per 100,000 workers,” he said to members of the press during a press conference promoting the upcoming 44th IFAWPCA convention in .

Foo highlighted that these figures indicated that the construction industry had the highest fatality rate compared to all other local industries and were mostly improper safety procedures for workers while they are working at height.

He advocated for industry players to buck up and take safety and health seriously during project implementation and stated that MBAM would be working alongside government agencies to implement stricter rules and guidelines for safety and quality of ongoing construction projects.

Occupational Safety and Health Construction Industry Management (OSCHIM)

Following that train of thought, Datuk IR Ahmad ‘Asri Abdul Hamid, chief executive officer (CEO) of CIDB shared that the most recent efforts in increasing our safety guidelines have been from the Department of Safety and Health (DOSH) who introduced the OSCHIM in 2017 which is based on the principle of ‘prevention through design’.

“This concept, also known as Construction Design Management (CDM) makes all parties responsible in ensuring safety at construction site, from clients, consultants to contractors.

The idea behind OSCHIM and CDM is that managing occupational safety and health risks at the planning and design stage is often more effective, easier to sustain and cheaper to achieve, as compared to making changes later when the hazards become real risks in the site.”

“These guidelines provide practical guidance to the client, designer and contractor on the management of safety, health and welfare when carrying out construction projects,” detailed Dato’ IR Ahmad.

He emphasised that this was a particularly strong point to focus on as CIDB’s commissioned study had indicated that the discrepancy of responsibility and accountability of adhering to safety guidelines between, contractors, developers and other parties was extremely high.

“In current situation, only contractors are held liable for any untoward incidents on-site and consultants who are involved in structural design do not consider the risk that has to be manged by the contractor, when undertaking the construction work.

“But with CDM, all stakeholders in a project – from conception to completion – share the responsibility for ensuring the health and safety of the entire project life cycle.

“In fact, under CDM, the top entities in the value chain such as the client or project owner, are held ultimately responsible as the project originators,” Dato’ IR Ahmad shared.

Showcasing the effectiveness of CDM implementation, Dato’ IR Ahmad highlighted that the UK where the method originated from and Singapore where it was adopted in the late 90’s have seen tremendous improvements in their safety records and overall cost efficiencies in time.

“Both countries show decreasing rate of construction site accidents since mandating CDM,” he said.

DOSH is in the midst of making OSCHIM mandatory by amending the Occupational Safety and Health Act (OSHA) 1994 to include it. This motion is expected to be tabled in parliament on October 2018.

In preparation for this, CIDB is currently carrying out nationwide road shows to educated and engage with the industry about OSHCIM before its actual introduction.

Harsher punishments or better prevention?

While having better safety regulations and mandated better operation practices will definitely help make our construction zones a safer place, it will not necessarily mean that players will end up adhering to the new procedures and regulations as often times it is more cost and time effective not to.

And the incentives to follow rules seem to be low as CIDB’s commissioned study cited that many players do not see the severity of fatal accidents as the level of penalty upon conviction is low.

When asked if the industry might see harsher punishments to deter this, Baru said, “Harsher punishment is one of the mechanisms of enforcement. However, as the saying goes, prevention is better than cure, and CIDB is actively investing in awareness and educating construction players to adopt its safety and quality assessments.

“These are the Safety and Health Assessment System in Construction, and (SHASSIC) Quality Assessment System in Construction (QLASSIC).”

According to Baru, the SHASSIC system will assess and evaluate the safety and health performance of a contractor in construction projects while the QLASSIC will measure and evaluate the quality of workmanship of a worker based on the relevant approved standard – Construction Industry Standard – CIS 7:2006.

Rather than punishing players for not adhering to rules, Baru explains that the two systems would work better in ensuring rules are met as they would become a quality rating which will be a prerequisite for permit issuance to stimulate demand for quality rated buildings.

“Hence, QLASSIC will improve the quality standards in the construction industry as this system assesses contractor workmanship and broader quality assurance for construction of buildings.

“Also, we reckon that QLASSIC assessments also should be expanded to cover Structural and Mechanical & Electrical (M&E) works as this will lead to improvements in the quality of contractors and the overall construction work,” he said.

Although it is a monumental task to address every single challenge, Baru Bian said the ministry has put in place a solid work plan to ensure our home ground construction industry is developed and sustainable.

The ministry through its three agencies — namely Public Works Departments (PWD), Construction Industry Development Board (CIDB), Malaysia Highway Authority (MHA) and 3 Professional Boards (Board of Architects, Board of Engineers, Board of Quantity Surveying) — are commited in propelling the initiatives and mechanisms under the Construction Industry Transformation Programmes.

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Source: Borneo Post Online

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