Why are there so few successful bumiputera contractors?

Posted by Aliran (Reposted) on September 01, 2005 at 15:00:06:

A look at how we can produce more construction

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"Giving out juicy contracts without open tendering dramatically increases the likelihood of corruption involving large sums of money."

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Although I have wanted to write this article for a long time, I was hesitant because the subject is very sensitive and I could easily be misconstrued as a racist and an unfair critic of the government?s efforts in trying to produce more competent bumiputera contractors. However, I am now encouraged after having read the report entitled ?Opinion? in the New Straits Times (1 May 2005) where bumiputeras themselves openly expressed their frustrations.

With regard to this issue, I think it would be better if I told you a little about my background from the onset so that you will listen to and appreciate what I have to say. I am a 72-year-old Chartered Civil Engineer and I was one of the founders of the three larger construction companies listed on Bursa Malaysia. These are Gamuda Bhd, Mudajaya Group Bhd, and IJM Corporation Bhd. I was a member of the Board of Engineers, Malaysia for three terms totalling six years. I was also on the SIRIM Board responsible for writing the Malaysian Standard Specifications for Cement and Concrete. In addition, I was the Secretary General of the Master Builders Association, Malaysia for nine years.

These days, I have completely retired, and I would like to assure you that my intentions for writing this article are totally honourable. Many people may not like reading what I have written and the truth may be difficult to accept. Nevertheless, I have decided to make this contribution for the benefit of bumiputera contractors and the construction industry.

Govt efforts have failed

Firstly, I would like to pose a few questions. Out of hundreds of high-rise buildings in Kuala Lumpur, does anyone know of any bumiputra contractor who has won any of the building contracts through an open competitive tender process? Out of hundreds of kilometres of highway in Malaysia, do you know of any bumiputra contractor who has won any part of the highway contracts through open tender?

The obvious answer to the above questions proves that all the government?s efforts in trying to produce reputable and competitive bumiputera contractors since our independence in 1957 have failed. Unless the government changes its methods and policies, which have proven to be unworkable, it will be a long time before we can see more good bumiputra contractors.

As reported in the ?Opinion? piece, Malaysia has one contractor for every 614 persons. The ratio is likely to be amongst the highest in the world and I am sure it is causing the government a big headache. The government recently announced the freezing of further issuance of new class F licences, i.e. no more new baby contractors. The objective is to have a smaller number of hungry contractors getting a bigger share of the limited amount of contracting works. With due respect, the whole article has NOT touched on the fundamental problems facing contractors. Just stopping the birth of baby contractors will not produce more good contractors.

Since our Independence, the government has been trying very hard to produce successful bumiputera entrepreneurs in all fields including bumiputera construction contractors. In spite of the government?s efforts in helping bumiputera contractors, there are only a few good contractors out of the thousands of contractors in the country. After you have read my explanation of the inherent difficulties involved, you will understand that it will take a long time to produce good contractors. I will also suggest some appropriate action to be taken to achieve better results.

Before this, a clearer understanding of the construction industry and its inherent difficulties is essential. Up until now, the Government?s efforts have never been more determined and they would still award juicy contracts to bumiputera contractors hoping to help them. Unfortunately, records have shown that all the extra money and assistance given out has not produced that many good bumiputera contractors. A juicy contract with very good rates does not necessarily mean that the contractor will be able to complete the contract on time and make a profit. The extra money is simply wasted and has made them more inefficient. For example, The Edge of 21 May 2005 reported that the RM2.54 billion Ipoh-Rawang railway contract awarded to DRB-Hicom in July 2000, almost five years ago, is still not completed and now the contractor wants another RM700 million to complete the project. What will the Government do?

Contracting is a very difficult business; yet, it is so easy to register as a contractor. To register as a Class F contractor, one has only to show that one has RM5,000. He does not even require a pass in the Lower Certificate of Education. But it will take at least 10 years to learn how to overcome all the inherent difficulties and become competitive and efficient. Continuously giving out juicy contracts without open tenders will only make the recipients less competitive.

Studies have shown that there are more failures and bankruptcies in contracting than in any other business, and also almost all construction projects are NOT completed within the originally scheduled time. The delay will cost the contractor more, and that is why you can often see incomplete buildings and abandoned projects, which had been undertaken by inefficient contractors. There are many reasons for this peculiar phenomenon.

Over-optimistic assumptions in open tender bids

Although this system is the best way to ensure completion of any project/contract at the lowest price, it is the most difficult obstacle any contractor has to face in the real competitive world. He must know his business very well and be efficient to face open competition all the time. Like a good athlete, he has to keep fit and be constantly aware of market conditions and competitors. There is a classical saying: ?A cheap thing is not good and a good thing is not cheap? But contractors always have to produce good work at the cheapest price. The first astronaut was asked just before take off what his biggest worry was. He replied that it was that the hundreds of tons of steel-work supporting him was undertaken by the cheapest contractors.

To submit the cheapest tender, the contractor must be very optimistic in all his assumptions to get the cheapest rates. He must assume that he will not encounter any cash flow difficulties and that he will always get his progress payments on time to pay his creditors. He must also assume that he will not encounter any difficulty in getting all the required materials on time to avoid any delay and also that there are ample workers lined up for him to pick and choose. Furthermore, he must also assume that the heavens will be kind to him and that he will not meet any harsh weather during construction. Invariably, many of these assumptions will be misplaced; thus, the completion will be delayed and it will cost more to complete the contract.

Material price escalation

There was no material price escalation clause in the conditions of contract before I became the Secretary General of the Master Builders Association. During the unprecedented oil crisis, building material prices shot through the roof. The result: many contractors could not complete their contracts for schools and other projects. After several appeals the Public Works Department (PWD), now known as JKR, eventually allowed only cement and steel [leaving out hundreds of other materials] for price variation reimbursements. Without a price fluctuation clause for the other items, contractors are exposed to risk. Bearing in mind that making excessive allowances would automatically price themselves out, contractors normally under-price to achieve the lowest tender. Invariably, most materials would increase in price due to inflation and other reasons. Contractors require many years of experience to be able to foresee the future and make adequate provisions - without overpricing their tenders.

Every construction site different

No two high rise buildings in KL are the same. The construction of a building, a bridge or a stadium is always akin to making a prototype. The process is much more difficult than manufacturing any product where there is repetition. For example, in making cars, the first prototype and the initial few cars may be more difficult to make, but once everyone gets used to the routine, the manufacturing process will normally proceed smoothly. However, in the construction of buildings or any civil engineering works, there is very little repetitive work. Every construction site is different and most of the people involved have never worked together before. On top of this, there may also be inexperienced supervisory staff who can create a lot of difficulties for the contractors. Invariably, by the time all parties get used to the routine, the scheduled time is over.

Insufficient financing

Most contractors do not have sufficient capital to finance their undertakings. Contractors generally do not have fixed assets like most manufacturers. They usually do not have land and buildings but instead, they have construction equipment. Unfortunately, banks do not accept these moving assets as collateral for a loan. Without bank financing, contractors will obviously find it more difficult to undertake their business.

Lack of experience as material suppliers and merchants

There are very few bumiputera businessmen dealing in hardware, building materials and other general goods. As traders or merchants, they can naturally acquire the skill to wheel and deal, like the Chinese. That is why you can see the majority of the listed companies were started by Chinese merchants. Most of them do not have tertiary education e.g. Tan Sri Lim Goh Tong of Genting who started as a scrap-iron dealer and contractor, and Tan Sri Yeoh Thiong Lay of YTL Corp, who also started as an ordinary contractor. Generally, bumiputeras are not interested in working long hours in managing small businesses earning marginal profits. Many have a life-long dream to secure permits or concessions for some big deals so that they can become instant millionaires.

More bumiputeras should follow the humble foot-steps of the Chinese to become traders and merchants for building materials and other goods. The business skills they can learn will carry them a long way. I am very sure some of them will eventually become good contractors and successful businessmen.

Lack of skilled foremen, carpenters and other workers

Although there are lots of bumiputera engineers and many universities are increasing the number of engineers who qualify every year, without a sufficiently skilled work force, all the engineers in the world would not be able to complete a single project. There are so few bumiputera construction foremen, carpenters and other skilled workers. If you were to go into any building construction site, you would see the truth of what I am saying. How many Malay carpenters have you seen in KL? Without skilled bumiputera workers, it would be more difficult for bumiputera contractors to succeed. In fact most of the Chinese contractors started as apprentices and rose from the bottom to become successful contractors. More bumiputeras should be encouraged to work as apprentices in construction sites. This is a surefire way to further produce really good bumiputera contractors.

Not enough trade schools

There should be more trade schools and more bumiputeras should be encouraged to learn construction skills such as carpentry, welding, plumbing, and brick laying. Very soon, skilled tradesmen will be able to earn more than degree-holders as is the case in Australia or England. The Government should build more trade schools and should not hesitate to offer scholarships to bumiputeras to be trained in these trade schools. Presently the construction industry is not short of engineers but very short of skilled workers and supervisors. If more bumiputeras are properly trained, some of them will go on to become good contractors.

Results expected too quickly

They say Rome was not built in a day. I say IJM Corporation Bhd. has taken almost 40 years to attain this competence. IJM was made up of three construction companies: Ipoh Garden, Jurutama and Mudajaya. I started Mudajaya in 1966 with three other partners to under take construction work in the Muda Irrigation Project in Kedah and Perlis. The World Bank financed this project so that Malaysia could double its rice production. All my three original partners had little formal education but they had skills to teach me. They all died about 10 years ago. It takes a long time to produce a really good contracting company like IJM to be able to compete internationally for contracts.

Change unworkable policies

In my opening statement, I said that I was afraid that I might be miscontrued as a racist and unfair critic of the Government. Now it looks like all my sin in writing the above will be acceptable basing on the Deputy PM Najib?s statement on 5 May when launching the entrepreneurship programme, Gerak Usahawan. He said that bumiputeras should emulate the Chinese entrepreneurs who set long-term goals, and combined them with hard work to sustain their businesses over generations.

Contracting is one of the most - if not the most - difficult businesses, and it will take a very long time to produce competent bumiputera contractors. It is very dangerous to quickly produce half-baked ones, who will soon find themselves in financial difficulties as the bankruptcy record shows. The Government must change its methods and policies which have proven unworkable.

Giving out juicy contracts without open tendering dramatically increases the likelihood of corruption involving large sums of money. As far as I know IJM Corp. Bhd. the biggest road builder in Malaysia, which is capable of winning contracts in India and other countries, completed all their North-South Highway contracts as subcontractors and now they are also subcontractors in the RM2.9 billion Rawang-Ipoh railway project. Isn?t that ironical? Now you can understand why Transparency International has placed Malaysia only in 39th position whereas Singapore was ranked 5th in its Corruption Perception Index 2004. Since we are so keen to compete with Singapre, why don?t we get rid of corruption and improve our placing in the Index?

As reported in The Star (26 May 2005), Dr. Mahathir said that the Government and political parties must be more serious in tackling the corruption problem. So, stop giving out juicy contracts without tendering and use the savings more effectively to implement the options I have suggested above.