The best way to produce competitive Bumiputera contractors

by Koon Yew Yin

I recently published an article with the title, “Room for Competitive Bumiputera Companies – A Wasteful National Mission”. My intention was to support Petronas Chairman Tan Sri Shamsul Azhar Abbas who is under fire from the Malay Economic Action Council (MTEM) for allegedly marginalizing Bumiputera companies and favouring more competitive foreign companies.

In fact MTEM has conveniently forgotten that in 2010 and 2011 alone, Petronas awarded a huge sum of about Rm 74 billion worth of contracts to Bumiputera controlled companies. Apparently this is not enough for MTEM which has called for Tan Sri Shamsul and the board members of Petronas to resign. MTEM expects to get most of the contracts irrespective of whether they are competent to undertake the contracts.

This politicking against Petronas – a national company with all Malaysians as stakeholders – is certainly not good for our economy. I wish to emphasize that Petronas is not a Malay company and Malay cronies of UMNO should not expect hand outs and contracts as if we are still living in the NEP era.

It is time that all Malay business enterprises and individuals grow up and realize they have to become competitive if they wish to survive in the business world. Nowhere in the real world is there preferential treatment for Bumiputera or any other ‘putera’!

Continuously giving out contracts to Bumiputeras as MTEM is calling for – without competitive tenders – will make them more inefficient and result in poor quality work. At the end of the day, it will be all Malaysians who will have to bear the collapse of a crony-driven and Malay-oriented Petronas if it loses its standing in the global market.

Giving out contracts without a full tender process is akin to corruption. Why a closed tender or Bumiputra favouring policy has to be pursued by Petronas needs to be openly justified by MTEM rather than swept under the carpet and hidden by the veil of threats.

The best way to produce efficient and competitive Bumiputera contractors

I would like to share my experiences in the contracting industry with Bumiputera contractors so that they can understand why they have failed and what needs to be done by the government to correct this situation.

Most difficult huddle is to submit the cheapest tender

Firstly, it is necessary to warn that contracting is a difficult business although it is so easy to register as a contractor in Malaysia. It is not well known that there are more failures and bankruptcies in contracting than in any other business. Another little known fact is that almost all construction projects are NOT completed within the original scheduled time. This explains why one can often see uncompleted or abandoned projects.

A key point to note is that contractors – under an open tender system – 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. He must assume that he will not encounter any cash flow difficulties and that he will always get his progress payments on time.

He must also assume that he will not encounter any difficulty in getting all the required materials to avoid any delay and also that there are ample workers for him to choose.

Furthermore, he must also assume that he will not meet any inclement weather or other adverse factor during construction. Invariably, some of these assumptions will be proven wrong, thus delaying completion. Often, the infrastructure will cost more to complete than provided for in the contract.

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 or abilities. It is determined by his ability to develop a great team. His co-workers 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. Their main goal must be saving cost. If they cannot complete the contract within the tender price, all of them will be affected.

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) and Tengku Razaleigh, the Finance Minister then, eventually allowed 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. Invariably, most materials would increase in price due to inflation. Contractors require many years of experience to anticipate such price changes and to make provisions for them whilst at the same time not overpricing their tenders and losing the bid.

No two contracts are exactly the same

Construction of a building is always akin to making a prototype. The process is much more difficult than manufacturing any product where there is repetition. In the construction of buildings or other engineering works, there is very little repetitive work. Every construction site is different.

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.

Financing

Most contractors do not have sufficient capital to finance their undertakings.

Contractors generally do not have fixed assets like most manufacturers. Unfortunately, banks do not accept moving assets as collateral for a loan. Without bank financing, contractors will find it more difficult to undertake their business.

Beginning at the bottom: 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.

There are other factors explaining why or how some of the most successful tycoons associated with the construction industry have managed to get to where they are. Perhaps the main one is learning by starting at the bottom. 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 general contractor.

Generally, Bumiputeras are not interested in managing small businesses and earning small profits. Because of the NEP, many have hopes of securing concessions for big deals. There are relatively few Bumiputeras involved in small and medium-scale enterprises (SMEs).

More Bumiputeras should start by becoming traders for building materials. The business skill they can learn from these humble beginnings will carry them a long way. I am sure some of them will eventually become good contractors if they learn the trade at the bottom.

Importance of skilled workers.

There are so few Bumiputera construction foremen, carpenters and other skilled workers. If you were to go into any 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. More Bumiputeras should be encouraged to work as apprentices in the construction industry.

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

Contracting is one of the most difficult businesses and it takes a long time to produce competent contractors.

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

The government must change its policies which have proven unworkable. There is no urgency in producing more Bumiputera contractors as many of the key industries e.g. the banks, toll roads, water, electricity, plantations, commodities, 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.