Malaysia excluded public-private partnerships (PPPs), including build-operate-transfer contracts and public work concessions, from its commitments under the Trans-Pacific Partnership (TPP) agreement. It was one of three TPP participants to do so (the others being Mexico and Vietnam). By excluding PPPs, Malaysia would be able to provide preferential treatment to its Bumiputera (ethnic Malays) in infrastructure projects undertaken with PPPs. This post explores Malaysia’s PPP process and the opportunities and constraints relating to foreign firm participation in such projects – even if they are not covered by a trade agreement.
In 2009, the Malaysian government established a Public Private Partnership Unit (UKAS) under the Prime Minister’s Department to drive economic transformation through strategic PPPs. As the coordinator of these projects, the UKAS plans, evaluates, negotiates and monitors them. The use of PPPs for infrastructure and other facilities can take many forms, which in Malaysia includes the Private Finance Initiative (PFI), a type of PPP also utilized by Japan. The Malaysian Cabinet must approve all PPP projects.
Malaysia has adopted guidelines for its PPP program, which set out the key principles and characteristics of PPPs. They specify the typical information that must be submitted in PPP projects. The guidelines also provide a useful comparison of conventional procurement, PPPs and privatization.
In undertaking a PPP, a new entity, a Special Purpose Vehicle, is created to carry out the project. Its role includes raising funds for the project, paying subcontractors, financiers and other creditors, delivering the agreed services to the public sector and maintaining the assets during a specified period (concession period). The other main parties to a PPP are financiers, a construction contractor, a facilities management operator and the procuring authority.
The guidelines stress that a key element of a PPP is the partnership between the public and private sectors, with the public sector procuring specified outcomes (such as a transit system) for a concession period and the private sector determining the best way to achieve the specified outcome and providing the capital for the project. The charges for services provided to the public are based on pre-determined standards. Under a PPP, the government has the option to have the assets (toll road/transit system) transferred to it at the end of the concession period.
Malaysia permits foreign firms to participate in a PPP where there is a lack of domestic expertise. Such areas include green technologies and high-tech projects, for example, projects for converting waste to energy. In such areas, the Malaysian government encourages partnerships or joint ventures between domestic companies and foreign companies in order to develop the expertise and competiveness of its local firms. Other opportunities for foreign participation in PPPs arise where their participation is necessary to promote the export market, there is insufficient local capital for the project, and the nature of the business requires global linkages and international exposure.
Even when foreign firms are permitted to participate in a Malaysian PPP, foreign participation in the entity established for the project is generally limited to a maximum of 25% of the entity’s capital. For projects of strategic and national importance, foreign ownership must be spread over several foreign participants to ensure that no single foreign party would have undue influence over the company.
Malaysia also requires that Bumiputera take up at least 30% of the equity of the PPP entity. In addition, PPP projects such as Mass Rapid Transit (MRT) have included carve-outs for Bumiputera businesses. These are examples of Malaysia’s practice of using government procurement as a tool for Bumiputera development.
The Malaysia government’s portal contains extensive information on the PPP agency and the PPP process.
Jean Heilman Grier
October 25, 2016