Bumiputera contractors: A wasteful national mission to date

By Koon Yew Yin
Wednesday, 18 November 2009 07:54

Centre for Policy Initiatives

It is an indictment of our system that IJM is able to compete internationally for contracts but yet is required to work as a sub-contractor to Bumiputera companies on the North-South Highway in Malaysia.

On Oct 25, 2009 our Second Finance Minister Ahmad Husni Mohamad Hanadzlah said that government has vowed to cut down on wasteful spending to lower its budget deficit and all major public projects must go through the open tender system.

Earlier, the Auditor-General’s report for 2008 revealed continuing financial management weaknesses at every level of the government. Delays in project completion seem to be a perennial problem and the lack of oversight by various ministries and departments in the procurement of goods and services continue to cost the government hundreds of millions of ringgit.

These statements indicate perhaps that our Prime Minister Najib Razak may want to reverse his announcement on January 9 in Kuala Teregganu that the government would always look after Class F contractors. (Non- Bumiputeras cannot register as a Class F contractor).

The government had in fact already set aside RM900 million, which was RM300 million more than last year, for works to be undertaken by Class F contractors this year.

Producing competitive Bumiputera contractors

As reported on May 1, 2005, Malaysia had one contractor for every 614 persons. Most likely there are more contractors by now. This ratio is again likely to be amongst the highest in the world and is obviously costing the public a significant amount of money besides affecting our overall economic performance.

I would like to pose a few questions which may appear unkind or insensitive but nonetheless need to be asked.

Out of hundreds of high-rise buildings in Kuala Lumpur does anyone know of any Bumiputera contractor who has won any of the building contracts through an open competitive tender process? Out of hundreds of kilometers of highway in Malaysia, can any Bumiputera contractor who won any part of the highway contracts through open tender be identified?

The answer to the above questions unfortunately is in the negative. The evidence is that all the government’s well-intentioned efforts in trying to produce competitive Bumiputera contractors since 1957 have failed.

Why this has happened needs to be openly discussed rather than swept under the carpet. In this note, I share my experiences as a contractor and my knowledge of why Bumiputera contractors have failed in the past and what needs to be done by the government to correct this unhealthy situation.

Facts of life in the contracting business

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 he has RM5,000. He does not even require a pass in Lower Certificate of Education (LCE). 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 lucrative and over-priced contracts without open tenders will only make the recipients less competitive.

Secondly, 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 original scheduled time.

The delay will cost the contractor more and that is why you can often see uncompleted buildings and abandoned projects which have been undertaken by inefficient contractors. There are many reasons for this peculiar phenomenon.

1. Open tender system

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 the open competition all the time. Like a good athlete, he has to keep fit and constantly be aware of the market conditions and his competitors.

There is a classic 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.

In order 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 for him to pick and choose from.

Furthermore, he must also assume that the heavens will be kind to him and he will not meet any inclement weather during construction. Invariably, many of these assumptions are proven wrong and thus completion delayed, and the infrastructure will cost more to complete than provided for in the contract.

2. The importance of teamwork

Teamwork is important in all business endeavours. It is more so in the contracting business. Every contractor must realise that his success is not going to be determined by his own knowledge, talent or abilities. It is going to be determined by his ability to develop a great team. Those who are closest to him will help determine the level of his success.

Every efficient contractor must have a reliable team comprising managers, sub-contractors, material suppliers, foremen and skilled workers. All the team players must cooperate with one another, bearing in mind that the main contractor’s survival depends on their contribution. Their main goal must be saving cost. If they cannot complete the contract within the tender price, all of them will also be affected.

3. Construction material pricing

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. As a result, many contractors could not complete their contracts for schools and other projects. After several appeals the Public Works Department (PWD), now known as Jabatan Kerja Raya (JKR), eventually allowed only cement and steel for price variation reimbursement.

This was only a partial solution as hundreds of other items were excluded.

Without a protective price fluctuation clause for the other items, contractors are exposed to risk. At the same time, knowing that they have to undercut their competitors during the tender process, contractors would 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 anticipate such price changes and to make adequate provisions for them whilst at the same time not overpricing their tenders and losing the bid.

4. No contract is exactly the same

No two high-rise buildings in KL are the same.

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 that 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.

5. 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.

Beginning at the bottom: The key to success

I have provided some insight into why contracting is not a business that is as easy or profitable as it is commonly perceived to be.

There are other factors explaining why or how some of the most successful tycoons associated with the building or construction industry have managed to get where they are.

Firstly, it should be noted that the majority of listed companies were started by Chinese merchants most of whom incidentally did not have tertiary education. For example, Lim Goh Tong of Genting began his working career as a scrap iron dealer and a contractor; and Yeoh Tiong Lay of YTL Corp. started off as a small contractor.

Generally, Bumiputeras are not interested in working long hours in managing small businesses earning marginal profit. Because of the NEP, many have hopes of securing permits or concessions for big deals so that they can become instant millionaires. There are relatively few Bumiputeras involved in small and medium-scale enterprises (SMEs).

More Bumiputeras should follow the humble footsteps of the Chinese to become traders and merchants for building materials and similar goods. The business skill they can learn from these humble beginnings will carry them a long way. I am very sure some of them will eventually become good contractors and successful businessmen if they learn the trade at the bottom and not try to parachute into the contracting business.

The importance of skilled workers

Although there are already many Bumiputera engineers unable to find employment, most of the universities are still producing more and more engineers every year. But without a sufficiently skilled workforce, 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 necessary good practice to produce really good Bumiputera contractors.

The role of trade schools

There should be more trade schools and more Bumiputeras should be encouraged to learn construction skills like carpentry, welding, plumbing, bricklaying, etc. 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 not hesitate to offer scholarships to Bumiputeras to be trained in these trade schools. Presently, the construction industry is not short of engineers but it is very short of skilled workers and supervisors. If more Bumiputeras are properly trained in various crafts and blue collar skills, some of them will go on to become good contractors.

Time and more time

They say Rome was not built in a day. It is easier to produce engineers, doctors and other professionals than to produce efficient and competitive contractors who do not need government financial aid. Just giving out lucrative contracts to Bumiputeras is not the answer; in fact it is counter-productive as it simply makes them more inefficient and less competitive.

IJM Corporation Bhd has taken more than 40 years to attain a competitive level of competence. The record shows that IJM has secured on competitive tenders five toll road concessions in India. Three are currently in operation and two are under construction. The total length of the roads exceeds 1,000 kilometres, longer than our North-South Highway.

In addition, IJM completed a toll bridge in Kolkata and sold its interest for RM65 million profit after a short period of three years. IJM is also a very reputable LRT builder, having to date completed 15km of the elevated sections of the New Delhi Metro and it was recently awarded another 8km.

Based on open competitive tender, IJM won the contract to build the tallest building, a prominent future landmark for the Delhi Municipality, in New Delhi.

It is an indictment of our system that IJM is able to compete internationally for contracts but yet is required to work as a sub-contractor to Bumiputera companies on the North-South Highway in our own country.

Conclusion: Half-baked contractors are not in our national interest

Contracting is one of the most, if not the most, difficult business and it takes a very long time to produce competent contractors.

It is very dangerous to quickly produce half-baked ones as they will soon find themselves in financial difficulties and require bailouts. The bankruptcy record shows that a large number of debtors are Bumiputera contractors with many of them unable to pay back the loans given by government-controlled financial institutions.

The government must change its methods and policies which have proven unworkable. There is no urgency in producing more Bumiputera contractors as many of the key industries e.g. the banks, plantations, motor vehicles, taxis, rice etc are already under the control of Bumiputeras.

Our government must not be narrowly communalistic and should make use of all the groups, irrespective of race, that are more efficient in the contracting business.

Giving out contracts without a full tender process is akin to corruption. I urge the government to stop this corrupt practice and to utilize the savings from these enormous sums to implement the options suggested above.

Note on the Author

I am a 76-year-old chartered civil engineer and one of the founders of the three larger construction companies listed in 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. I was also on the Sirim Board responsible in writing the Malaysian standard specifications for cement and concrete. In addition, I was the Secretary General of Master Builders Association, Malaysia for nine years.

These days, I am completely retired. My intention in writing this article is honourable. Many people may not like reading what I have written and the truth may be difficult to accept. Nevertheless, this is my considered analysis for the benefit of my country, the Bumiputera contractors and the construction industry.

  1. #1 by boh-liao on Wednesday, 25 November 2009 - 5:56 pm

    Wonderful insights fr a retiree, though oredi well known ‘what-2-do’ remedies
    But as we all know these wise words will be fallen on deaf ears – AGAIN
    Come 2010, de AG’s report for 2009 will still hv the same old craps
    Year in, year out, sh!t in, sh!t out
    Soon Happy 2010, another 10 more years 2 de famous 2020

  2. #2 by HJ Angus on Wednesday, 25 November 2009 - 6:04 pm

    Unfortunately we have a system where a few cronies need to be fed caviar instead of just fish.
    They only want to work at the top end of the project cycle – ie the part that connects with the those awarding the contracts – just see how the PKFZ fiasco panned out.
    This type of project scamming only creates problems as those at the top end will receive quick profits while those having to actually do the work take all the risk.
    When the price escalates, they may just find it easier to go bankrupt. That is why we have so many uncompleted white elephants.

  3. #3 by boh-liao on Wednesday, 25 November 2009 - 6:17 pm

    And all crappy work will be protected under OSA
    See, de Bukit Antarabangsa landslide report cannot be made public
    Tak boleh tahu
    No need 2 talk abt learning fr mistakes in order 2 improve
    No need 2 go after de culprits
    Best place on earth 2 do business, 1 M’sia

  4. #4 by ktteokt on Wednesday, 25 November 2009 - 6:20 pm

    Facts speak for itself! Look at the PLUS highway, look at the Kepong flyover, look at the Courts Complex in Jalan Duta, KL! All these tell one thing and one thing only, i.e. the guys securing the contract are not the guys completing them! UMNO only ensures its cronies get to secure projects but they do not even lift a finger to participate actively in its completion. All they know is to sub it to a main contractor, who in turn sub it to a sub contractor who in turn sub it to a sub-sub contractor, etc.

    The line goes on until the guy who actually executes the job but then, in between, all the lucrative profits have been taken away and shared by these “big tail snakes”. With minimum or no profits, what do you think the guy executing the job will do? Obviously, he will go for the cheapest in both materials and labour. So eventually, the final product is one of sub-sub-sub-sub-sub quality.

    No wonder the Courts Complex in Jalan Duta became a fish pond and the flyover in Kepong cracked!

  5. #5 by k1980 on Wednesday, 25 November 2009 - 7:01 pm

    Predictions for 2010 AG’s report–

    (1) Laptops were purchased at RM99,000 each

    (2) Ministers awarded tenders without even applying for them

  6. #6 by Better Malaysia on Wednesday, 25 November 2009 - 7:08 pm

    “Collapse, collapse, collapse” that’s what you get with the present system.

    Go international for those that are highly competent and eventually you will be rewarded and more brain drain will take place. Bloody UMNO and cronies.

  7. #7 by k1980 on Wednesday, 25 November 2009 - 7:08 pm

    Selangor state govt to fall soon? Malaysia boleh!


    Unless you pay for their services, security guards will not lift a finger to help you. Malaysia boleh!


  8. #8 by lkt-56 on Wednesday, 25 November 2009 - 7:41 pm

    The writer did not mention that even with open tender, the process can be rigged when the Consultants collude with certain favoured contractors. In some cases even the Project owner is involved. If open tender can be rigged what more can we say about a negotiated contract.

    The construction industry in Malaysia is corrupt to the core.

    I had a memorable but funny encounter: a guy told me that he had already got the fish but needed someone to cook it for him… :D

  9. #9 by Godfather on Wednesday, 25 November 2009 - 8:12 pm


    Was the “guy” our resident village idiot Kasim Amat ?

    I wonder why he hasn’t appeared on this thread threatening to charge us all with sedition for questioning their rights.

  10. #10 by ablastine on Wednesday, 25 November 2009 - 10:35 pm

    Mr Khoon, I wonder why you bother to waste time writing such a long essay on Bumiputra contractors. One thing is for sure- nothing is going to change. You must be out to your mind to think that UMNO cronies will give up on lucrative government contracts which they can subcontract out for generous kickbacks. They spend millions on money politics to get into position of power primary to get these freebies. You think they do not know the problem? Solving the problem brings no benefit to them and as such it will perpetuate as long as UMNO is the government. To most of these UMNO warlords, how the bumiputra contractors perform is irrelevant. What is relevant is how much they can siphon off money for self gain in whatever projects there are. If you really want change to occur go into politics and help PR so that all these parasites will be exterminated in the next election. If the BN government does not fall in the next election do not waste your time preaching solutions as they will only fall on deaf ears. In any case there isn’t very much hope for Malaysia if they win as the plunder will just become worse.

  11. #11 by pwcheng on Wednesday, 25 November 2009 - 11:27 pm

    UMNO is all set to bankrupt the country at the rate they are going. No consideration for norms except favor anything that can give them votes. Buildings can come down (Trengganu Stadium),Bridge can crack(MRR2), Tunnels to control flood do not serve its purpose, and many many more. Education standard brought down to pass those who are suppose to fail. Large tract of land in exchange for a building that costs half its value. Abandon ports with billions wasted. Aps given freely to individuals to make them rich without much effort. Thanks to UMNO and TDM, With a hand in all these, he must be blind in spite of him having vision 2020. A vision without a mission will forever remains a passion.

  12. #12 by frankyapp on Thursday, 26 November 2009 - 2:50 am

    Hi PWcheng,sure Umno is all set to bankrupt the country but do we an alternative ? Yep we now seem to have PR lead by PKR Anwar.Currently pkr Sabah is in a mess ,the KDM majority is pretty unhappy with Anwar’s action.Even pkr Sarawak too is unhappy with Anwar,hence Sabahan and Sarawakian dream to depend on PR to end Umno/Bn rule is now pretty uncertain.Sabahan is beginning to feel the lacking of confidence in PR due to PKR undemoncratic action against some respected local leaders from the KDM group.You guys can talk and shout about the Umno/Bn corrupted regime and want to get rid of it but have forgotten your alternative party which is tearing itself apart.Similarly I can tell you and other guys too that though you have a vision,but a dim vision as those leading the mission are not sharing the same visionary dream.Hence you guys vision will only remain a vision at the end of the day.My suggestion is tell the PR guys to start cracking and go on track all the way to finish of the Umno/Bn corrupted regime.

  13. #13 by taiking on Thursday, 26 November 2009 - 9:34 am

    Sheeeet. Godfather is three comments ahead of me in making the same remark.


    Oi kassim u mana? Kasi sama dia. Ya kasi hentam koon yew yin betul betul. What audacity to question your rights.

  14. #14 by taiking on Thursday, 26 November 2009 - 9:40 am

    I missed this one by k1980 (#5).

    I believe in 2010 projects would be awarded to umnoputras even if they do not want them.

    You know. Like our public university places and the very common remark by bumiputra students: “I got into law and I did not even apply for it”.

  15. #15 by Winston on Thursday, 26 November 2009 - 12:30 pm

    I wonder why he hasn’t appeared on this thread threatening to charge us all with sedition for questioning their rights. – Godfather

    I know why.
    We will make mincemeat of such people!
    And that applies to all UMNO/BN apologists!

  16. #16 by SENGLANG on Thursday, 26 November 2009 - 1:22 pm

    with due respect only retiree dare to write this kind of sincere analysis. Not retire but only for those completely retired.

    Well, it is not that the authority did not realized the problem and it is also not that they did see the wastefulness and the incompetence of the special treatment given. BUT, if this was not given the environment will be totally different and we might not have save environment to operate on.

    Any change will be painful but for change to come it must first the sincerity to make changes and the courage to make the change. Second for all those involve must admit the change is not an option but a must in order to survive in this global world which is approaching border less in time to come or it may already existed without our realization.

    We must admit we just simply operate on robbing here to give to the people from the some environment, we must teach and empower them to seek business outside our shore. But before they can be teach they must have the willingness to be taught, and to have this thye have to admit that this need is essential for them to survive.

    There is no point to talk about ketuanan of this and that when you can’t even survive with out the usual hand out. Please be realistic that hand out is always hand out and it will come to exhaustion in time to come.

  17. #17 by i_love_malaysia on Thursday, 26 November 2009 - 1:26 pm

    During Ching Dynasty, three Han families will have to feed one manchu FOC. What is the difference between then and now over here??? It is only different in form and even worst than that in percentage wise!!! Imagine it is only 1/30 then but we have 7/3 here!!! Wah Habislah Malaysia!!!

  18. #18 by i_love_malaysia on Thursday, 26 November 2009 - 1:36 pm

    BN UNNO and their cronies know all these issues, but they just dont have the time to really want to solve these problems!!! It is easier for them to become billionaires than to look into these!!! AP will continue beyond 2015, direct nego will continue, every thing will continue!!! Do you think they will suffer if Malaysia becomes a bankrupt state??? No, it is the normal Rakyat that will suffer!!!

  19. #19 by frankyapp on Thursday, 26 November 2009 - 2:36 pm

    Since we know that Umno/bn would bankrupt the state and the rakyat,what are we going to do to prevent this rot ? PR,yes an alternative but is it reliable ? It does not seem so presently.Pretty lots of the current pkr leaders have the frog sysdroms ,hence lots of voters are now lacking confidence with these guys.Further more,PR accused and charged Umno/Bn of certain corruption on one hand and on the other,themselves committed wrong doing.Hence two wrong cannot make one right.Liken the chinese saying ” half a lbs,eight ozs.”

  20. #20 by trublumsian on Friday, 27 November 2009 - 4:24 am

    a repeat of what i’ve said..

    who is perpetually supplying the gambling chips umno is playing with? 1. ever depleting natural resources, 2. taxes paid by malaysian chinese.

    as long as the supply keeps coming, the plundering continues. as if the kampungs aren’t duped enough, umno will have a new line item on the expenditures list next year- spin doctoring, on a large scale.

    and, i m utterly let down by what i’ve seen since the the last election. pkr n the leaders who r supposed to be the demi messiahs, what the eff hv u accomplished??

  21. #21 by cheng on on Friday, 27 November 2009 - 9:22 pm

    Yes , contracting is a very tough business, For bumi, Malaysia must be easiest place to register as a contractor.
    No wonder so many govt projects hv tons of problem, stadium roof collapsed in Trengganu, hostel collapsed in Ulu Perak, small river bridge collapsed in Kampar, Perak, cracks in Kepong flyover etc

  22. #22 by Kasim Amat on Sunday, 29 November 2009 - 7:54 pm

    First, asking for removal of 30% Bumi share in listed companies. Second, demanding for allocation of more scholarships to Chinese at the expense of Bumi. Third, insulting our Royal Rulers. Fourth, questioning the special rights of the Malays provided in the Constitutions and now, interfering with the national building courses that we give to our people. I think enough is enough. We have been tolerating the non-Malays all these years and trying to work with them. But they do not tend to appreciate what we have done and keep asking for more. What is the big deal if we say Chinese is the “Jews of Asia”? Isn’t it the fact? They come here and make all the monies and now they want everything. When we want to protect our rights, they are making all sort of noise. What else do they want from us?

  23. #23 by alaneth on Sunday, 29 November 2009 - 11:48 pm

    Look at our Malaysian born contractors…. they can only work in US Sanctioned countries such as Libya, Syria, Iran, Sudan, middle east etc…

  24. #24 by alaneth on Sunday, 29 November 2009 - 11:57 pm

    Having previously worked with JKR before, I see that JKR do not mind Class F contractor sub-contracting jobs out. Even fully subcontracting (or selling) the whole contract…!
    Even though in the contract which stipulates that contractors are not allowed to sub-contract without written permission etc, but most people just close their eyes & let it be.!
    even many Bumi contractors I know from JKR times know & will subcontract most works away >80%. Say for example a specialist but small landslide job, Class F (or maybe D-E) gets it. They just provide labour to close the road & divert traffic using their workers. The rest of the works they sub-contract out 99%. JKR knows very well that this contractor subcontracts out as he is not the specialist contractor. But unfortunately the specialist contractor cannot tender as he is not a Bumi company! So the Bumi company gets a cut, say 20% of margin. Untung buta!

    But I say the specialist company will not lose out. He will quote his price accordingly. It is the Bumi company tendering for JKR which marks up 20%. If 5 tenderers, all marks up 15-25%. In the end, the govt is losing money when they can easily get the specialist contractor to do the job.!

  25. #25 by akk8870 on Monday, 30 November 2009 - 12:17 am

    This article is truly well written and is a true reflection of the current construction industry.

You must be logged in to post a comment.