PFI in Malaysia

Salam and dear all, On 2nd March 2009 I participated in a workshop on PFI. The workshop was organized by the Faculty of Architecture, Planning and Surveying, UiTM Shah Alam. During the workshop I was appointed facilitator for group 2 (finance). The key findings of group 2 include:

Understanding the concepts of PPP and PFI

1. Malaysia introduced ‘Privatization’ and the ‘Malaysian Incorporated’ in the 1980s. These policies are seen as the foundation of PPP in Malaysia.
2. PFI was introduced in Malaysia under the 9^th Malaysia Plan (2006-2010).
3. PPP is not a new concept for it has long been practiced before the 1980s, for e.g. the supply of electricity by a private company in Perak and the tolled Slim River to Tanjong Malim trunk road (in the 1960s and 1970s respectively).
4. The current PFI in Malaysia is considered a ‘misnomer’ for it does not transfer all risks of a project to the private sector. The characteristics of the Malaysian PFI indicate that most of the risks are still in the hands of the public sector (see the 9^th Malaysia Plan).

Answering the questions on PFI (in the Malaysian context)

1. What are the financial options?

i) Conventional banking, ii) Islamic banking, iii) bond market, iv) public issue of shares.

2. Financial sector mature and ready to handle PPP?

Yes, based on the market’s ability to fund privatization projects since the 1980s but it is the question of size i.e. how much? and the need for transparency and clear guidelines on PFI.

3. Current credit crunch affects PPP?

Yes, in terms of a potential need for more PPP kind of projects as the government may not be able to afford investing in newer infrastructures but confidence of the financial and private sectors may not be good; they might adopt the ‘wait and see’ kind of attitude.

4. Drivers of PPP in Malaysia?

Mostly the government (as seen in the 9^th Malaysia Plan) but the private sector has a fair share in initiating projects that could be delivered through PFI.

5. Government reforms / policies?

i) Clear guidelines or even law on PFI is required, ii) more transparent PFI transactions, iii) public participation and iv) capacity building (training).

6. Subsidy for the private sector to uptake PPP projects?

May be difficult to give subsidy (given the current political, economic and social environments) but some forms of longer term fiscal and monetary policies may be possible (e.g. better tax regime and cheaper costs of borrowing money).

PFI financial modeling

Aspects to be included in the model are: i) Costs i.e. construction, financing and O & M, ii) interest rate, iii) IRR, iv) duration of the concession, v) government’s assistance and guarantees, vi) public attitudes, vii) PEST, viii) unitary charges.

Acknowledgement:

UiTM, IIUM, Workshop organizer, members of group 2, speakers, facilitator and all participants.

Wassalam. p.s. I am in the midst of publishing a book entitled Understanding PFI (with specific reference to Malaysia). Insyaallah, the book will be out in September 2009.