This article is too important not to be read by more people. It is
written by Koon Yew Yin. Who??? Well, if you like Mudajaya, IJM or
Gamuda, Mr. Koon was one of the founders for all three companies. We
certainly do not need more contractors - we must ensure that our
resources are put into creating value to industry and economy, not
creating layers after layers of profits being hived off.
The article was taken from Center For Policy Initiatives:
http://english.cpiasia.net/Article by Mr. Koon can be linked to:
http://english.cpiasia.net/index.php?option=com_content&view=article&id=1783
:bumiputera-contractors-a-wasteful-national-mission-to-date-&catid=211:koon-
yew-yin&Itemid=156
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.
-------------------------------------
Written by Koon Yew Yin
Wednesday, 18 November 2009
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.
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