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EU-MALAYSIABUSINESSEUMCCI TRADE ISSUES &RECOMMENDATIONS 2019

Published by:EU-Malaysia Chamber of Commerce and Industry (EUMCCI)Address: Suite 10.01, Level 10, Menara Atlan, 161B Jalan Ampang, 50450 Kuala Lumpur, Malaysia.Tel: +603 2162 6298Fax: +603 2162 6198 E-mail: [email protected]: www.eumcci.com

Publication Date:APRIL 2019

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DISCLAIMER:This publication has been produced with partial assistance of the European Union. The contents of this publication are the sole responsibility of the EUMCCI and under no

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CONTENTSCONTENTS

FOREWORD

Alexandra Herbel, Deputy Chairperson, of EUMCCI.........................................................................005

Roberto Benetello, CEO of EUMCCI................................................................................................006

INTRODUCTION

EU-Malaysia Chamber of Commerce and Industry...........................................................................007

COMMITEE LISTING..............................................................................................................008

ECONOMIC OUTLOOKS

Malaysia Economic Outlook............................................................................................................011

EU-Malaysia Business Outlook......................................................................................................014

ASEAN Economic Outlook..............................................................................................................015

EU-ASEAN Business Outlook........................................................................................................019

POSITION PAPERS BY SECTORS

Aerospace......................................................................................................................................022

Energy Sustainability & Electric Power Grids Transformation............................................................026

Green Building................................................................................................................................028

Healthcare......................................................................................................................................030

Human Resources..........................................................................................................................038

Intellectual Property Rights..............................................................................................................042

Logistics.........................................................................................................................................045

Transparency & Integrity..................................................................................................................048

Wine & Spirits..................................................................................................................................050

SEBSEAM-M MARKET REPORTS

Service Liberalisation in Malaysia :A Political Analysis...........................................................................................................................055

Public Procurement in Malaysia, 2018.........................................................................................078

Empowering Women in the Malaysian Corporate Sector :Executive Summary.........................................................................................................................116

APPENDIX....................................................................................................................................119

Alexandra HerbelDeputy Chairperson,

EU-Malaysia Chamber ofCommerce and Industry

The European Union (EU), as a regional bloc, has always endeavoured to expand external trade and investment opportunities as a means of strengthening international economic cooperation with countries around the world. EU member states are committed to establishing healthy relations with countries possessing high economic potential, premised on diplomacy and trade. Furthermore, the EU member states encourage the beneficial exchange of goods, services, technology, as well as knowledge and other factors that influence national development of its member states and other countries it engages with. With that in mind, Malaysia is no exception.

Strategically located within the centre of the ASEAN region, Malaysia is inspirited by a blend of rich cultural and historical heritages with a touch of modernity whilst maintaining diverse eco-systems amid an abundance of natural and industrial resources. This is complemented by Malaysia’s ambition to become an even more economically and politically effective nation within Asia and the world.

The pro-activeness of its national economy speaks volumes about Malaysia’s commitment to economic excellence. The country recorded a trade surplus of MYR 120 billion, stemming from its exports totalling up to MYR 998 billion, and imports worth MYR 878 billion in the year 2018, signifying an increase of 6.7% and 4.8% respectively from the preceding year.

A substantial portion of that is derived from Malaysia’s trade performance with the EU, as its largest trading partner outside Asia. In 2018, exports totalled MYR 99 billion as compared to 2017 which was MYR 95 billion while imports in 2018 grew to MYR 85 billion from MYR 80 billion in the previous year. This accounted for a percentage growth of 3.5% for exports and 6.5% for imports, with hopes that this momentum can be maintained in the long run.

Our efforts to promote and expand trade relations between Malaysia and the European Union are strengthened through the crafting of our Trade Issues & Recommendations Booklet 2019. Expressed within this booklet are vital insights, outlooks and recommendations by our esteemed sector committees revolving around development of the business climate in their respective industries.

FOREWORDS

EUMCCI Trade Issues & Recommendations 2019 | 5

Advocacy is the main mission of EUMCCI and all endeavours made by the Chamber could not have come to life without the immense contributions from our sector committees made up of European and local companies, derived from various sectors that represent key industrial fields in Malaysia. Our committees have shown dedication in creating a progressive playing field for business through expressing their concerns, policy recommendations as well as engaging with EUMCCI on extended collaborative efforts such as organising forums, trade missions as well as various other platforms for business facilitation.

Advocacy is the core service provided by EUMCCI to its stakeholders. In the wake of growing international trade and investment, it is our commitment to ensure that organisations in Malaysia, both European and local entities enjoy a business-effective environment.

The key purpose of EUMCCI is to help businesses to grow by identifying common issues and challenges faced by the various industries that make up our twelve- sector committees; and to strategically raise solutions and recommendations for these challenges to the relevant ministries or government agencies for their further action, which would then be reflected through policy change, dialogue facilitation, trade incentives or other forms of resolution.

It gives me great honour to present to you the EUMCCI Trade Issues and Recommendations Booklet 2019! Our aims for this year’s booklet publication are to assist stakeholders in understanding the climate of commerce and trade in Malaysia while identifying upcoming business trends and prospects for further effective strategy-craft.

Roberto BenetelloChief Executive Officer,

EU-Malaysia Chamber ofCommerce and Industry

6 | EUMCCI Trade Issues & Recommendations 2019


In order to fulfil its mission, EUMCCI carries out activities that catalyse and stimulate networking of European companies in Malaysia with the Malaysian business community, business associations, relevant ministries, official representations and other Chambers in Asia. The EUMCCI makes it a commitment to promote, support and develop EU business interests in Malaysia as well as facilitate trade, commerce and investments between EU and Malaysia.

About Us

To develop and enhance EU position and image in Malaysia.

High profile advocacy/dialogue with Institutions and Government.

Speed up decisions and actions within the ministries and authorities.

Promote and market EU technologies, SMEs products and services in Malaysia.

Facilitate the dialogue between the European private sector and the Malaysian government.

Objectives

The EUMCCI Committees are advocacy platforms for EUMCCI’s direct, bilateral or indirect members of various sectors, where they discuss relevant issues that are affecting their businesses while operating in Malaysia. The committee members are encouraged to invite key stakeholders (known as “guest members”) to the meetings in order to drive advocacy or any committee's flagship programme, activity or project.

Advocacy Committees are pivotal to EUMCCI and their aim is:

To advocate the necessities of the EU business community with the goal of improving the business environment in Malaysian market.

To promote, support and develop EU-Malaysia business interests and investment opportunities in Malaysia.

To foster partnerships between EU and Malaysia based on mutual, long term and measurable commitments for sustainable business development.

Each committee is responsible for writing a position paper outlining the most pressing issues or stumbling blocks in carrying their business in Malaysia as well as to provide recommendations to move forward. Every year, all the position papers submitted by the committees are compiled and published into a "EUMCCI Trade Issues & Recommendations" booklet. This booklet will then be circulated among government administrations, relevant authorities in Malaysia and the European Commission in Brussels.

This year we are happy to announce the reconfiguration of the Energy Sustainability & Electric Power Grids Transformation Committee and the Transparency & Integrity Committee. Additionally, we are also working on new sector committees in order to widen our advocacy efforts.

EUMCCI Committees

INTRODUCTION

AEROSPACE

Head of Committee,

David A. Jones

Deputy Head,

David F. J. DaviesCEO, SME Aerospace

AUTOMOTIVE

Head of Committee,

Klaus LandhaeusserRegional Sales Director, Robert Bosch

Deputy Head,

Vacant

ENERGY SUSTAINABILITY & ELECTRIC POWER GRIDS TRANSFORMATION

Head of Committee,

Anand MenonCTO & Head of Engineering ASEAN, Siemens Malaysia

Deputy Head,

Vacant

EU-MALAYSIA TRADE FACILITATION

Head of Committee,

Dato Andy SeoChairman, Alphaprima Engineering

Deputy Head,

Vacant


COMMITTEE LISTING


HEALTHCAREHead of Committee,

Jari NiemiBoard Director, Ruissalo Foundation

Deputy Head,

Hitendra JoshiHead of Government Affairs

and Market Access, B. Braun

HUMAN RESOURCES

Head of Committee,

Elisabeth Laubel Managing Director, All1KL

Deputy Head,

Jenny ChuaHuman Resources Manager, F-Secure Corporation

INTELLECTUAL PROPERTY RIGHTS

Head of Committee,

Chew Phye KeatPartner, Raja, Darryl & Loh

Deputy Head,

Jesper Stig AndersenTrade Counsellor,

Royal Danish Embassy

GREEN BUILDING

Head of Committee,

Gregers ReimannManaging Director, IEN Consultants

Deputy Head,

Allan JensenSenior Director, Danfoss Industries

RESEARCH AND INNOVATION Head of Committee,

Vacant

Deputy Head,

Rofina Yasmin OthmanDirector of Centre for Innovation & Commercialisation (UMCIC),

Univerty Malaya

LOGISTICS

Head of Committee,

Marco TiemanCEO, LBB International

Deputy Head,

Vacant

TRANSPARENCY & INTEGRITY

Head of Committee,

Mark LovattSecretary General, Business Integrity Alliance

Deputy Head,

Vacant

WINE & SPIRITS

Head of Committee,

Mathieu DucheminManaging Director, Moët Hennessy Diageo

Deputy Head,

Sebastien MouquetManaging Director, Pernod Ricard Malaysia



Following a larger-than-expected growth of 5.9% in 2017, the Malaysian economy saw moderate growth

in 2018, closing at 4.7%. This was attributed by the central bank, Bank Negara Malaysia (BNM), to several

external and domestic challenges, including major policy and political shifts arising from the historic change

of government and global trade tensions, as well as supply disruptions in the mining and agriculture

sectors.

Despite a slower pace, the economy was resilient, anchored by the domestic demand, whereby private

consumption remain strong, recording the fastest rate since 2012. According to the OECD, the economy

was further supported by an active labour market, reining a low unemployment rate as the labour

participation rate and real wages rise (OECD 2018).

In its “Malaysia Economic Monitor, December 2018: Realizing Human Potential” report, the World Bank

stated that the Malaysian economic performance moved forward and backwards in different areas, such

as:

Table 01 - Recent Developments

Malaysia’s Economic Performance

ECONOMIC OUTLOOKSECONOMIC OUTLOOKS

Decrease to 4.4 (-)

SectorProgress in Q3

2018 (%)

- Weaker export performance- Continued inventory drawdown

- Zero-rating of GST

- Stable labor market

- Steady income growth

- Increased spending in machinery &

equipment

- Decreased capital outlay

- Deferment/cancellation of mega infra

projects

Justification

- Increased spending on supplies & services

- Public sector consumption

Mining

- Production of natural gas affected by

supply outrage and pipeline repairs

Agriculture

- Palm oil production reduce due to adverse

weather & productions constraints

- Slower growth in manufacturing exports

- Decline in agricultural exports

- Decline in capital import growth

- Decline in intermediate imports

Economic Growth

- Impact of consumption tax policy

- Lower growth in transport prices

- Impact of consumption tax policy

- Lower growth in transport prices

Monetary Policy

- Unchanged since January

Net Financing

- Growth in outstanding loans of banking

system and development financial

institutions

Increase to 9.0 (+)Private Sector Consumption

Increase to 6.9 (+)Private Sector Investment

Increase to 1.1 (+)Public Sector Expenditure

Decrease to -5.5 (-)Public Sector Investment

Mining:Decrease to -4.6 (-)

Agriculture:Decrease to 1.4 (-)

Commodities

Decrease to 5.1 (-)Export Growth

Decrease to 6.3 (-)Gross Imports

Decrease to 0.5 (-)Headline Inflation Rate

Increase to 68.5 (+)Labor Market

Monetary Policy:Maintained at 3.25 (=)

Net financing:Increase to 5.1 (+)

Financial Systems

Source: World Bank Group

MALAYSIAECONOMIC OUTLOOK


Malaysia is estimated to grow at a 4.6% average in 2019-2023. For the year 2019, the Malaysian central

bank has forecasted sustained growth momentum of between 4.3% and 4.8% in the face of slower global

growth in both advanced and major emerging markets.

The new Malaysian government has taken several steps to stimulate the Malaysian economy including by

introducing the RPGT (Real Property Gains Tax), a taxation system that encourages acquisition of property

by lower-income groups and enables consumers to sustain ownership for a longer period (Garcia 2019).

Other initiative include the fixing of the retail fuel price of RON95 petrol, and special payments to civil

servants and pensioners to further stimulate household consumption (BNM 2019).

Moreover, Malaysian public consumption saw an increase amidst the zero-rating of the GST (Goods &

Services Tax) prior to the governments re-introduction of the SST (Sales & Services Tax) in September

2018, a single-stage tax system that allows for organisations to apply for exemption of taxable services for

imported or local goods and services

Economic Outlook

The World Bank’s “Doing Business Report 2019” lists Malaysia as one of the top 20 most open countries

in terms of ease of access for business, placed at 15th, moving up 9 places from the 24th place in the 2018

report. The report also accredits Malaysia as the 2nd best behind New Zealand in terms of protection for

minority investors .

Electrical & Electronic products remain as Malaysia’s prime export to the global market, with an increased

MYR 384.00 billion in 2018 compared to the year before, which was MYR 314.33 billion. In the case of

imports, Electrical & Electronic products also constitute the largest share of imports amounting to MYR

239.70 billion in 2018 .

Malaysia has managed to step into its 21st consecutive year of trade surplus, which should indicate that the

Malaysian economy remains resilient despite certain sectors seeing opportunities for improvement.

Foreign Trade

Apart from the more traditional strengths that Malaysia presents to foreign investors such as the English

proficiency of its labour force, geographical position, levitation of certain non-tariff measures, as well as

extending tax exemption periods, the new government remains resilient in creating an attractive

environment for foreign investment. Seeing how the concept of IR4.0 is gaining global interest, the

government will be supporting the expansion of Malaysia into an Industry 4.0 base in South East Asia

through assisting SME’s in assessing the incorporation of IR4.0 technologies into their operations.

Taking into consideration the on-going trade disputes between the U.S. and China, Malaysia can see itself

as an alternative investment hub in the region. Depending on how healthy the economic ties are

maintained with both the U.S. and China, Malaysia might be able to shift dependency on manufacturing

and distribution of electrical & electronic products into the ASEAN region.

Foreign Direct Investment

1. Trade

Malaysia is dedicated to transforming the country into an Industry 4.0 nation and has devised several

initiatives to realise this ambition. Among these is a Readiness Assessment (RA) programme which will be

run by The MPC (Malaysia Productivity Corporation) for 500 SMEs to adopt Industry 4.0 technology with

an allocation of MYR 210 million from the years 2019 to 2021.

Malaysia Policy Priorities


Apart from that, MYR2 billion under the Business Loan Guarantee Scheme will be channelled to assist

SMEs to invest in the automation and modernisation with a 70% guarantee. The BPMB (Bank Pembangu-

nan Malaysia Berhad) will be allocated MYR3 billion to establish an Industry Digitalisation Transformation

Fund and a subsidy incentive of 2% to organisations that require the financial capabilities to modernise their

respective setups. MYR250 million will be channelled into MIDA’s High Impact Fund for Research & Devel-

opment efforts, international certification/ accreditation and modernisation facilitation.

Small Medium Enterprises (SMEs) in the country account for 98.5 percent of Malaysia’s businesses. They

comprise mainly of 89.2% from the services sector and 5.3% from the manufacturing sector (Garcia 2019).

The government aims on solidifying the position of SMEs in Malaysia through a number of initiatives such

as reducing the tax rate to 17% (from 18%) on the first MYR500,000 of chargeable income for SMEs as

well as an allocation of MYR100 million to be utilised to enhance capabilities of SME industries venturing

into the Halal sector. Additionally, to help finance Halal product exporters, a Sharia-Compliant Financing

Scheme of MYR1 billion will be provided by financial institutions at a profit subsidy rate of 2%.

2. Tax

Through a self-declaration process, manufacturers in the Principal Customs Area (PCA), as well as organi-

sations engaged in hospitality and haulage operators may apply for sales tax exemption on machinery,

equipment, spare parts, prime movers as well as container trailers. Organisations are then needed to obtain

a confirmation letter from MIDA signifying the machineries, equipment, spare parts, prime movers and/or

container trailers to be exempted from taxation to be submitted to the Royal Customs. In an effort to sustain

cost-effectiveness of trade, the government has committed itself to several tax reforms and improvements.

Among these are reviews of 130 investment incentives will be undertaken by the government via its 32

Investment Promotion Agencies.

There will also be a credit scheme to reduce sales tax exercised on the 1st of January 2019 to reduce the

burden of small registered manufacturers who buy manufacturing inputs from importers and not from regis-

tered manufacturers, as well as to avoid double layer taxation and reduce business costs. The Government

will also offer a Pioneer Status incentive of 70% or Investment Tax Allowance of 60% for up to 5 years to

be given to organisations producing environment-friendly plastics based on bio-resins and biopolymers to

foster in more green investments and to reduce the usage of single-use plastics.

3. Services

The education sector may see more promising improvements. The Dana Wibawa TVET (Technical and

Vocational Education and Training) will be allocated MYR30 million to enthuse training organisations to bid

for funds and conduct training programs. TVET Boot Camp Programs will also be allocated MYR20 million

to foster stronger youth capabilities to be on par with industrial requirements.

Apart from that, MYR400 million will be allocated for research & development funds that are to be dissemi-

nated via contested bids to higher learning institutions, as well as a supplementary MYR30 million to the

Malaysia Partnerships and Alliances in Research (MyPAIR) programme for matching grants to encourage

enhancement of research activities and syllabus quality for all levels.

For the healthcare sector, the Malaysian Healthcare Tourism Council (MHTC) will be allocated MYR20

million to form collaboration with private health institutions to further strengthen Malaysia’s bid to become

the medical tourism hub of the world.

To achieve the target of 30 million tourists into Malaysia, which is expected to contribute an estimated

MYR100 billion revenue by 2020, the government will allocate MYR100 million via matching grants to

private organisations to promote tourism, as well as marketing exercises within the tourism sector. In an

effort to increase and promote investments in the green technology sector, an allocation of MYR2 billion has

been allocated under the Green Technology Financing Scheme (GTFS), which grants an interest rate

subsidy of 2% for the first 5 years to financially aid green tech producers. Expansions on the list of assets

under the Green Technology Tax Allowance (GITA) from 9 to 40 are to be listed under the MyHijau Directory.

EU-MALAYSIABUSINESS OUTLOOK

Trade between Malaysia and the European Union (EU) has remained steady. Considering the EU’s position

as Malaysia’s 3rd trading partner, and Malaysia’s position as the EU’s 21st trading partner, 2018 witnessed

Malaysia’s exports to EU totalling MYR98.60 billion as opposed to MYR 95.29 billion in 2017, an increment

of 3.5%. Imports from the EU on the other hand, rose to MYR 84.77 billion from MYR 79.78 billion in 2017

and recorded an increment of 6.5%. This indicates a trade surplus on Malaysia’s end for the 21st

consecutive year since 1998. Trade with the EU for 2018 totalled up to MYR 183.37 billion constituting a

9.8% share of Malaysia’s overall trade.

Despite witnessing slight moderation in 2018, Electrical & Electronic Products, palm oil products as well as

optical and scientific equipment reserve their positions as the most heavily exported products to the EU.

Electrical & Electronic product exports totalled MYR 46.88 billion in 2018, while palm oil products and

optical & scientific equipment fared at MYR 5.9 billion and MYR 5.88 billion in the same year, respectively.

Supposedly in January 2019, Malaysia was to sign a Partnership and Cooperation Agreement (PCA) with

the EU. The PCA is a binding agreement which is signed between the EU and third party countries,

indicating the EU’s commitment towards the socio-economic development of the third party country it goes

into agreement with and encompasses matters such as science, technology, politics, economics,

agriculture, tourism, culture, etc.

The PCA is seen as a first step towards realising a Malaysia-EU Free Trade Agreement (MEUFTA) between

Malaysia and the European Union, as it would be the similar case for ASEAN members such as Singapore

in 2013 and Indonesia in 2015. However, Malaysia has yet to start negotiations with the European Union

on the prospects of a PCA.

While current conditions suggest that a free trade agreement between Malaysia and the EU would generate

positive gains for both the EU and Malaysia, as highlighted by the Sustainability Impact Assessment (SIA)

draft interim report released by EU Commission in December 2018, negotiations between the two blocs

seem to have reached an impasse. The Malaysian government is exploring the possibility of restarting

negotiations on an FTA between Malaysia and European Union (EU), as well as an FTA between Malaysia

and European Free Trade Association (EFTA) countries. However, talks have yet to restart, among others,

due to the tension existing between Malaysia and Europe in relation to the palm oil issue.

The Malaysia-EU negotiation was formally launched on Oct 5, 2010. A total of eight rounds of negotiations

were held between December 2010 and September 2012. The negotiations reached an impasse in 2012

as both sides had exhausted their negotiating options at that time. Subsequently, it was agreed that

negotiations will resume when a fresh mandate and/or flexibilities become available on both sides. The

Malaysia-EFTA FTA also saw a total of eight rounds of negotiations being held since March 2014. The last

round was hosted by Kuala Lumpur in May 2017.



ASEANECONOMIC OUTLOOK

Among the ASEAN-5 (Indonesia, Malaysia, Thailand, Singapore and the Philippines), the economic

performance of Indonesia and Thailand stood out as the two economies that have witnessed an increase

of the real GDP growth rates between 2017 and 2018 (see Table 02). The decline in 2018 in the other three

countries can be mainly attributed to a global slowdown in international trade and investment, as well as to

international trade tensions.

China, the largest trading partner of ASEAN, also observed a decline in their economic growth, with its GDP

growth falling to 6.6% in 2018 from 6.9% in 2017. This has translated into a weaker trade performance with

its trading partners. Economists suggest that the continuity of the US-China Trade War remains the main

factor of global import-export performance. However, the US-China Trade War has also motivated ASEAN

countries to strategise alternative key areas and partners for trade facilitation.

The growth for the next 5 years in the region from 2019 to 2023, as projected by the Organization for

Economic Cooperation and Development (OECD) in their “Economic Outlook for Southeast Asia, China

and India 2019” suggests varied outcomes with Myanmar, Laos, Indonesia and the Philippines showing

more promising signs of growth.

Table 02 - Real GDP Growth (%) among ASEAN Countries

Economic Performance

2019-23

(average est.)ASEAN Countries 2017 2018

2019

(est.)

ASEAN 10

Indonesia

Malaysia

Philippines

Thailand

Vietnam

Brunei

Singapore

Cambodia

DPR Lao

Myanmar

Indonesia

Malaysia

Philippines

Thailand

Vietnam

Average of ASEAN-5

Average of ASEAN-10

5.1

5.9

6.7

3.9

6.8

1.3

3.6

7.0

6.9

6.8

5.1

5.9

6.7

3.9

3.6

5.0

5.3

5.2

4.9

6.4

4.5

6.9

2.0

3.5

7.0

6.6

6.6

5.2

4.9

6.4

4.5

3.5

5.0

5.3

5.2

4.8

6.5

4.1

6.7

2.3

2.9

6.9

6.8

6.9

5.2

4.8

6.5

4.1

2.9

4.7

5.2

5.3

4.6

6.6

3.7

6.5

2.0

2.7

6.9

7.0

7.0

5.3

4.6

6.6

3.7

2.7

4.6

5.2

ASEAN 5

ASEAN aims to promote effective regional integration among its members in the pursuit of establishing an

area with zero barriers. Several initiatives in the form of agreements have since been crafted to help realise

this said ambition, such as:

- AFAS (ASEAN Framework Agreement on Services) in 1995,

- ATIGA (ASEAN Trade in Goods Agreement) in 2009,

- ACIA (ASEAN Comprehensive Investment Agreement) in 2012,

- AAMNP (ASEAN Agreement on the Movement of Natural Persons) in 2012.

These agreements respectively encompass vital issues revolving around international trade such as the

movement of goods, frameworks for services, outlines for investment as well as mobility of manpower (see

table 03).

Table 03: Prospects of ASEAN Economic Community Agreements

Developments in ASEAN Integration


Outcome

Area

ASEAN Trade in Goods

Agreement (ATIGA)

ASEAN Framework

Agreement on Services

(AFAS)

ASEAN Comprehensive

Investment Agreement

(ACIA)

ASEAN Agreement on

the Movement of

Natural Persons (AAMNP)

Liberalization Reduction/elimination oftariff and nontariff

measures

Broadening & deepeningof the levels of

binding services commitments

Reduction/ elimination of impediments to

investment

Commitment to review policies and guidelines

Description ASEAN-6 (Brunei, Indonesia,

Malaysia, Philippines,

Singapore, and Thailand)

have already eliminated

ASEAN import duties for

99.65% percent of the tariff

lines among ASEAN 6

countries (since January

2010). ASEAN is reviewing

and simplifying the policies

and regulations related to

the Rules of Origin (ROO).

ASEAN undertakes rounds

of negotiations to achieve

increased coverage and

higher levels of liberalization

commitments on various

services sectors.

ASEAN improves the

investment environment

via further reduction of

restrictions in the reservation

lists. Under the reservation

list, ASEAN Member States’

enumerates non-conforming

measures to ACIA’s provisions

on national treatment and

appointment of board of

directors.

ASEAN continues to discuss

possibilities to improve

commitments related to

movement of natural persons.

raw materials, production inputs

opportunities for specialization and exploitation

of the economies of scale

invest in

industrial complementation

and specialization

participation in liberalized

sectors

What it means

to investors? hiring qualified workforce

foreign and local manpower

Facilitation Facilitation of trade procedures

Enhancement ofcooperationin servicesamong ASEAN Member

States

Adoption of internationalbest practices in

investment

Facilitation of movementof professionals and

skilled laborers

Description ASEAN works towards,

among others, customs

integration and the

establishment of the ASEAN

Single Window.

ASEAN, through cooperation

efforts, establishes/ improves

infrastructural facilities,

conducts R&D, and

exchanges information on

trade in services.

ASEAN commits to develop

and implement measures that

will better facilitate

investments.

ASEAN streamlines procedures

for immigration applications for

temporary entry or temporary

stay of natural persons.


Improved logistics and

faster movement of

goods

Improved efficiency and

competitiveness of service

suppliers within the region

What it means

to investors?

Ease of movement of companies’

business visitors, intra-corporate

transferees, and contractual

service suppliers

Description ASEAN provides for the following:

security

conflict

and without delay

event of expropriation

in the settlement of disputes

Improved procedures in

doing business including

start of investments,

licensing, and incentives

scheme

Protection Investment protection to all sector

from improved legal infrastructure

What it means

to investors?

Transparency &

PredictabilityGreater clarity in scope and coverage, clear transparency disciplines, and publication of relevant measures

ASEAN commits to

consistently make available

to all interested parties all

rules and procedures

relating to trade

Reduction and/or

elimination of import duties

are clearly set out and

defined in the schedule

ASEAN commits to publish all

relevant investment laws,

regulations, and guidelines.

ASEAN is also establishing

enquiry points for all investors.

Market access is clearly set

out through a single

reservation list

ASEAN provides for transparent

procedures for the applications

for immigration formalities for

temporary entry or stay of natural

persons.

General conditions and limitations

related to the temporary entry

or temporary stay of natural

persons which may include

business visitors, intra-corporate

transferees, contractual services

suppliers and other categories

of natural persons, are provided.

ASEAN guarantees market

access and national

treatment for the sectors/

subsectors at the level set

out in the schedules of

commitments

Description

What it means

to investors?

Source: Invest ASEAN,2018

According to OECD’s assessment on the ASEAN regional economic outlook for 2019, the fiscal

performance trends by countries remain divergent against a background of robust overall economic

expansion. This is mainly factored by the volatile fuel prices and domestic developments. While inflation

rates have gentled down for most of ASEAN, it continues to be a concern especially for the Philippines,

Thailand, Cambodia, Laos and Myanmar1, which are gradually picking up on their economic potential

amidst internal developments that influence fiscal performance. The Philippines and Thailand Central

Banks, within their stated monetary policy framework, have set targets for their inflation rate to ensure both

governments can sustain efforts in ensuring a low percentage of inflation2.

In the efforts to address monetary normalisation and pressures in price and exchange rates, the ASEAN

monetary authorities have maintained efforts in altering interest rates to allow for even greater exchange

rate flexibility. Moreover, while asset quality comes as a primary concern for ASEAN, banking systems

continue to remain stable.

The OECD projected the 2019 to be a year of expansion in financial technology (FinTech) in ASEAN, with

an emergence of organisations providing services within this industry such as Remittance, DMT (Domestic

Money Transfer) and crowd-funding across the region3.

However, some variance exists in individual countries. The variance stems from the outlook on countries

such as Myanmar and Laos, which have limited known number of services provided by the local or foreign

FinTech companies. On the other hand, countries such as Malaysia, Brunei and Indonesia, have taken

extensive measures to make adoption of FInTech more attractive, including but not limited to the

introduction of Islamic FinTech services4 that appeal to the interest of a largely Sharia-compliant market.

ASEAN governments and monetary authorities are continuing to monitor and weigh the benefits and costs

of the expansion of this sector domestically and in the region. While FinTech is seen as an industry that can

foster deeper financial inclusion, there are concerns revolving around regulatory risk management, financial

literacy and cybersecurity. These issues require stretching the efforts by policy makers to ensure successful

inception of FinTech into the ASEAN market, while at the same time ensuring effective policy and regulatory

mitigation practices.

Monetary & Fiscal Policy Overview

1Organisation for Economic Cooperation and Development. Economic Outlook for Southeast Asia, China And India 2019: Towards Smart Urban Transportation. N/A: OECD

Development Centre, 2018. Pg.3.2Dany-Knedlik, Geraldine, and Juan Angel Garcia. Monetary Policy and Inflation Dynamics in ASEAN Economies. Berlin: IMF, 2018.3Organization for Economic Co-operation and Development. Economic Outlook for Southeast Asia, China And India 2019: Towards Smart Urban Transportation. N/A: OECD

Development Centre, 2018. Pg.4.4Ibid.


EU-ASEANBUSINESS OUTLOOK

Trade of Goods and Services

The Association of South East Asian Nations (ASEAN) as a whole represents the European Union's 3rd

largest trading partner outside Europe (after the US and China) and, in parallel, the EU is ASEAN’s largest

trading partner outside Asia (after ASEAN, China and Japan).

Figure 01: Trade of Goods and Services between EU and ASEAN

Imports from ASEAN by EU

Trade value in million ECU/EURO

Exports from EU to Asean


Balance for values between EU and Asean



GoodsAs seen from the figure above (Figure 01), the trade balance between the EU and ASEAN in 2018 recorded

a deficit on the side of EU, which has consecutively been the case in previous years. However, as shown

by Appendix 01, trade growth has significantly expanded over the years, for both imports and exports for

two trading regions. Machinery and transport equipment are the most heavily traded goods between the

two blocs, with the EU increasing its import rate as opposed to its exports on such goods. These goods

constituted 46% of the market for imports and 48% for exports in 2017.

As for the second most significantly traded goods, it is clear to see that the EU relies much more on imports

from ASEAN for miscellaneously manufactured products (24%). In terms of exports from the EU to ASEAN

countries, the second main trading products are chemicals, which contributed to 15% of total share.

According to the “40 Years of EU–ASEAN Cooperation” report published by Eurostat in 2017, Germany

was recorded as the largest EU exporter to ASEAN in 2015, consolidating 27.7% of the total market share

of EU exports, followed by France, the United Kingdom and the Netherlands (see Appendix 02). In the

same year, Singapore stood out as the prime destination for EU exports, taking up 35.8% of the total share

of exports into ASEAN, ahead of Thailand, Malaysia, Indonesia and Vietnam (see Appendix 03).

Additionally, for imports from ASEAN to the EU countries, the report shows that Vietnam (25.3%) and

Malaysia (19.2%) are the main sources of goods, closely followed by Thailand, Singapore and Indonesia

(see Appendix 04).

Overall, Germany consumes most of goods imported from the ASEAN region, making it the destination for

21.6% of the total goods exported from ASEAN. Germany is followed by France, the Netherlands and the

United Kingdom (see Appendix 05).

2018M02

10,640.4

2018M03

11,213.1

2018M04

11,585.7

2018M05

11,466.0

2018M06

11,667.6

2018M07

11,930.2

2018M08

12,287.6

2018M09

12,008.1

2018M10

12,647.0

2018M11

12,288.2

2018M02

7,552.9

2018M03

7,801.8

2018M04

7,884.7

2018M05

7,913.6

2018M06

7,829.8

2018M07

8,626.3

2018M08

7,965.9

2018M09

7,779.8

2018M10

8,799.5

2018M11

8,851.9

2018M02

-3,087.4

2018M03

-3,411.3

2018M04

-3,701.0

2018M05

-3,552.4

2018M06

-3,837.8

2018M07

-3,303.9

2018M08

-4,321.7

2018M09

-4,228.3

2018M10

-3,847.4

2018M11

-3,436.3

Source: Eurostat Jan 2019 – “EU28 trade by SITC product

ServicesFor services, a much different paradigm exists. The trade balance for services between the EU and the

ASEAN-5 (Indonesia, Malaysia, Thailand, Singapore and the Philippines) observes a surplus for the EU,

compared to its trade deficit with ASEAN on goods. Moreover, statistics show this surplus increased

significantly – about three and a half times – between 2010 and 2015 (see Appendix 06). It is imperative to

note that the services which have strongly contributed to this surplus are telecommunications, computer

and information services, other business services, as well as usage charges on Intellectual Property. In

contrast, the services that observed a higher decrease in traded services were travel services, financial

services and manufacturing services of physical inputs owned by others.

In terms of exported services from the EU into ASEAN in 2017 (see data in Appendix 07 and 08), the Neth-

erlands and the United Kingdom take up almost half of the total exported services into ASEAN with a

percentage of 43.8%. The biggest consumer of exported services from the EU is Singapore at 60.4%,

followed by Malaysia at 10.3%. For the case of exported services from ASEAN into the EU (see Appendix

09), Singapore provides the most services to the EU, accounting for 57.7% of total market, making the

island nation the biggest overall consumer and exporter of services to the EU. Germany and the United

Kingdom make up the biggest consumer of ASEAN services, with a combined total of 36.8% of market

(see Appendix 10).

Member states of the European Union consolidated the largest share of foreign direct investment in

ASEAN, with a figure of 16.7% recorded in 20155. From the years 2010 to 2017 (see Figure 02), it is

important to note that FDI inflows into ASEAN observed an uncertain trajectory. While 2012 was recorded

as the year with the lowest percentage of FDI inflow, the next four years witnessed rapid surge, with 2016

being the year with the highest percentage of FDI inflow.

Between 2012 and 2017, manufacturing emerged as the industrial sector that contributed the most to EU

FDI inflows to ASEAN (see Appendix 11). While the financial and insurance sector recorded a weaker

performance compared to manufacturing, it would be strategic to monitor the development of this sector

in the ASEAN region.

Foreign Direct Investment (FDI)

5Foreign direct investment net inflows in ASEAN from selected partner countries/regions”, ASEAN, 2016. Available at

https://asean.org/wp-content/uploads/2015/09/Table-26_oct2016.pdf


Figure 02: Foreign Direct Investment from ASEAN to EU

su

m o

f va

lue

40,000.00

20,000.00

0.00

Total EU [EU]

- ASEANHost country / Source country

Source: ASEAN Secretariat - ASEAN FDI Database, Oct. 2018 – “Flows of Inward Foreign Direct Investment (FDI) by Host Country and Source Country

(in million US$)” https://data.aseanstats.org/fdi-by-hosts-and-sources

A positive outlook for EU-ASEAN business in 2019 can be accredited to the effective bi-regional

commitments made between the EU and ASEAN in the previous year. In October 2018, leaders from both

blocs gathered in a series of meetings held in Brussels, Belgium, premised on enhancing cooperation.

These meetings covered crucial discussions on common challenges, as well as strategies to fortify the

EU-ASEAN relations even further.

The EU-ASEAN Plan of Action 2018-2022 was launched by leaders from both the EU and ASEAN in 2017

and aimed to serve this interest, as well as to maintain a positive outlook for business prospects. The Plan

of Action speculates increased joint efforts between the two blocs in matters such as political and security

cooperation, economic cooperation, socio-cultural cooperation and connectivity cooperation. In terms of

Economic Cooperation, it is important to highlight the commitment to expand trade, business and

investment. Both blocs look forward to encourage further dialogue and cooperation in the field of economic

policy and social policy, as well as to “intensify work towards the ASEAN-EU Free Trade Agreement (FTA)

negotiations”6.

During the last EU-ASEAN Ministerial meeting held in January 2019, both parties have agreed to deepen

cooperation on multiple key areas, such as fair and open trade, sustainable development, narrowing the

development gap, circular economy, smart cities, and climate change, among many others. Both blocs

reaffirmed the strategic importance of economic partnership in the pursuit to increase and strengthen

two-way trade and investment flows as well as their “commitment to a future EU-ASEAN Free Trade

Agreement”7 and to intensify work towards that goal. It was stated in the meeting that both parties are to

“enhance economic cooperation, including a standard, quality and conformity assessment; micro, small

and medium-sized enterprises; and science and technology … and encourage greater

Business-to-Business and Business-to-Government engagement…”8.

Political Engagement and Cooperation

The 2018 EU-ASEAN Business Sentiment Survey, a report published by the EU-ASEAN Business Council,

stated that 99% of respondents, derived from members of the EU business community, are looking to

either expand or maintain their current frequency of trade and investment within ASEAN. 75% of those

respondents went on to agree that ASEAN will grow in its importance towards global revenues for the next

two years.

It is important to mention that approximately 9 out of 10 respondents felt that a region-to-region deal would

translate into more advantages to their businesses than a series of bilateral FTAs with individual ASEAN

Member States. These correspondents continued to state that a removal of tariffs and non-tariff barriers to

trade make the top focus points in a bi-regional FTA.

Business Sentiment

2019 is foreseen as a year with greater and even deeper cooperation between the two blocs, both in terms

of politics and economics. This is a positive sign for European business, with economic indicators showing

that trade flows would continue to increase. It should be highlighted that the service sector is one sector

that EU companies can look upon as a strategic business opportunity, seeing as how ASEAN dependency

on EU imports continues to grow.

Sentiments on the general business environment in ASEAN remains positive by the EU business

community. Overall, it can be said that there are optimistic signs of strengthened economic ties between

ASEAN and EU. Nevertheless, it is important to mention that the European Union’s future outlook on palm

oil may play a role in influencing the business sentiments and decision-making of investors in Malaysia and

Indonesia.

Outlook 2019


6 “ASEAN-EU Plan of Action 2018-2022”. European External Action Service (EEAS), 2017. Available at

https://eeas.europa.eu/headquarters/headquarters-Homepage/30781/asean-eu-plan-action-2018-2022_en 7 “Joint statement of the 22nd EU-ASEAN ministerial meeting”, European Council, 2019. Available at

https://www.consilium.europa.eu/en/press/press-releases/2019/01/21/joint-statement-of-the-22nd-eu-asean-ministerial-meeting/ 8 Ibid.

48%MRO

26%Aero

Manufacturing

10%Others

16%Training

BackgroundThe EUMCCI Aerospace Committee is the longest standing aerospace committee in Malaysia dedicated

to the improvement of the aerospace sector by raising and addressing current issues in areas of concern.

The Committee’s endeavours are in support of the efforts of the Malaysian aerospace industry to

strengthen its presence in the global marketplace. Its members hold regular meetings, many of them

off-site, with various government and industry stakeholders to discuss and advocate issues to the

Malaysian government. The Committee seeks to encourage and ensure close cooperation with relevant

governmental bodies and prominent aviation stakeholders to bring about constructive change.

Committee activities include but are not limited to:

Advocating for further development.

Investment and support of the aerospace industry.

Bridging the links between the aerospace sectors in Europe and Malaysia.

Focusing on securing a high standard of aviation safety.

Ensuring that the resource needs of the local aerospace industry are met

through human capital development.

Considering environmental initiatives.

Providing financial advice including taxation issues.

Encouraging routes between the European Union and Malaysia.

About 62% of all Aerospace activities are located in the State of Selangor. Invest Selangor also came up

with a Selangor Aerospace Action Plan which is supporting and bringing down the main areas and

strategic points needed from the National Aerospace Blueprint done by the Federal Government.

According to National Aerospace Industry Coordinating Office (NAICO), Ministry of the International Trade

& Industry (MITI), the Malaysian Aerospace Industry is composed of:

Source: NAICO


Figure 03: Company Activities (230)

POSITION PAPERSPOSITION PAPERSAEROSPACE


Outlook in 2019The Malaysian aerospace sector is forecasted to grow significantly across a number of areas. It will be led

by continued expansion in aviation fleets due to business and leisure travel growth from 2.2 to 3.3%

annually, according to MAVCOM. Recovery in the oil sector will also lead to an increasing demand for MRO

(maintenance, repair & operations) services. According to various expert reports, Malaysia’s MRO sector is

expected to expand by more than 8% CAGR over the next 20 years making it the fastest growth area in

the APAC region. This will be supported by the return of Malaysia Airlines engineering to the sector as well

as Air Asia’s desire to ensure more MRO work is performed in the country.

Meanwhile, increasing investment is expected to expand manufacturing growth by more than 3% CAGR

over the same period which will lead to support clusters being developed to support principal suppliers.

Among the principal areas of growth that have been identified are aerostructures, precision machining and

avionics. Malaysia has initiated a few industry-led research and technology projects to ensure it remains a

regional leader in manufacturing and MRO, and more investment will be required to ensure it remains

ahead.

The ready availability of skilled labour will be a key to Malaysia’s success. It is estimated that more than

13,000 technicians and engineers will be required to support this expansion. To achieve this, it is imperative

that Malaysia develops holistic training and education programs that align with the latest technology and

industrial trends.

The Malaysian Aerospace Industry Blueprint 2030 has set a vision for Malaysia to become the leading

aerospace nation in South East Asia by 2030. The implementation of this blueprint is being led by the

National Aerospace Industry Coordinating Office under the Ministry of International Trade and Industry with

a target for Malaysia to achieve annual revenue of US$14.3 billion (MYR 55.2 billion) by 2030 and the

creation of more than 32,000 high-income jobs.

1. Access to Government Contracts

Access to government contracts are not being equally granted to international companies. Whilst the

Malaysian government values foreign investment as a driver of continued national economic development

in a high technology sector such as aerospace, it was only until recently that international companies based

in Malaysia have been given the same recognition as their counterparts based abroad. In the case of some

defence contracts, they have not been given equal opportunities.

If the government wishes to ensure continued growth in high technology and propel Malaysia up the global

value chain, it is imperative that foreign investors are permitted to bid for government contracts. The new

government administration has recently hinted at change, and this is welcoming news for encouraging

future foreign investments. The government should further support aerospace companies in Malaysia

through the Technology Depository Agency under the Ministry of Finance to accept direct offset from

international companies located in Malaysia, where their prior investment in capability enables the further

development of long-term sustainability and advancement of technologies in country.

2. Setting up and Operating in Malaysia

LicensingIt has been observed that too many licenses (e.g. business, signage, advertising, etc.) are required for a

new company to set up business in Malaysia. The administrative bureaucracy that comes with operating in

Malaysia such as, electrical supply, IT connection and various charges incurred, need to be reduced to

make Malaysia a more conducive business environment. PEMUDAH has assisted in this area but more

rapid implementation is essential.

Issues / Challenges

Access to FundingForeign investors are not able to obtain loans from local banks and therefore rely on parent companies for

loans which are then charged withholding tax on any interest the parent company charges. Some banks

have engaged themselves in the aerospace sector but in general have limited knowledge of the industry,

which is a cause of concern for aerospace businesses leading to many opportunities being lost to other

countries in Asia. This is particularly worrying for SME’s, who do not always have the financial structure and

resources for prominent investments. The Government should consider offering inexpensive loans to

support the development of the industry.

Finally, the committee believes that there is a need to produce some guidance in the form of a handbook

regarding best practices in the industry that can be a reference point for new aerospace investors coming

to Malaysia.

3. Lack of Technical and Skilled WorkersThe high level of technicality required in the aerospace sector, that is concurrent with the increasing growth

of the industry, has brought a growing demand for skilled and technical workers that is not at present being

sufficiently met by the Malaysian job market. The committee believes that one way of resolving this is to

implement a European-style apprenticeship programme in the country where academia and industries

intersect to ensure the skills required are met. A collaborative effort between government agencies,

educational institutions and private sectors where training and education is part of the business would

produce talents with more quality.

The government has recently announced their plans to introduce a RM30mil Technical and Vocational

Education and Training (TVET) Prestige Fund to encourage various training institutions to bid for and run

competitive programs with specific KPIs on job placements for technicians. The committee strongly

recommends that the government specifically focuses their efforts on high-technology sectors such as

aerospace, and utilise such funds efficiently. Through the National Dual Training System, it is recommended

that this scheme be fully adopted by all manufacturing and MRO players within the aerospace industry as

a standard practice.

In addition, the Human Resource Development Fund (HRDF) has agreed to launch two new programs,

“Apprenticeship” and “Graduate Enhancement Programme for Employability” (GENERATE) to provide skills

to school-leavers as well as to increase the marketability of our graduates from higher learning institutions.

HRDF will allocate RM20mill in matching grants for these programs. In addition to these measures, the

government also intends to upgrade the marketability of graduates and the skill-level of the Industry 4.0

related workforce by providing double tax deduction.

This will be for:

Scholarships and bursaries provided by companies to students enrolled for technical and

vocational training, diploma and degree courses in engineering and technology.

For company expenses related to participation in the National Dual Training Scheme for Industry

4.0 and other related programs approved by the Ministry of Human Resources, or the Malaysian

Investment Development Authority (MIDA).

For company expenses in carrying out structured training programs for students in the fields of

engineering and technology which are approved by the Ministry of Human Resources.

In 2018, the National Aerospace Industry Coordinating Office (NAICO) developed two National Operational

Skills Standard (NOSS), the Aerospace Assembly and MRO B2 Avionics respectively. These have received

approval and are awaiting endorsement from the DSD as well as the Civil Aviation Authority Malaysia

(CAAM) before being implemented. NAICO has also carried out a road show promoting the development

of aerospace skills to a number of companies to ensure an overall understanding about the importance of

maximising skilled development.



1. Access to Government Contracts Companies that prove competent in bringing the latest technology, knowledge and job

opportunities should be treated equally for access to government contracts - even if they are

international companies provided they are registered in Malaysia - in order to foster fair competition

and further develop this important industry.

2. Setting up and Operating in Malaysia There is a need for continuous effort to reduce bureaucracy and to ensure the minimum number

of licences to operate.

The government should consider offering attractive loans to aerospace companies to encourage

their future expansion.

3. Human ResourcesEuropean standard apprenticeship models would constitute a significant leverage for Malaysia and should

be a straightforward system for companies to implement as they follow a common framework. The

committee fully applauds the recent developments in Malaysia and fully supports the National Dual Training

System to replace or be incorporated into existing apprenticeship programmes.

Recommendations

A common criticism by industry players is that vocational training providers are not delivering suitably skilled

personnel. As such, the above measures are commendable as they ensure a steady supply of skilled and

motivated personnel, as well as the continued growth and sustainment of the industry.

Finally, more effort needs to be made in respect of supervisory and management skills in anticipation of

industrial advancement. The government along with the industry should put programs in place to

encourage continuous professional development in leadership and management skills.

As the aerospace industry continues to gain traction in Malaysia, the EUMCCI Aerospace Committee will

launch an Aerospace Trade Mission to Malaysia to be held in the second half of 2019. Malaysian aerospace

is still highly dependent on foreign import and the committee foresees the need to attract more European

suppliers and investors. The forthcoming FTA negotiations could also add significant support and leverage

for further investment and trade into the aerospace industry. Further investment would help cope with

regional demand as it shows clear potential for future development.

Best Practices / Case Studies

ENERGY SUSTAINABILITY & ELECTRICPOWER GRIDS TRANSFORMATION

BackgroundThe International Energy Agency states that in ASEAN the energy demand has grown by 60% over the past

15 years. This exponential growth requires new policies and programmes to keep up with the demand.

Thus, it does not come as a surprise that one of the main focuses of Ministry of Sciene, Technology,

Environment and Climate Change (MESTECC) is the Green and Efficient Energy Sector. It is their goal to

increase the percentage from 2% to 20% of renewable energy for electricity generation by 2025, and to

improve the national energy efficiency as well as improve the efficiency and transparency of the energy

market to ensure the best tariffs for energy consumers.

This being said, it is fundamental to rethink the integration of renewables in Malaysia in terms of adoption

of green tools for sustainable energy generation, combined with the new innovations available in the market

in terms of data analytics, Internet of Things (IoT), digital and smart technologies, which make it possible for

the electrical energy infrastructure to be updated and responsive to the growth demand and to strengthen

energy efficiency.

This committee has been recently restructured and it has defined its Strategic Plan for 2019 as follows:

MissionTo advocate for the establishment of smart technologies and energy management solutions, associated

with integration of renewable energies and electric grid transformation, programmes and policies as

instruments for optimal energy efficiency adoption in Malaysia.

VisionTo strengthen the aforesaid technologies or solutions for the energy efficiency landscape in Malaysia,

towards a more sustainable energy market and new and innovative technology enabling solutions

originating from European companies.

Aims of the Committee To advocate the increase of energy supply by adopting renewable energy solutions as alternatives

to fossil fuel.

To promote the country’s energy infrastructure development through the implementation of new

smart energy technologies.

To strengthen the European businesses voice towards the Malaysian Government in the energy

sector.



The advancement of renewables continues worldwide, spurred on by state policies to promote green

growth. Policies coupling the thermal (heating and cooling), transport and power sector, as well as policies

increasing the linkage between renewable energy and energy efficiency continue to emerge. In Malaysia,

the goal to achieve 20% renewables by 2025 is being realised by a combination of Large Scale Solar (LSS)

projects and encouraging the residential or commercial sectors to install solar photovoltaic (PV) through

better incentives as in the Supply Agreement for Renewable Energy (SARE).

Generally, systems need additional flexibility to be able to accommodate the additional variability of

renewable sources. Flexibility can be mainly achieved through grid-strengthening operational practices,

storage, demand-side flexibility, flexible generators besides institutional practices. While practices such as

Feed-in-Tariff (FiT) and Net Energy Metering (NEM) are already in existence, there is a need to move towards

an open energy market and introduce competitive retail service providers.

This is facilitated by the set-up of an Automated Metering Infrastructure (AMI) in Peninsular Malaysia, where

a smart meter roll-out is in progress. The AMI would serve to be the foundation for demand side

management practices, such as pre-payment, time-of-use (ToU) tariffs and increase public awareness on

energy consumption. There is also an increasing trend in optimising energy consumption and sourcing for

in-house generation in the industrial sector, in line with the Fourth Industrial Revolution and the

Industry4wrd launched in the country.

The above changes in progress are seen as a precursor to a digitally regulated energy market and

emergence of blockchain technology, which can enable peer-to-peer trading in the future.

Current Scenario & 2019 Outlook

Action Plan

Work closely with MESTECC and other Government entities to develop and/or implement energy

plans, roadmaps or projects related to the introduction of green technologies for renewable energy

generation, energy management and efficiency.

To raise awareness in the setting up of best energy standards and legal tools to achieve the

committee’s aims.

To put forward proposals for new programmes, tax incentives, barrier removal, policies or anything

similar, to benefit the business environment in the energy sector.

To encourage a solid dialogue between European businesses and national organisations for the

establishment of a prolific energy infrastructure.

To promote the optimisation of the country’s resources through technological innovations and

adoption of renewable alternatives.

The EUMCCI Green Building Committee’s primary role is to support ongoing initiatives to accelerate the

implementation of mandatory Energy Efficiency Labels for commercial buildings in Malaysia on a political

level.

GREEN BUILDING

Background

The Ministry of Energy, Science, Technology, Environment and Climate Change (MESTECC) has

announced that it will launch mandatory energy labelling for Malaysian government buildings, after

identifying it as the most cost-effective sector to reduce energy consumption. Building electricity

consumption comprises of more than 50% of the electricity consumption in Malaysia (YB Yeo Bee Yin,

MESTECC Minister Speech, 2018). In response to this, MESTECC has announced that it will launch an

Energy Performance Contracting (EPC) initiative that will collaborate with the Works Ministry to spur energy

efficiency of existing government buildings. The initiative is predicted to ease the government’s financial

burden by 20%.

The Malaysian government has begun drafting the Energy Efficiency and Conservation Act (EECA) and will

be seeking stakeholder engagement including – hopefully – with the EUMCCI Green Building committee,

on matters related to electrical and thermal energy. The EECA is meant to include energy efficiency

requirements for buildings and is expected to be tabled to parliament in late 2019 and enforced by Q2/Q3

of 2021.

Green buildings are cost-effective even if there is a higher initial cost, since the total lifecycle of a green

building is lower in comparison to conventional buildings of the same size. Nevertheless, industrial insiders

have advised that existing MS 1525 (“Energy efficiency and use of renewable energy for non-residential

buildings”) compliant buildings can easily achieve green building status after few adjustments. The

Malaysian Standard MS 1525:2014 monitors energy efficiency and the use of renewable energy for

non-residential buildings.

Since 2018, as a result of more developers being educated about the long-term cost-saving benefits, up

to 40% of new buildings in Malaysia have green building initiatives, resulting in more energy efficiency with

zero carbon emission9. This is also evidenced by the numerous green building certification schemes

mushrooming in the Malaysian market, most notably the Green Building Index (GBI), GreenRE and

MyCREST.

Outlook in 2019

1. Greenhouse Gas EmissionsUnder the Paris Agreement, Malaysia has committed to reduce Greenhouse Gas (GHG) emissions by 45%

by 2030 in relation to our 2005 GDP10. The much welcomed announcements by YB Yeo Bee Yin,

MESTECC Minister, in October 2018, stated that Net Energy Metering (NEM) will be tweaked to improve

the incentives offered to consumers in exchange for generating and exporting electricity from solar panels.

It is imperative that progress for renewable energy in Malaysia is monitored over the coming years, and

policies adjusted should they not contribute efficiently and significantly to the greening of electricity

generation. As of today, the country’s Renewable Energy share of electricity generation is under 3%, which

explains why Malaysia is among the nations falling short of meeting the pledges it made to the UNFCCC in

2015.

Issues / Challenges

9 The Edge Markets (2018). Up to 40% of new buildings in Malaysia are ‘greener’.

Available at: https://www.theedgemarkets.com/article/40-new-buildings-malaysia-are-greener. 10 Malaysia and the United Nations Framework Convention on Climate Change (UNFCCC) – the Paris Agreement.

Available at: https://www.miti.gov.my/miti/resources/Article_on_Malaysia_UNFCCC-_Paris_Agreement.pdf?mid=572 28 | EUMCCI Trade Issues & Recommendations 2019


2. Carbon TaxMESTECC has stated that no carbon taxation will be introduced in the next two years, consequently

keeping energy prices artificially cheap and maintaining an uneven playing field for energy efficiency.

Malaysia already lacks strong policies necessary to transition to a low-carbon economy and our most

urgent priority is to ensure a reliable and sustainable supply of electricity at affordable prices, as well as a

rational use of diminishing fossil resources. Decades of heavy subsidies and only marginal energy price

hikes are hindering the development of energy saving solutions and technologies. With appropriate

increase in energy prices, energy-saving solutions would be more economically feasible and the market for

it would develop more attractively.

Hence, without an enforced and comprehensive energy efficient labelling system, Malaysia is at risk of

locking itself into substantial inefficiencies, together with higher than necessary climate change impacts

from the building sector.

The Government should lend its support to ongoing initiatives dedicated to implementing energy efficiency in

the building sector, namely:

Mandatory energy efficient labels for all Government buildings to be launched by MESTECC.

Incorporate energy efficient building ratings in the Malaysian Standard 1525 with to the possibility of

making it mandatory.

Energy Performance Contracting (EPC) initiative to be launched by MESTECC.

Energy Efficiency and Conservation Act (EECA) to include energy efficiency requirements for

buildings.

Recommendations

Numerous countries across Europe offer mandatory energy labels. In the Netherlands and Denmark, for

example, all house owners are obliged to provide an energy performance certificate prior to selling or leasing

out their property. The measurement is part of a general law on sustainability improvement, as stipulated in

the Energy Agreement for Sustainable Growth.

The legislation is intended to encourage house owners to invest in energy efficient enhancing measures, such

as the use of sustainable materials. Consumers benefit from lower emissions which lead to lower costs for

utilities – making the property more attractive for both buyers and renters. Lower emissions benefit the

consumer, health-wise too.

The Green Building Index (GBI) has already been issuing certificates that carry an Energy Efficiency (EE) Star

rating that represents a performance level that reflects the Building Energy Intensity (BEI) index, a measure of

energy usage per annum on each square meter of gross floor area. The BEI index developed by GBI, is

widely accepted, referenced and quoted by the industry. Therefore, the GBI EE Star rating will be

implemented as a mandatory energy efficient labelling scheme.


BackgroundThe objectives of the Healthcare Committee are as follows:

To act as a sounding board for the intersection between healthcare improvement and

technological progress, pressing for innovative products to be brought faster into the Malaysian

market and simultaneously encourage local manufacturing and innovation.

To promote exports and imports in the healthcare sector between the EU member states and

Malaysia.

To enable and facilitate fair and easy market entry for EU companies, by reducing red tape and

trade restrictions on the healthcare sector.

The EUMCCI Healthcare Committee supports developments in the booming Malaysian healthcare industry

and strives to promote efficiency in the system. Besides providing a strong platform for dialogue and

cooperation between the public and private sectors, the Committee maintains its critical mindset and

addresses issues, varying from healthcare facilities for senior citizens to the clarification of legislation. Apart

from focusing solely on the Malaysian market, the Committee seeks to explore business opportunities for

European healthcare companies and engage in Malaysian healthcare regulations for foreign suppliers.

Malaysian Healthcare in 2019 is predicted to steer into a progressive direction as the recent general election

held in May 2018 witnessed a change in coalitions leading the government for the first time ever. Pakatan

Harapan, under the leadership of Tun Dr Mahathir Mohamad, have committed to a strategic approach

towards national reform that stretches into key areas of governance including healthcare. The sector is

predicted to increase in efficiency amidst a higher allocation within the 2019 Federal Budget for improving

services and infrastructure development.

On the 20th November 2018, the Budget announcement was done at the Dewan Rakyat. The MYR 29

billion allocation to the Ministry of Health (MoH) represents approximately 9.2% of the total budget of

MYR 314, 555 billion, and has a 7.8%, or MYR 2 billion, increase from the Healthcare Budget in 2018.

The budget includes providing healthcare services, medicine, as well as an upgrade and improvement of

the quality of health services at clinics and hospitals, including RM100mil for the National Health Protection

Scheme (PEKA) are also at the centre of the measures to be taken into account11.

myr 10.8 billion has been allocated to restore clinics and hospitals, as well as the purchase of medicine and

medical equipment12. It is also important to note that MYR 20 million13 has been allocated to the Malaysian

Healthcare Tourism Council (MHTC) to team up with leading private hospitals, to boost Malaysia's image

as a health tourism destination.

The government healthcare expenditure covers approximately half of the total healthcare expenditure. In

2016 the share of public budget was 53% of the total spending14. However, in comparison with Europe

where the average government expenditure is almost 70%, Malaysia is still heavily relying on private

spending on healthcare and private sector healthcare providers. Although Malaysia has a universal

healthcare coverage, it is only available through the public healthcare

ystem which is fairly well developed, but has not somewhat been able to provide the quality of care and/or

the access needed for the public. This has resulted in a significant proportion of the healthcare services

provided by the self-funded out-of-the-pocket private sector.

Outlook in 2019

11EY Budget 2019 Malaysia (2018). Available at:

https://www.ey.com/Publication/vwLUAssets/Take_5_Budget_2019_Malaysia/$FILE/EY_Take5_Budget2019_3Nov2018_FINAL.PDF 12Ministry of Finance, 2018. Available at http://www.treasury.gov.my/pdf/budget/speech/bs19.pdf 13Ibid.14Ministry of Health, 2016. Available at

http://www.moh.gov.my/images/gallery/publications/MNHA/MNHA%20Health%20Expenditure%20Report%201997-2016%2007122018.pdf

HEALTHCARE



Economic Impact of Rising Healthcare Expenditure

Malaysia has one of the highest medical inflation rates in the region and the cost of healthcare continue to

rise every year. While the general consumer price inflation rate is low, the annual medical trend rate was 9%

in 2017, 11.4% in 2018 and is estimated to be 13% in 2019, according to a recent survey on global medical

trends.

The major drivers of medical trend rates and increasing overall costs are the availability and adoption of new

medical technologies, medications and procedures, the ageing population, growing number of non-communicable

diseases (NCDs) and increasing patient demands. (Willis Towers Watson, 2019 Global Medical Trends Survey

Report.)

The top reasons for seeking private medical treatment (based on dollar amount in insurance claims) are cancer,

gastrointestinal and intervertebral disorders, cardiovascular diseases, diabetes or respiratory diseases. For

Malaysians, the risk of dying from any of these conditions between the age 30 and 70 is 17.2% (WHO, World

Health Statistics 2018).

The majority of Malaysians are not prepared for the increasing price tag on healthcare services and are at risk of

debt in case of medical emergencies their needs or family members’ care needs suddenly change.

More than half of Malaysian households have no financial assets and one in three Malaysians do not have a savings

account (86% of urban households and 90% of rural households have zero savings). Most households do not have

private medical insurance and medical expenses are in fact the second highest cause of personal debt.

The Employees' Provident Fund (EPF) had a total of 7.1 million members in 2017 with an average of MYR 78,359

savings per member account. This amount is not nearly enough to cover increasing healthcare costs later in life, in

addition to the regular everyday living costs. (KWSP/EPF).

Medical Devices / Halal Certification

Originally mooted by the previous government of Malaysia, the Department of Standards Malaysia, the

Medical Device Authority and JAKIM (Department of Islamic Development of Malaysia) have been

developing a halal medical device certification.

The establishment of such standards would not only bring several challenges but they would also be severe

in nature:

It may unintentionally lead to a severe reduction in consumer welfare and in the public's access to

healthcare due to a limited range of choices of halal products and treatments. Another concern is

that the halal certified devices could exclude their use for non-Muslims and would therefore limit

their access to healthcare.

The abrupt changes and the stringent process to get the halal certification would impact the

healthcare industry resulting in unintended negative consequences that could severely disrupt the

business environment and economic growth.

This will also hamper Malaysian patients from benefiting from cutting edge medical technology or

frontier products from the European Union and other foreign markets.

The process of getting medical devices to be halal certified will increase costs in manufacturing

due to the complexity of the certification process.

Separate logistics and general operation of medical devices, as well as complicated maintenance

issues, including severe impact on the supply chains of Multinational companies (MNCs) as raw

material will have to be newly sourced.

There will be significant impact on tender procurement as devices with Islamic values will be given

preference.

Any changes or new requirements in addition to existing medical device certification should be

consistent with current supply and demand dynamics, evidence-based and effective in achieving

the specific purpose without burdening the public healthcare system in Malaysia.

Issues / Challenges

There is no indication of the Gulf or other countries looking to adopt halal medical device

certification.

All of the above may cause foreign companies to reconsider Malaysia’s current position as an

international hub for medical device manufacturing.

Public ProcurementThe procurement model by the Ministry of Health for the purchase of medical equipment requires the

existence of a licenced Bumiputera agent. This tender system increases the cost to private companies

operating in Malaysia, as well furthering delays in deliveries, services and maintenance. As such, the

concession systems further raises the cost of the public healthcare system. In brief, it does not allow for a

free and open market access by the equipment providers.

The Public Procurement System for the healthcare sector in Malaysia dictates that foreign entities are

eligible to apply for projects involving supply of medical devices provided it is done via joint-venture with a

Bumiputera entity. For example, Company A from Sweden wishes to contend for a government contract

supplying medical devices to government hospitals. It will be able to do so, provided that the purchasing

and re-selling to the government is carried out through a Bumiputera vendor, Company B. This is in line with

Malaysia’s Industrial Collaboration Program (ICP) as well as the Treasury Circular PK1, which details specific

provisions for the Bumiputera business community in terms of public procurement that applies to all

Government Ministries and Agencies.

An element within the Industrial Collaboration Program is the Bumiputera Vendor’s Development Program

(BVDP) which encourages Government-Linked Companies (GLCs), Government-Linked Investment

Companies (GLICs), and Multi-National Companies (MNCs) who are defined as ‘Anchor Companies’ to

acquire supplies and services via a third party, namely Bumiputera entities which are the ‘Vendor

Companies’. The BVDP is an initiative under the purview of the Ministry of International Trade and Industry

(MITI) and aims to increase competency of Bumiputera businesses.

While it is acknowledged that there is a need to facilitate business opportunities for local players in a

globalised market such as Malaysia, equal emphasis must be considered for the possible trade-offs in the

public procurement system for the business community and the public. For the business community,

especially businesses originating from abroad, this creates an inequitable paradigm in terms of access to

government projects. A substantial number of foreign businesses have largely invested in facilitating their

operations in Malaysia, bringing national revenue while creating job opportunities for the Malaysian people,

which makes it all the more regretful that they are at a disadvantage as compared to local companies.

Within this context, the concerns that we have for the Malaysian public is the cost of medical care that

would worryingly increase due to third party leasing/purchasing of devices and drugs. Without the inclusion

of a third-party purchasing agent, companies would be able to sell directly to the government thus lowering

the cost of healthcare services for Malaysian citizens.

The BVDP/concession system prevents foreign-owned companies from tendering directly to the

public sector.

The procurement system still lacks transparency and we welcome Pakatan Harapan’s reform

measures.

Preference is still given to local companies via adoption schemes – but this excludes MNCs

operating locally (i.e. manufacturers). MNCs have invested billions over the past decades, provided

job opportunities to thousands, spurred local innovation via transfer of technology and yet they are

unable to secure appropriate tender volume albeit lower prices, in some cases.

Having a middle agent increases costs and slows down the procurement process as well as the

service and maintenance of devices and equipment.


Aged CareIn 2018, every tenth Malaysian or 3.2 million people were over 60 years old, compared to 2.6 million or

8.5% in 2013. Urban, wealthier states are ageing more rapidly and by 2020 Selangor will have 16% over

60 years old, Johor will have 12% and Perak 11%. By 2040, every fifth Malaysian will be over 60 years old,

e.g. 19.8% or 8.2 million of the whole country’s populations. (Department of Statistics Malaysia)

Malaysia has been slow to develop aged care facilities and geriatric services for its growing number of

elderly citizens and too much responsibility is still being placed on the family as the primary caregiver. The

few existing government-based aged care units only cater to a small portion of those in need - the elderly

with no means, no immediate family nor relatives to take care for them. Most elderly people, especially in

the middle class, fall outside the public support system and their access to private aged care facilities

depends completely on their own or their family's financial capability. Many are at risk of poverty due to

insufficient savings, inadequate social security and provisioning care in their old age.

The ageing population is however not the only factor in the growing need for purpose built, specialised

housing and residential care facilities in Malaysia. The “National Strategic Plan for Non-Communicable

Diseases (NSP-NCD) 2016-2025” highlights that the rapid increase in the number of people suffering from

NCDs presents one of the biggest challenges to the healthcare system and if the trend continues, the future

healthcare costs will be unsustainable.

The results from the latest “National Health and Morbidity Survey (NHMS) 2015” show that NCDs are a

major cause of disease and disability, and the number of patients diagnosed with chronic conditions will

continue to grow, increasing the need for long-term care facilities and non-communicable disease manage-

ment among both the older population and young adults. As long as specialised housing and long-term

care facilities for special needs groups and elderly are not available, homecare is the only option for many

families and the demand for trained, professional caregivers in the homecare sector will continue to grow.

Lack of funding has been pointed out as one of the primary reasons for the slow development of a compre-

hensive aged care infrastructure with both a health and social component, including specialised geriatric

clinics, dementia care units, long-term care facilities, social and support services, rehabilitation care, pallia-

tive and hospice care, home care, assisted-living and purpose-built senior housing. Furthermore, the limita-

tions on foreign equity for nursing homes, hospices and dementia units are preventing foreign investments

and development of the aged care sector. There is a pressing need to create and implement long-term

funding models, support mechanisms and investment opportunities in order to enable the development of

the nationwide, extensive aged care system that Malaysia desperately needs.

The long-awaited, new Private Aged Healthcare Facilities and Services Act 2018 (PAHFAS) and Care

Centres (Amendment) Act 2018 (CCA) were gazetted in March 2018. The PAHFAS regulates care centres

providing care to elderly (aged 60 and above) and the quality requirements and standards of care are

stricter than for other care centres operating under the CCA.

In recent years there have been more investments in geriatric services and new geriatric units have been

established in both public and private hospitals. In 2018, geriatric services are now offered in 11 of the 14

states with a total of 38 practicing geriatricians, compared to only 14 in 2011 (see Appendix 12). There is

however still an even greater demand for geriatric professionals, distributed all over the country in propor-

tion to the number of aged persons in each state. In 2018, 14 geriatricians were located in Kuala Lumpur,

a state with only 187,400 persons aged 60 and above, while Selangor had 6 geriatricians caring for

518,900 persons aged 60 and above. Johor had 2 geriatricians for 397,600 persons aged 60 and above,

Perak had 4 for 372,500 and Sarawak 2 for a total of 306,800 persons aged 60 and above. (Department

of Statistics Malaysia, Malaysian Society of Geriatric Medicine).


Foreign Equity Participation in Private Healthcare Facilities / Foreign Direct InvestmentAccess to foreign healthcare providers, to invest and operate in Malaysia is still somewhat limited.

Therefore, the Committee’s concerns remain the same as per the 2018 Booklet available online.

Table 04: Policy on Foreign Equity Participation in Private Healthcare Facilities

Home CareThe committee defines Home Care as any care that happens outside the hospital, but instead is provided

at home, at a service care provider or at a community setting.

The committee would like to raise awareness towards homecare as a viable alternative. With the

advancements made in healthcare and technology, medical care may be rendered at home and reduce

dependency on in-patient services. The demand for homecare in Malaysia is rising as a result of the nation

progressing towards an ageing society. The increase in life expectancy, chronic diseases (respiratory

diseases, diabetes, cancer etc.) and its associated complications will further add cost-pressure on the

healthcare system.

There are several problems associated with home care in Malaysia:

Home Care is a very grey area in terms of regulations and provisions in Malaysia, as there are no

standards in place to ensure the quality of homecare products and services since the industry

lacks structure and is in its premature stage.

There are many providers and freelancers in the market with varying standards offering their

services in Malaysia. Patients and their family members are at risk of not understanding the most

appropriate services required.

This environment is also operated without indemnity; therefore, no protection is offered to parties

involved in this service business.

Lack of funding as medical care outside of the hospital system is not covered. There’s minimal

coverage by private health insurers, usually on nursing care, but not on medical treatment

(e.g. home antibiotics, home parenteral nutrition, home chemotherapy, etc.).

High risk patients are exposed to hospital acquired infection (HAI) in the public healthcare units,

therefore increasing length of stay and higher utilisation of services and drugs (e.g. antibiotics).

The prevalence of HAI in South East Asia is 9.0%15.

15Ling, M. L., Apisarnthanarak, A., & Madriaga, G. (2015). The burden of healthcare-associated infections in Southeast Asia:

a systematic literature review and meta-analysis. Clinical Infectious Diseases, 60(11), 1690-1699.

Specialist Dental Clinic

Ambulatory Care Centre

Nursing Home

Hospice

Psychiatric Nursing Home

Community Mental Health Centre

Medical Clinic (GP)

Blood Bank

Maternity Home

Equity Facility

Local Joint-Venture (JV)

Deantal Clinic (GP)

Specialist Medical Clinic

Psychiatric Hospital

Pathology Laboratory

Haemodialysis Centre

Private Hospital

-

-

-

-

-

-

-

√

√

√

√

√

√

-

-

-

-

-

√

√

√

√

-

-

-

-

-

-

-

-

-

√

√

**

-

-

-

-

-

-

-

-

-

-

-

√

-

-

-

-

-

-

-

-

-

-

-

-

√

√

√

√

√

√

-

-

-

-

-

-

-

-

-

√

√

-

-

-

-

-

-

-

-

-

-

-

-

-

-

-

Foreign Interest

Majority

Required

(≤70%)

New ExistingNot Allowed

(0%)

Minority

(≤49%)

Type of FacilityNo

Not Required

(100%)

2

7

3

8

4

9

5

10

6

11

1

12

13

14

15

Note: For healthcare facilities not listed above, foreign equity participation will be considered on case by case basis.

Effective Date: 29 July 2015

Source: Ministry of Health



The committee strongly believes that a regulated Home Care industry and system has the potential to

eliminate pressure on the national healthcare system. Family members and other stakeholders (e.g. funders

and private health insurers) also stand to financially benefit from this system. It is essential for Malaysia to

adapt to innovative solutions such as home care models to alleviate pressure on brick-and-mortar

institutions and long patient wait times for public health facilities.

Additionally, there is the extra challenge of medicine provision, whereby the reimbursement of medicines

outside public hospitals by the private health insurers is not possible. This requires ill patients to go to

hospitals to get medicine, rather than having a doctor come to their homes or visit a private clinic instead.

As an example, even bedridden nursing home patients must be driven with an ambulance every few

months to visit a public hospital for free medication.

Digital HealthcareIn a fast-paced digitalised world, the healthcare sector is certainly one of the industries where there is room

for multiple innovations and digital transformation. Particularly in Malaysia, there is a large potential for

future technologies to be tested and implemented towards generating a more advanced industry.

Digitalisation opens new possibilities for the access and delivery of medical services to the overall

population even in remote locations.

Nevertheless, digital healthcare raises a few challenges for Malaysia, such as:

Reliable networks and access to potential digital healthcare services varies across different regions

in the country and is dependent on diverse income levels. This sets the population on uneven

levels of available technology, internet access, access to devices, among others, which should be

modernised and up-to-date for reliable use.

Data processing, collecting, archiving and cybersecurity risk management is a challenge for any

nation, and Malaysia is no exception. Data breach is a major issue, especially in the healthcare

sector because health data about patients is highly valuable due to the sensitivity it carries.

Leveraging from the use and interconnection of data for the benefit of each patient and for the

knowledge acquisition and sharing of the healthcare system.

Continuous learning and training for the medical staff to best adopt and implement new

technologies.

ASEAN standardisationIn 2015, 10 ASEAN member states agreed to regulate medical devices within the region and signed the

ASEAN Medical Device Directive (AMDD)16. The goal is to harmonise standards, technical regulations and

conformity assessment procedures through their alignment with international practices, where applicable,

as well as the harmonisation of the medical device regulations in order to reduce the time to market access

and facilitate trade, reduce the cost to market, improve regulatory efficiency and enhance public health

protection17. However, three years later, several challenges on the state-member level are being

encountered and local guidelines that are still in place need to be followed18, penalising a faster and

smoother harmonisation across ASEAN.

Intellectual Property (IP) Rights Issues in the Pharmaceutical industryIn 2017, the Malaysian government utilised a non-transparent process to issue a Compulsory Licensing

(CL) on a patent-protected innovative United States of America (U.S.A) Medicine. This unnecessary and

unjustified measure was taken in a unilateral and non-transparent fashion, even as the manufacturer was

engaged in good faith negotiations with the government on a voluntary licensing regime. The CL has sent

a devastating signal to global biopharmaceutical innovators that their patents are not safe in Malaysia.

Additionally, if this action is not met by a strong response, the government of Malaysia may use CLs on

other innovative medicines, or inspire other countries to unilaterally determine that it is exempt from its

obligations with respect to IP protections under well-established and binding international agreements.

16ASEAN Medical Device Directive (2015). Available at: https://asean.org/storage/2016/06/22.-September-2015-ASEAN-Medical-Device-Directive.pdf 17Medical Device Authority (2015). Introduction to ASEAN Medical Device Directive (AMMD). Available at:

https://www.mdb.gov.my/mdb/index2.php?option=com_docman&task=doc_view&gid=305&Itemid=30 20Qualtech (2018). ASEAN Medical Device Directive Implementation: 18Current Progress and Future Direction – May 2018. Available at:

http://www.qualtech.com.tw/en/about-qualtech/news1/1017-asean-medical-device-directive-implementation-current-progress-and-future-direction-may-2018.html

Pricing Regulations within the Pharma sectorIn 2018, MoH published the Medicine Prices Monitoring in Malaysia, 201721. Key findings of the report

revealed that procurement prices were stable across originator medicines. However, there were variations

between procurement prices in the following descending order: retail pharmacies, university hospitals,

private hospitals, public hospitals and health clinics. In retail, the range of mark-up for originator brands in

private hospitals is between 18.9 up to 117.4%, the highest among all the channels. As the government

moves forward to the implementation of price control as a mechanism to address the increasing healthcare

cost, it should not be the only option as pharmaceutical expenditures are only 8% of the Ministry of Health’s

(MoH) budget allocation.

Malaysia must streamline its healthcare related policies to develop and maintain a sustainable healthcare

system. As Malaysia is on the way to becoming a developed nation, among indicators of such development

are life expectancy, access to healthcare and provision of care to the elderly and special needs groups. To

reach a developed nation status, Malaysia must further improve and develop access to funding and

insurance, technology and medicine, infrastructure, human resources and procurement in the Healthcare

system.

On Medical Devices / Halal Certification the Committee is open for dialogue with the relevant

entities to demonstrate the concerns and the consequences that such measure would have in

terms of healthcare and economic impact.

Concerning the Healthcare Equipment Acquisition Models / Bumiputera Vendor Programme, the

Healthcare Committee has solutions for medical procurement, in terms of finding the most

effective procurement model for Malaysia in order to drive the largest benefits for the country, with .

the ultimate goal of having a transparent free open market.

On Aged Care, Malaysia needs to develop a sustainable and integrated model for the ageing

population, including everything from day care centres, home care services, rehabilitation,

specialised housing and assisted living facilities to nursing homes, dementia units, palliative and

hospice care, to ensure that a sufficient number of geriatric professionals and skilled caregivers are

available in the future. There is also a pressing need for Malaysia to create and implement

long-term funding models, support mechanisms and investment opportunities in order to enable

foreign equity and investments in the aged care sector and develop the nationwide aged care

infrastructure.

Foreign equity participation in private healthcare facilities should be encouraged and allowed

without any ownership restrictions in order to deliver a competitive healthcare ecosystem for

Malaysia. The citizens of Malaysia will stand to benefit from new medical technology and the best

of treatment via transfer of technology and policy. Additionally, this would promote Malaysia as a

medical tourism destination.

On Home Care:

The Government should set up a regulatory framework with participation from the industry

and funding should be included to enable the private sector to enter and shape the market,

with the Ministry of Health playing the role of regulator or enforcer.

The Committee is also keen on a close dialogue with MoH to establish a good governance

framework for home care in Malaysia, encompassing all necessary soft and possible hard

infrastructures essential for a healthy service delivery system. It is fundamental to initiate

and drive a suitable model for home care in Malaysia, along with needed budget

allocations, funding mechanisms, proper regulation and enforcement. The model should

enable equitable access to home care with recognised standards of care and treatment

modalities in place.

Additionally, further training programmes and professional standards could be

implemented to certify professionals and staff who would perform the home treatments

under the direction of the patient’s doctor.

Recommendations

21Medicines Prices Monitoring In Malaysia, Survey Report (2017). Available at :

https://www.pharmacy.gov.my/v2/sites/default/files/document-upload/medicine-price-monitoring-malaysia-2017-final-sep-18.pdf22Levine, D.M., Ouchi, K., Blanchfield, B. et al. J GEN INTERN MED (2018). Hospital-Level Care at Home for Acutely Ill Adults: a Pilot Randomized Controlled Trial. Available at:

https://link.springer.com/article/10.1007%2Fs11606-018-4307-z#Sec16 36 | EUMCCI Trade Issues & Recommendations 2019


Home Care treatment not only provides more comfort to the patients but it is also highly

beneficial for the national healthcare system through reduction of hospital costs: firstly, by

providing the necessary treatment services for the patients at home without the need of the

resources used in the hospital; which ultimately might reduce hospital readmission, since

studies have shown that healthcare costs for an acute care episode were 52% lower than

when acutely-ill patients received hospital care at home, as opposed to being placed in a

hospital bed22.

In order to foster a long-term benefit and to be a pioneer in Digital Healthcare, the Committee

recomends:

More investments to improve the necessary infrastructure for the ICT technologies to run

smoothlyand faster.

Proactivity and openness in the adoption of new solutions.

Integration and connectivity among stakeholders and industry players.

Adequate regulatory framework to promote digital innovation.

Application of a Cloud Management System, together with high-level protection security

services.

The Pharma industry seeks the government’s attention to:

inquire into healthcare expenditure more efficiently, this includes looking at overall

healthcare costs by therapeutic areas, reduce administrative costs and waste, and

improve efficiency.

support evidence-based care and empower patients and providers, backed by sound

research and quality measures.

avoid blanket policies that chill investment, and collaborate to find new approaches.

HUMAN RESOURCES

The EUMCCI Human Resources (HR) Committee aims to promote the importance of human capital in trade

in general and among member companies specifically.

The committee acts:

As an Advocacy Group – by gathering feedback and views from members on important and

pressing HR issues and channel them to the relevant government authorities for discussion and

due consideration.

As a Resource Group – by working to provide member companies with current and useful HR

related knowledge, skills and information through appropriate channels such as workshops,

seminars, surveys and training programmes;

As a Networking Group - by raising awareness on HR matters through meaningful activities and

events and to contribute to other committees in EUMCCI through regular networking or social

Background

In the recent 2019 Budget announcement, it was found that there are many other areas impacting on

human capital development. Therefore to counter such problems:

A. The Human Resource Development Fund (HRDF) will launch 2 new programs, “Apprenticeship”

and “Graduate Enhancement Programme for Employability” (GENERATE) to provide skills to

school-leavers as well as to increase the marketability of our graduates from the institutions of

higher-learning. HRDF will allocate MYR 20 million in matching grants for these programs which

will benefit at least 4,000 youths.

B. The government will also introduce MYR 30 million to the Training and Vocational Education and

Training (TVET) Prestige Fund, a contestable fund where we will encourage the various training

institutions to bid for funds to run competitive programs with specific KPIs on job placements for

the graduates. There will also be an additional allocation of MYR 20 million to raise youth

competency via a TVET sponsored Bootcamp (Refer to Federal Budget 2019, page 26, point

no.121)

C. On top of these measures, the government also intends to upgrade the marketability of our

graduates and the skill-level of the Industry 4.0-related workforce by providing double tax

deduction:

For scholarships and bursaries provided by companies to students enrolled for technical

and vocational training, diploma and degree courses in engineering and technology;

For company expenses related to participation in the National Dual Training Scheme for

Industry 4.0 and other related programs approved by the Ministry of Human Resources,

or the Malaysian Investment Development Authority;

For company expenses in carrying out structured training programs for students in the

fields of engineering and technology which are approved by the Ministry of Human

Resources.

Outlook in 2019

1. Lack/Shortage of skilled workers Every year, over 200,000 students graduate from institutions of higher learning in Malaysia. Nevertheless, 1 out of 5 graduates remain unemployed 6 months after graduation, with the majority being degree aholders. These graduates make up 35% of those who are unemployed in Malaysia.

Skills shortages occur more frequent for SMEs as they face a tougher time attracting good talents compared to MNCs due to the pre-assumed concern of wage disparity among job seekers. This translates into an imbalance that requires relevant engagement.



Issues / Challenges1. Lack/Shortage of skilled workers

Every year, over 200,000 students graduate from institutions of higher learning in Malaysia. Nevertheless, 1 out of 5 graduates remain unemployed 6 months after graduation, with the majority being degree aholders. These graduates make up 35% of those who are unemployed in Malaysia.



For example, EU-based Maintenance Repair & Overhaul (MRO) companies within the Malaysian Aerospace industry are facing a great challenge acquiring qualified and competent technicians for

employment to meet growing market demands.

2. Mismatch of skill sets due to expectations and working culture between talents and companies In the most general sense, skill mismatch is a situation where skills that are available in the labour

market do not match with the demand of the labour market. However, in an actual setting, it is

more complex than that and differs in each layer of the employment line:

Individuals face the complication of being either under-qualified or over-qualified

for a particular position.

Enterprises face the issue of determining the necessary and supplementary skills

needed for positions they need talent for.

Existing employees face situations where their skills are not fully utilised due to

lack of motivation or job satisfaction.

The concern for job seekers within the context of this issue is not the profile quality of the

organisation, but whether a company can give them an innovative project that can help them

develop their career competency and team-building capacity, where they can showcase and grow

their talents further. Talents prefer companies that can offer them employee-centric work culture

where they gain greater transparency in workflow, a nurturing atmosphere as well as flexible

working conditions. According to a report published by Khazanah Research Institute entitled "The

School-to-Work Transition of young Malaysians" which surveyed 23,785 respondents comprising

of young Malaysians and employers, it was found that youths within the ages of 15-29 today prefer

a work life balance rather than a high paying job.

On the other hand, in the case of organisations seeking talent, an applicant’s skill set is looked

upon with more stock as compared to academic accreditation, as there is a consideration on the

probable value that an applicant can add to an organisation. Also, according to a survey

conducted by Jobstreet, 65% of the employers pay less attention to the status of a particular

institute whether it is local or foreign.

3. Inadequate training or education to produce skills Technical and Vocational Education and Training (TVET) in Malaysia needs to be better streamlined

and organised. Currently, TVET in Malaysia involves at least 7 ministries with different and diverse

purpose, objectives, certification and recognition.

European Countries have their own governing agency that manages the TVET movement which is

known as CEDEFOP (which stands for European Centre for the Development of Vocational

Training). This makes a more effective execution as this body will be the authority that determines

the criteria, guidelines and is also responsible for crafting the frameworks that can be centralised

across government ministries and agencies, despite the variety of skill enhancement programmes.

Currently, there are several negative perceptions among secondary level students concerning

TVET, with the main perception being that the programme is a remedial programme for those who

are less academically capable rather than a skill development exercise or an alternative to

University. This becomes a case not only for Malaysia but for European countries such as Belgium,

Denmark, France, the Netherlands and Austria. TVET is looked upon as a less-favoured

contingency plan. Youths and several parents hold more preference towards the conventional

streamline of academic qualification, which causes for the lack of enthusiasm in participation for

TVET programMES. If the programmedoes not appeal to their interests, they are more likely to

disengage from it. Data from 2014 showsthat Europe is only 0.9 percentage points from its target

but that 4.4 million young people still did not complete upper secondary education. TVET, has a

higher rate of early leavers than general education.

4. Rise of the Gig EconomyThis concept refers to a paradigm where the operations of an organisation are undertaken by individuals

hired on contract basis rather than full-time employment. It is also defined as an environment where it is

common practice to hire freelancers for specific tasks or projects. This concept is manifesting rapidly in

Malaysia, especially with the surging rise of the digital economy and growing demand for more science and

technology-based skill-sets.

Organisations may find this to be advantageous as they are able to acquire talent with various skills that can

add value to a project or a task in a cost-effective manner. Additionally, these organisations can dictate

terms such as the length of the contract as well as specific working conditions that suit the flexibility of the

worker in exchange for their acquired services. There is a concern for the welfare of individuals who either

choose to opt for freelance work or those who have been offered independent contract positions since they

might not be eligible for several employee benefits, such EPF and SOCSO contributions.

The continuity of embracing the gig economy can have a negative effect as a large portion of the Malaysian

workforce would not only be in financial scarcity post-retirement, but would also see strong dependency on

social welfare programmes. The common short term duration of these contracts and lack of contributions

cause financial instability, which in the long run, may not be sustainable for the workers.

Although acknowledging that a National Education Policy Committee has been created, it is vital to

reform the syllabus for primary and secondary level education, namely:

The curriculum review should focus more on Science, Mathematics, Physics, English, as well as

on soft skills;

Course-centric rather than exam-centric;

Emphasis on practical & interactive learning.

Establishment of TVET as Individual Body with Centralised Framework

The committee would like to see TVET established as a single institution but will stretch its

engagements across government ministries and agencies, which also includes state-level

government.

A centralised framework allows for the increase effectiveness in execution, especially in terms of

facilitation of talent and centralised frameworks for various skill enhancement exercises

categorised as a TVET programme. This authoritative entity would handle content crafting,

promotion, certification, funding, as well as talent acquisition and channelling into the suitable

government entities.

This must be taken into consideration in situations where there are syllabus overlaps, complication

in certification processes for the various courses as well as the matter of funding for these TVET

programmes.

Recommendations



Promote TVET as an alternative to achieve academic qualifications

Changing the perception of TVET and bringing awareness on TVET as a serious and valuable

alternative for students who see less interest in conventional methods of attaining academic

qualification. Seeing as how TVET will then be fine-tuned in a more systematic manner with

sophisticated facilities and enhanced quality of training, it is possible to witness an increase of

participation, especially from youths that are aware of a more skill-oriented labour force demand.

Intensive & More Holistic Training for Educators in primary, secondary & tertiary level education

Increased focus on key subjects In terms of academic content for primary and secondary students, teachers should consider

strong emphasis on subjects such as English, Maths, Science and special programmes for soft

Skills, without side-lining subjects such as history or geography. The need to increase focus on

these subjects is to ensure the preparation of youths who will enter the labour force with

proficient use of the English language, fluency in Science & Technology as well as a fine-tuned

set of soft skills. This will allow the students to be more prepared and, especially, more aligned

and equipped to answer the demands of the industry.

Course-Oriented & Practical Learning Models The committee would also favour that Malaysian educators’ take on more course or

project-centric exercises and less exam-oriented models. While there has been traction for

secondary education recorded in 2014 when the Penilaian Menengah Rendah (PMR)

Examinations where replaced with the Pentaksiran Tingkatan Tiga (PT3), a much intensive

approach must be done to harmonise critical thinking and learning into formal education,

especially for primary-level learners. This suggestion might raise interest in their subjects as well as

in-class participation for primary, secondary and tertiary learning.

Course-oriented learning methods such as research assignments as well as practical in-class

tasks or mind-games give students hands-on exposure to the learning content and will allow for a

much easier way to comprehend a subject matter as opposed to memorising content from a

textbook in the pursuit of obtaining an ‘A’ for an examination paper.

Establishment of Provident Schemes for Freelance Workers

The new Malaysian government should monitor the development of this new trend of labour

force participation, with ready initiatives to facilitate it, being one important element to provide

similar mandatory and regular social and financial security contributions to these workers.

The execution of this initiative can also be complemented with promoting awareness on

financial planning for gig economy workers. This is to give a clearer view to the overall Malaysian

workforce on the labour climate in Malaysia, and to present an effective scheme for freelancer

post-retirement planning.

INTELLECTUAL PROPERTY RIGHTS

The IPR Committee’s most important consideration is to bring the attention of the Malaysian authorities

towards Intellectual Property Rights, in pursuit of a stable business environment.

The committee acts:

To advocate for the enhancement and administration of Intellectual Property Rights in Malaysia.

To establish more potent mechanisms that are advantageous to the interests of domestic and

global commerce.

To enable rights of stakeholders to improve their business strategies and operations as well as to

provide better protection for their corporate value.

Background

Malaysia is a member of the World Intellectual Property Organization (WIPO) as well as party to a number

of international treaties such as the Paris Convention, The Berne Convention, the Patent Cooperation

Treaty (PCT), and is in the process of amending the Trademarks Act 1976 to properly fall in line with the

Madrid Protocol - a procedural multinational system that provides a route for trademark owners to obtain

trademark registrations in numerous member countries by filing a single trademark application, as follows:

Patent Prosecution Highway (PPH) DevelopmentThe Patent Prosecution Highway (PPH) comprises of agreements between a number of countries

to help accelerate patent examination by allowing the results from a first Patent Office to be used

by a Second Patent Office. The Malaysian Patent Office already has bilateral agreements with the

Japanese Patent Office (JPO), European Patent Office EPO, and Chinese Patent Office (SIPO).

Madrid ProtocolThe Ministry of Domestic Trade and Consumer Affairs is in the process of repealing the Trademarks

Act 1976 and crafting a new Trademarks Act that allows Malaysia to fall in line with the Madrid

Protocol in 2019. In 2018, there have been a total of 32,481 applications coming from trademark

owners from various industries while 24,020 registrations were made until September involving

both local and international businesses. (Bernama News, 2018).

Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP) IP Chapter The CPTPP includes a comprehensive framework on Intellectual Property which complements

and is in line with standing treaties on Intellectual Property. However, certain provisions have been

suspended: patents & pharmaceuticals, copyright, and Internet Service Provider (ISP) liability.

On patents and pharmaceuticals, the parties agreed to suspend the TPP obligations on

patent-term adjustment and patent-term restoration, which required parties to adjust the patent

term in respect of patent office and marketing approval delays. The parties also agreed to suspend

all provisions dealing with data protection for small-molecule drugs and biologics, as well as

certain provisions on patentable subject matter to closely align with international standards under

the WTO Trade-Related Aspects of Intellectual Property Rights Agreement (TRIPS). (Government

Of Canada, 2018).

On copyright, the CPTPP suspends the original TPP obligation on the basis of protection for

copyrights and related rights and a provision on national treatment dealing with payment on

copyright and related rights, as well as provisions on technological protection measures (TPMs, or

“digital locks”) and rights management information (RMI, or “digital watermarks” on copyrighted

works). (Government Of Canada, 2018).

Outlook in 2019



On ISP liability, the CPTPP suspends obligations on legal remedies and safe harbours for ISPs. As

well, on IP rights enforcement, parties have agreed to suspend provisions in respect of encrypted

program-carrying satellite and cable signals. (Government Of Canada, 2018).

Regional Comprehensive Economic Partnership (RCEP) IP Chapter The RCEP also includes a comprehensive framework on Intellectual Property that similarly entails

stronger protection on patents, designs, and trademarks. An unresolved complication remains

which states that should the RCEP be implemented in developing countries such as India and

Myanmar, access to pharmaceuticals will be reduced due to the banning of cheaper copied

generic drugs. This calls for a need to implore ministries such as the Ministry of Domestic Trade

and Consumer Affairs or the Ministry of International Trade & Industry to provide consultation to

stakeholders (especially within legal practice) concerning the participation of Malaysia within the

RCEP.

1. Awareness of Customs towards Intellectual Property

The Royal Malaysian Customs Department plays an instrumental role in carrying out enforcement tasks

against offences involving Intellectual Property Rights. Malaysian Customs are also mandated to ensure the

protection of Intellectual Property Rights under the Trade Marks Act 1976 - section 70-C to 70-O. Despite

the current review of the IP legislation and the enhanced efforts of the government, IPR enforcement still

remains a concern, particularly at the border. There is widespread availability of IPR-infringing goods in

Malaysia in both physical and online markets. The widespread availability of such goods in physical markets

is prevalent in places such as Batu Ferringhi Night Market (Penang), Petaling Street (Kuala Lumpur) and

Low Yat Plaza (Kuala Lumpur), which are popular with both locals and tourists alike. (European

Commission, 2018)

2. Policy Implementation

Among the angles that can be considered is to enforce legal provisions for design infringement in a criminal

and not just civil matter, and hence provide for wider enforcement options. There is also the tediousness of

having to satisfy certain criteria for filing a complaint on breaching of the Trademarks Act 1976. Information

such as estimated time and date of a suspected cargo carrying counterfeit shipments must be known

first-hand, including the name and number of both the ship and the container. This has exacerbated

enforcement which in turn has caused rampant cases for distribution of counterfeit goods around Malaysia.

Despite having the Trademarks Act 1976, The Patents Act 1983 and the Patents Regulations 1986,

Industrial Designs Act 1996 and Industrial Designs Regulations 1999 in place, there is still an opportunity

to fortify the protection of Intellectual Property in Malaysia by taking into consideration the effectiveness of

the current regimes in place.

3. Malaysia as a Validation State for European Patents

Around the period of March to April 2018, the European Patent Office visited MyIPO to determine

Malaysia’s interest in becoming a validated state for European Patents. Cambodia has recently

implemented the relevant legislation which states that when a European patent is granted, it can be put into

effect in Cambodia. Malaysia, in contrast to Cambodia, is relatively advanced and has had a Patents Act in

place since 1986, whilst providing for full examination of patent applications for the past 30 years.

Implementing the EPO Validation system would seem to undermine MyIPO’s role as a national examining

body for patent applications and also adversely affect the growth of the local patent agent profession

(reducing decapacity to handle work for local companies). The commitee’s view is therefore to reject this

initiative.

Issues / Challenges

1. Increased government effort towards IPR ProtectionThe Government needs to improve the strength of border measures through stern custom control and

legislations.

2. Create stronger awareness for CustomsThere is a need for stronger encouragement for customs and local authorities to participate in training with

the IPR Committee. This will increase awareness on IPR as well as to chart enforcement on IPR

transgressions effectively. There is room for improvement on the degree of comprehension towards

Intellectual Property and authorities can further strengthen their understanding on the complexities of

Intellectual Property issues, in the pursuit of more effective enforcement.

3. Increasing platforms for dialogueThere is a need for frequent engagement among stakeholders on potential legislative changes within

Intellectual Property Rights.

4. Expanding Malaysia’s international commitment towards IPRMalaysia has not yet ratified the Madrid Protocol (Relating to the Madrid Agreement Concerning the

International Registration of Marks), the Geneva Act of the Hague Agreement Concerning the International

Registration of Industrial Designs and the 1991 Act of the International Convention for the Protection of New

Varieties of Plants (UPOV 1991). (European Commission, 2018). It would be strategic for the government to

communicate with stakeholders on the feasibility of implementation of these agreements which may improve

the outlook of the international community towards Malaysia as a conducive platform for IPR protection.

Recommendations

Since 2017, Malaysian officials have invested in greater resources to combat online piracy and have

sustained their efforts to deny access to piracy websites, taking down IP infringing content on sites, and

conducting raids and arrests of Malaysians either operating or posting links to sites with pirated content.

Malaysia has also introduced IP enforcement coordination mechanisms and agreements to enhance

interagency cooperation. Additionally, they have assembled an interagency Special Anti-Piracy Task Force to

tackle matters regarding the distribution of counterfeit and infringing goods, as well as the Special Internet

Forensics Unit (SIFU) in Malaysia’s Ministry of Domestic trade, Cooperatives, and Consumerism responsible

for IP enforcement.




The EUMCCI Logistics Committee acts as a representative body of the logistics industry in Malaysia and as

a united voice from both large and SME logistics companies in the country. The vision of the Committee is

to promote, support and improve logistics efficiency in Malaysia, as well as to facilitate trade, logistics and

investments between the EU and Malaysia.

The objectives of the Committee are: To promote long term sustainable logistics and infrastructure in order to give Malaysia a competitive

edge in ASEAN.

To discuss relevant issues and means to resolve them or at least minimise their impact.

To advocate better policies to reduce stumbling blocks and constraints of the logistic industry through

advocating strategies via seminars, forums and dialogues.

To visit operators of the sector and to conduct a regional survey on logistics processes and costs.

Background

The Logistics Committee focuses on the following priorities:

According to the consulting firm PWC23, the logistics sector in Malaysia has a positive outlook driven by

several factors including increasing freight volumes, improved logistics infrastructure and structural growth

in e-commerce. Government initiatives such as the Logistics and Trade Facilitation Masterplan present

attractive opportunities for logistics players in the country to benefit from greater ease of doing business.

Furthermore the thriving e-Commerce sector and establishment of the DFTZ will propel Malaysia as a

regional logistics hub for e-Commerce players, with a projected CAGR growth rate of 11% for the

e-Commerce market.

There is also a growth in the niche segment, in particular cold chain trade, driven by healthy margins,

increasing demand for perishables and lesser competition, as well as a recent wave of consolidation in the

logistics market.

Outlook in 2019

1. Impact of Waste Management Massive waste flows and circulation have been changing the dynamics of waste management on a global

scale. In the West, some countries have long established and implemented recycling programmes for many

years. Others have spare waste and wish to ship it somewhere else.

On the other side, there are countries in Asia, namely Malaysia, who do not have waste segregation

platforms in place (with an estimation of only 15% of plastic being recycled, for example) but have demand

for more (recycled) plastic from manufacturers.

Issues / Challenges

23“Logistics in Malaysia”. PwC Malaysia (2018). Available at:

https://www.pwc.com/my/en/assets/blog/pwc-my-deals-strategy-logistics-in-malaysia.pdf

LOGISTICS

In Malaysia, Ministry of Housing and Local Government has decided to freeze approved permits on plastic

waste import in July 2018, for a period of three months. A levy on plastic imports of MYR15 per tonne was

then introduced in October 2018, especially in light of China banning plastic waste imports into their

country in 2017. Permits that were issued previously lacked monitoring and, in turn, had been causing

environmental and health issues in the recycling operators’ areas. As a consequence, the logistics sector

has been met with tighter import regulations and licensing, and more control monitoring, which in turn has

caused a reduction of volume due to the limitations and fluctuating regulations. This has resulted in plastic

containers being left at terminals, subsequently incurring additional costs. Warehouse prices, together with

rent have increased, affecting local players causing the market to become more unstable.

2. Business Competition on the Freight Forward Industry in MalaysiaThe Freight Forwarding Industry in the country has been subject to unfair competition by companies who

are surpassing the licences to get more business, and therefore, also resulting in unfair price competition.

3. Urban LogisticsCity logistics will become increasingly crucial for the future of Malaysia’s fastest growing metropolitan area:

the Klang Valley. The Klang Valley is expected to grow from its current 7.2 million population to an estimated

10 million in 2020 and 20 million in 2030. Congestion, road safety and traffic management are already key

concerns of the Government in the Klang Valley today. The increase in e-commerce (B2C and B2B),

convenience stores and other nano-stores (small outlets), will result in frequent and thinner cargo flows to

the city. This will lead to an exponential growth in traffic on roads in the Klang Valley over the next 15 years,

impacting not only congestion but contributing to very high air pollution levels. Therefore, it is imperative

that transportation to and within the city is better organised in order to avoid a so-called traffic infarct.

Recommendations

1. Impact of Waste Management To ensure that operations in the Logistics sector are able to resume smoothly, the EUMCCI Logistics

committee believes that the first step is to have close monitoring of illegal recycling operators. As the

primary source of the issue, these errant operators are not only damaging the reputation of the logistics

industry, but the health of the population as well. Secondly, with the first recommendation addressed, the

committee recommends the lift on the levy on plastic imports so that the importing businesses can run

smoothly, without constraints and delays.

2. Business Competition on the Freight Forward Industry in Malaysia Stricter control and monitoring by the authorities should be conducted to address this issue. In order to

best protect the legally established and qualified freight forwarders who are getting their business affected,

it is essential to have tighter screening of the Customs Licences by the necessary authorities.

3. Urban Logistics There are several opportunities for logistics service providers in the coming ten years. They are at least three

times more efficient compared to their own means of transport, as they are better able to:

Consolidate different cargos to the city.

Have distribution centres.

Transport larger volumes in more efficient vehicles.

Organise return cargo.



Hence, logistics service providers will be the key partner in solving the logistics to and within cities, as

opposed to owned cargo trucks (by manufacturers, traders and retailers). The Committee suggests:

Only logistics service providers should have a permit to enter Kuala Lumpur city centre with a cargo

truck or van during the daytime (7:30 am until 7:30 pm), whereas own trucks and vans are only able

to deliver outside these hours.

Introduction of electric and 100% biodiesel cargo vehicles for delivery of goods in the city as a

solution to address air pollution in the capital. These electric and 100% biodiesel vehicles could be

granted special privileges in the city over the conventional petrol and diesel trucks as a sort of

incentive to make the investment of these new vehicles financially attractive for the industry. An

example of one of these special privileges is that only electric and biodiesel cargo vehicles are

permitted to enter Kuala Lumpur city centre during peak hours, which would allow for better vehicle

efficiency. On the other hand, demand for green logistics could be supported by the introduction of

a ‘GREEN KL’ logo - which stores can display when supplied by only green cargo trucks. In order

to spearhead this initiative, the government and GLCs should lead by example.

Logistics service providers to invest in advanced planning software that allows them to have a

higher utilisation of their trucks and minimise empty kilometres driven. Dynamic traffic management

is the future, which is based on current traffic conditions, and deliveries to certain areas in the city

are postponed to a later time due to the heavy traffic and quieter areas are delivered to first. This

requires integration between the traffic management system of a city or private party (such as Waze)

and the ICT system of a logistics service provider.

Perhaps it is time to test various city logistics concepts through practical pilots. A collaboration

between various key stakeholders such as local government & authorities, logistics service

providers, universities and various relevant industry associations, could work together to test pilot

the concept. Once tested, these solutions can be implemented in the Klang Valley and replicated in

other big cities in Malaysia, such as Penang, Johor Bahru, Kuching and Kota Kinabalu.

Both Germany and the Netherlands have implemented best practice urban logistics solutions in their big

cities. These countries have implemented city distribution centres to better orchestrate cargo flows to and

from big cities. From these city distribution centres, collection from and distribution into the city is done by

electric vehicles as well as bicycles (driven vehicles) for the last mile. This not only increases efficiency of

urban logistics, but makes it more sustainable, as well as improves road safety by moving big trucks off the

road.


BackgroundTransparency International’s Corruption Perception Index for 2018 ranked Malaysia as number 61 over 180

countries with a score of 47 out of a 100, with 0 indicating the score for most corrupt nation and 100 being

corruption free. The score for Malaysia has remained unchanged since 2017 and reflects a growing

concern for both local and foreign entities conducting operations in Malaysia. These scores indicate that

while there have been several governmental efforts to eradicate corruption through policy change and

enforcement, the traction on the outcomes has proved to be minimal, if it can be identified at all. Corruption

and unethical practice can come in many forms and can be practiced at every level of governance through

bribery, embezzlement, extortion, cronyism, nepotism and graft, among others.

It is imperative that Malaysia, a country striving to achieve economic, political and social excellence, takes

heed of the conditions of institutional integrity and identifies strategic and effective measures to mitigate

corruption. This is needed to promote and attract Foreign Direct Investment to Malaysia and for the

business community to develop suitable practices to operate in the country.

MissionTo advocate for integrity and transparency as key values in all forms of interaction between the private

sector and ministries, agencies and government-linked companies.

VisionTo ensure that the business climate in Malaysia becomes one that centralizes transparency and integrity for

both the private and the public sector within all areas of governance.

Aims of the Committee To remove barriers to Foreign Direct Investment related to corruption;

To reduce the business risks for companies operating in Malaysia.

To drive transparency with respect to government actions and initiatives.

To eliminate political interference in business operations.

To ensure that strategic collaboration between local business partners are established on the basis

of merit and value delivery.

To advocate for the streamlining of business licensing and permits.

To promote clarity & transparency in the structure of Government-Linked Companies (GLC’s)

regarding beneficial ownership, anti-money laundering and anti-terrorist financing.

To support strategic preparation efforts to materialise the succession of the Comprehensive and

Progressive Agreement for Trans-Pacific Partnership (CPTPP), formerly known as the Trans-Pacific

Partnership (TPP), as well as the Malaysia European Union Free Trade Agreement (MEUFTA) with

regards to transparency and integrity.

TRANSPARENCY & INTEGRITY

The Transparency & Integrity Committee was also subject to reconfiguration, therefore, presented the

following Strategic Plan:



Areas of priority / Action Plan Conduct research on areas related to transparency & integrity, particularly related to the interface

between the Government and business community in Malaysia.

Carry out analysis on relevant topics within the scope of transparency & integrity.

Identify and develop policies and procedures intended to address the issues identified through

research and analysis.

Present policies and procedures to the relevant government representatives, with a request for

action and monitor the outcomes.

In conjunction with the BIA, organise Best Practice Sessions to strengthen transparency and

integrity in Malaysia.

2018 saw significant changes to the private sector corruption landscape in Malaysia. Corporate liability

legislation for acts of corruption committed on behalf of the company was introduced for the first time under

the MACC (Amendment) Act. Furthermore, the newly elected Government has made combating corruption

a priority, as revealed in the National Anti-Corruption Plan launched by the Prime Minister on January 29,

2019. These changes have made transparency and integrity increasingly significant for companies

operating in Malaysia.

Discussions with multinational companies operating in Malaysia have revealed an alarming number of

cases where abuses of power occur on an ongoing basis, particularly in the areas of government

procurement, joint-venture companies and interactions with government departments where licences,

permits and other approvals are required. These cases are not only stifling the ability of companies to

operate effectively in Malaysia, but are also impacting the country’s competitiveness as a destination for

foreign investment.

With these issues in mind, the European Union-Malaysian Chamber of Commerce and Industry has set up

its Committee for Transparency & Integrity. The Committee will work towards the goal of identifying the

nature and locations of abuses occurring, communicating these issues to government partners, and

formulating recommendations which will assist policy makers in resolving these matters.

Current Scenario & 2019 Outlook

The EUMCCI Wines & Spirits Committee was established in 2011 and comprises market leading

companies engaged in the importing and selling of wines & spirits in Malaysia. The members represent

more than 50 premium brands of wines & spirits imported and consumed in Malaysia and are the main

wines & spirits players in the country.

The objectives of the Committee are:

To represent the international wines & spirits industry and to serve as an effective platform and

focal point for addressing all issues affecting the imports and sales of wines & spirits in Malaysia.

Formulate joint policy responses to the authorities to facilitate market access by improving and

enhancing the efficiency of the alcohol tax regime.

Collaborate with relevant government authorities to address issues pertaining to contraband and

counterfeit wines & spirits, and to recommend measures to curb them.

Engage with the Ministry of Health in regards to Food Regulations and to provide

recommendations on regulations concerning wines & spirits.

Background

In 2019, the Committee will continue to:

Engage with the relevant government authorities to provide policy responses and inputs to

improve market access and regulations concerning imported wines & spirits. The Committee will

also carry on supporting the government’s efforts to combat illicit trade in alcoholic beverages,

maximise revenue collection by the Government and protect the interest of legitimate operators.

Work closely with the Ministry of Health to review and update the regulations and standards for

wines & spirits in Malaysia’s Food Regulations 1985.

Seek the support and collaboration of relevant stakeholders in the business sector to address

taxation and other issues affecting wines & spirits.

Work closely and seek support of the EU Delegation and major EU Embassies to represent issues

of interest to the government authorities.

Outlook in 2019

1. Taxation and Illicit TradeThe tax burden on imported wines & spirits is one of the highest across Asia. The tax (import duty + excise)

on brandy and whisky for instance, is MYR 88.50 per bottle of 75cl before sales tax. The imposition of the

10% sales tax from 1 September 2018 has further exacerbated the already high tax burden. The sales tax

is levied on the combined amount of the customs value (c.i.f) of the product, import tax and excise duty.

The imposition of a tax on tax is tantamount to double taxation. With the 10% sales tax, the total tax burden

on imported wines and spirits has increased by about 12% to 40%, for spirits such as brandy and whisky,

depending on the customs value of the product. Such high tax burdens are creating an even greater profit

incentive for contraband and counterfeit trade.

Issues / Challenges

WINE & SPIRITS



Illicit trade in wines & spirits is a serious and major problem in Malaysia. Illicit trade refers to:

Counterfeit products which are fraudulent imitations of legitimate branded products. They are

made from ethanol or even harmful liquids like methanol, or cheap imported spirits. They are

passed off as high-quality branded products which earn illicit operators an exorbitant profit.

Contraband products which are smuggled into the market, evading import and excise duties and

other internal taxes.

The high taxation on alcoholic beverages only encourages smuggling and local production of adulterated

and counterfeit products. These illegal activities will have a significant impact on:

Government revenue - substantial loss not only from import & excise duties and other internal

taxes, but also from other sectors such as tourism and food & beverages.

Legitimate businesses - due to the loss of consumer confidence in branded products and reduced

sales in the formal market. This will not only bring damage to their reputation but also to business

income of legitimate producers, distributors and retailers.

The health of the consumers - as counterfeit products are mostly produced under unhygienic

conditions using harmful raw materials.

Growth and investment - as a reduction in the formal and tax paid market will bring negative

impact on jobs, investment climate and tourism.

While there is no actual data on the magnitude of the illicit trade, according to a recent study by WHO in

2018, unrecorded alcohol makes up nearly 45%24 of total alcohol consumption in Malaysia. Unrecorded

alcohol is defined as alcohol which is not taxed and is outside the government's regulatory system

including smuggled alcohol and counterfeit alcohol.

Consumers are exposed to adulterated and counterfeited products which are produced under unhygienic

conditions. In some cases, there is use of harmful raw materials such as methanol - a cheaper form of

alcohol used as industrial solvents - which carries significant health issues and can be fatal, as evident in

the alcohol poisoning cases in September 2018. Original bottles containing alcohol are assigned lot codes

which contain “traceability information”. When substitute spirits are refilled into empty original bottles, these

lot codes are “decoded” to prevent tracing. These counterfeit spirits are commonly sold in the black market

together with contrabands and make for a very lucrative business for counterfeiters.

A reasonable tax level would not necessarily mean an increase in alcohol consumption but rather, transfer

consumption from illegal to legal products. This in turn will protect consumer health as well as induce a

positive impact on tax collection. High taxes do not necessarily lead to bigger revenues for the Government

if they are excessively high, instead it allows for smuggling and counterfeit businesses to further flourish. We

note that the government recognises the substantial revenue loss from illicit trade. The Minister of Finance

during the presentation of the 2019 Budget in the parliament had indicated that the government hopes to

collect at least MYR 1 billion from uncollected taxes through customs efforts in order to combat smuggling

and illicit activities.

24World Health Organization (2018). Global Status Report on Alcohol and Health.

Available at: http://apps.who.int/iris/bitstream/handle/10665/274603/9789241565639-eng.pdf?ua=1

Brandy & Whisky

Vodka, Gin, & Rum

Still Wine

Sparkling Wine

Compounded Hard Liquor

Total Tax

per bottle

75cl

MYR

Excise

Duty

Import

Duty

88.50295150145

86.30288150138

18.8020815058

57.80642450192

6.6060600

Product

MYR per LPA MYR per LPA MYR/LPA

Total

Tax

Table 05: Total of tax burden per bottle 75cl

2. Excise Tax RegimeThe reform of the excise tax regime in March 2016 to a specific tax regime based on alcohol content was

a positive step and is in line with international best practices. However, the specific tax level is very high,

and there are still some inconsistencies in the tax regime. Products that belong to the same category are

subject to significantly different tax rates, in particular on the following:

2.1 Sparkling WineThe already steep excise duty on sparkling wine was further increased to MYR 450 per litre of pure alcohol

(LPA) in the revised excise tax regime. The excise tax is three times higher than still wine, although both

products belong to the same category of wine. When the import duty is added, the total tax burden is

MYR 642 per LPA, which is significantly higher even compared to Singapore's (S$88 per LPA or equivalent

of MYR 265 per LPA), which has one of the highest taxes in the region.

Sparkling wine belongs to the category of wine, and is differentiated essentially because the wine contains

carbon dioxide generated during fermentation. Under Malaysia's Food Regulations 1985, still wine and

sparkling are covered under the same standard for wine, i.e. Regulation 362.

The high excise tax is apparently on account of the perception that sparkling wine is meant to be consumed

for celebrations. There are in fact varying price points to cater for several consumer levels for sparkling

wines, which are appreciated and enjoyed like any other wines. However, in Malaysia the very high tax on

sparkling wine has artificially inflated the prices of sparkling wine in comparison to still wine. In some local

cultures, wine is meant to be paired with meals, and is becoming more common as a lifestyle. If Malaysia

wants to establish itself as a key tourism destination, access to wine consumption at affordable prices is

essential for the development of the tourism and food & beverage industries.

2.2 Compounded Hard Liquor (CHL)There is a significantly lower excise tax in favour of locally produced compounded hard liquor (CHL), which

belongs to the category of spirits. Although the excise tax on CHL was increased to MYR 60 per LPA in

December 2016, it is still substantially lower than the MYR 150 per LPA on imported spirits, which is not in

compliance with World Trade Organisation (WTO) rules. Four previous WTO Dispute Settlement cases

(Japan 1996; Korea 1999; Chile 2000; and Philippines 2012) determined that all spirits are at least in direct

competition or substitutable. The internal tax structure should not impose different and discriminatory tax

rates on different spirits but should all be taxed at the same rate and on the same basis.

3. Enforcement Action and PenaltiesThe committee welcomes the recent amendments to the Customs Act 1967 and the Excise Act 1976

which enhance the penalties for smuggling and the sale of contraband goods. It is also encouraging to note

the commitment of the Customs authorities to curb revenue loss through greater enforcement measures,

and the setting up of an internal investigation unit by customs to monitor and report on corruption and

wrongful use of power within customs.

Besides addressing smuggling, we also look forward to sustained and coordinated enforcement action by

relevant authorities against counterfeit production activities and trade. Under the umbrella of the Interna-

tional Federation of Spirits Producers (IFSP), international spirits companies and brand owners have been

working together with Malaysian enforcement authorities to tackle counterfeiting and take action in accord-

ance to relevant local laws.

The committee is of the opinion that the actual fines for counterfeiting under the Trade Descriptions Act

2011 are too low. In view of the high health risks associated with illicit and counterfeit products, there

should be harsher penalties and speedier conviction of offenders. Cases regarding “decoded” lot codes do

not even carry penalties, as currently there are no laws to prohibit or penalise its tampering or removal.



4. Regulations on Wines & Spirits

4.1 Updating Regulations on Wines & Spirits in Food Regulations 1985The regulations on wines & spirits in Malaysia’s Food Regulations 1985 should be updated to be in line with

international standards and product developments. This is to avoid regulations from becoming barriers or

disruptors to trade; for example, in the case of flavoured vodka products. In October 2018, the Ministry of

Health declared that vodka products which contain flavouring substances are not allowed to be sold in

Malaysia on the grounds that there is no provision for the addition of flavouring substances in current

regulations on vodka. This is despite the fact that the flavoured vodka products which are produced in strict

adherence to safety product standards in compliance with EU regulations, are sold in all international and

regional markets.

The committee had submitted in July 2018 specific proposals to review and update the

regulations/standards for spirits in the Food Regulations to bring them into line with current international

standards. However, the amendments process may take up to the end of 2019.

Recommendations

Taxation and Illicit Trade Further considerations should be given to the following:

a) Review of Tax Regime

Undertake an assessment of the tax regime with a view to lower the excise taxes in order

to reduce the price gap between legitimate duty-paid and duty-unpaid products and

ultimately drive consumption away from the black market.

b) Harmonisation of Excise taxes

Alcoholic products in the same category should be taxed at the same rate.

The excise duty on sparkling wine is three times that of still wine, although both belong to

the category of wine. This is apparently on the account that sparkling wine is a product

meant solely for celebrations. Affordable good quality wine would also be in line with

Malaysia’s intention to attract high yield visitors and cement Malaysia as a leading

destination for business tourism.

The excise tax discrimination between imported spirits and locally produced

Compounded Hard Liquor, which is subjected to a lower excise rate of MYR 60 per LPA

compared to MYR 150 for imported spirits. This is not in compliance with World Trade

Organisation rules.

We are prepared to work with the authorities on the rationalisation of the tax regime to help stem the illicit

trade of wines & spirits and enhance tax revenue. This should be complemented by sustained and effective

enforcement efforts by Customs and the other enforcement bodies, in particular the Ministry of Domestic

Trade and Consumer Affairs and the Police.

Enforcement and PenaltiesThe committee commends the commitment of customs to enhance enforcement to reduce revenue

leakages, and the recent amendments to the Customs Act to increase penalties for smuggling. In this

connection we wish to suggest the following:

More sustained, effective and coordinated enforcement activities to tackle smuggling and

counterfeit activities. In light of the recent fatal methanol poisoning cases, harsher penalties should

be meted out to offenders to deter illegal activities.

Speed up the process for court action and conviction.

Operating licences of businesses involved in the sale of illicit products should be suspended during

investigations, and blacklisted from reopening or restarting a new business if there is evidence of

implication in the sale of illicit products. With the increasing number of independent liquor stores

with alcohol licences issued by local authorities, there is a need for stringent and regular

surveillance to ensure that such stores are not involved in illicit activities.

There should be rigorous vetting by Royal Customs in the issuance of import licenses, particularly

to new applications or licensees with poor track records. This is to ensure that importers bring in

products from legitimate sources and are genuinely authorised to import the branded products.

Introduce Regulations to prohibit the tampering, removal or defacing of lot codes affixed by the

manufacturer/brand owner on packages of wines & spirits products. Traceability is considered a

key risk-management tool as it provides authorities and the public with a good quality and safety

assurance system. Unfortunately, lot codes in Malaysia are increasingly being undermined by

counterfeiters and smugglers who decode the lot codes. Currently, there are no laws to prohibit or

penalise its tampering or removal.

In view of the tragic deaths of more than 40 people from consumption of counterfeit products with

high levels of methanol, we urge the authorities to put a task force in place to conduct regular

laboratory tests on suspected counterfeit products.

Online Platforms – Sale of Illicit ProductsE-Commerce delivers a comprehensive range of benefits to retailers, merchants and consumers while also

granting authorities the possibility of greater oversight over transactions. However, online platforms also

enable contraband and counterfeit alcohol products to be easily sold to consumers. For instance, a tell-tale

sign of this can be the low retail prices quoted for branded imported products. Given these developments

we urge the Customs:

To only allow importers, distributors or retailers which meet the conditions for a liquor business and

have the required licences, to engage in online sales of alcohol products.

To closely monitor online platforms and hold the owners accountable for sale of illicit alcohol

products.

Tax StampsA supposedly improved tax stamp system was introduced by the government in 2015 as part of efforts to

ensure tax compliance and curb sales of contraband and counterfeit products. Despite the improved

security features there appears to be issues of fake tax stamps in the market. Many countries have

abandoned tax stamps because they were determined to be ineffective, costly, very easy to counterfeit,

and create a false sense of confidence to consumers. The tax stamp system also imposes a

disproportionate administrative and cost burden on both the government and legitimate business

operators. It would be timely to make an assessment of the effectiveness of the tax stamp system in

combatting illicit trade in wines and spirits.

After the approval of the annual import licence, importers in addition have to apply to Customs for a tax

stamp stickering permit (lesen untuk melekatkan stem) before tax stamps can be purchased to clear

imports. This is an unnecessary additional layer and is a burden to both the customs officials and the

importers. We suggest that an approved import licence with a validation of one year be adequate without

the need for an additional approval of a tax stamp stickering permit.

Food Regulations on Wines & SpiritsTo facilitate the trade of businesses and to ensure that they do not become barriers to trade, we urge the

MOH to expeditiously review and update the regulations on wines and spirits in Malaysia’s Food

Regulations 1985 so that they are in line with international standards and product developments. The

Committee has submitted specific proposals and is prepared to work closely with MOH on this matter.

The Committee members carry out responsible advertising and marketing in compliance with local laws and

regulations. They also strictly adhere to regulations that require alcoholic beverage companies to have a

health warning label on the packaging of alcoholic beverages, stating “Meminum Arak Boleh Membahayakan Kesihatan” (Alcohol Consumption May be Harmful to Health).



SERVICES LIBERALISATIONIN MALAYSIA :A POLITICAL ANALYSIS



MARKET REPORTSMARKET REPORTS

CONTENTSCONTENTSForeign Participation in Service Sectors in Malaysia.........................................................................057

Barriers to Foreign Participation in Services.....................................................................................057

Methods of liberalisation..................................................................................................................058

Government, private and foreign participation in the telecommunications sector.............................060

Universal service obligations............................................................................................................062

Spectrum allocation........................................................................................................................063

Prospect of further liberalisation.......................................................................................................063

Financial Services in Malaysia..........................................................................................................064

Insurance........................................................................................................................................065

Other Restrictions...........................................................................................................................065

Government and private/foreign participation in the financial services sector...................................066

Prospects for further liberalisation...................................................................................................066

Airports...........................................................................................................................................068

Air services.....................................................................................................................................068

Government and private/foreign participation in the air transport sector...........................................069

Prospect for future reform................................................................................................................069

Ports...............................................................................................................................................071

Government and private/foreign participation in Malaysian ports.....................................................071

Shipping Services...........................................................................................................................072

Prospects for future liberalisation.....................................................................................................073

................................................................................................................................074

..........................................................................................................................................075

..................................................................................................................................077

IntroductionThis paper assesses the extent of services liberalisation in Malaysia, focussing on four key sectors: financial

services, telecommunications, air transport and maritime transport. In each case we consider the current

level of liberalisation from the perspective of foreign service providers and investors. We then consider the

likelihood of further measures to liberalise these services, including both unilateral, autonomous measures

on the part of the Malaysian government and through bilateral and regional trade agreements.

Foreign Participation in Service Sectors in MalaysiaForeign participation in Malaysian service sectors occurs through the cross-border trade in services,

whereby foreign entities outside of Malaysia supply services into Malaysia, and foreign direct investment

(FDI), whereby foreign entities outside of Malaysia establish or take controlling stakes in Malaysian entities

in order to provide services within Malaysia.

According to the Ministry of International Trade and Industry (MITI) in the first quarter of 2018, the services

sector had contributed almost 53.8 per cent to GDP, equivalent to US$ 47.1 billion, implying that the

services sector played a highly important role in the country’s economy (MITI, 2018).

In 2017, Malaysia’s total trade in services was US$ 78.9 billion, with total export value of US$ 36.8 billion

and total import value of US$ 42.1 million. The preliminary results of the economic report by MITI (2018),

also showed that in 2017, the total value of export of services was US$ 37,010.7 million, where the value

of export of financial services is US$ 537.4 million, telecommunications, computer and information services

sector contributed US$ 2,672.9 million and transport services sector generated export value of US$

4,496.2 million (MITI, 2018).

In terms of imports, the total import value of services in 2017 was US$ 42,316.0 million, where the financial

services sector had contributed US$ 555.0 million, telecommunications, computer and information

services contributed US$ 3,032.8 million and transport services contributed US$ 11,370.0 million to the

total import value of services in 2017 (MITI, 2018).

Foreign Participation in Service Sectors in MalaysiaService sectors in Malaysia are to some extent liberalised, allowing for a high degree of foreign participation,

but a number of restrictions remain. Resistance from local players partly contributes to the slow process of

reform. For example, professional associations, of lawyers, nurses, architects and doctors still oppose freer

mobility of professionals from abroad, despite conclusion of many free trade agreements (Alavi et al, 2016).

The barriers to entry for foreign service providers typically take the following forms:

(i) Foreign equity restrictions, which limit the extent to which foreign entities can hold equity in service

providing entities in Malaysia;

(ii) Conditions on the form of entity available for ownership by foreign entities;

(iii) Domestic regulation, such as licenses which can act as a barrier to service providers; and

(iv) Discriminatory conditions, where local providers are given explicit advantages in the market place.

These barriers often exist in order to deliver policy objectives, particularly to develop “infant industries” in

Malaysia which might not withstand competition from overseas, and to ensure Malaysia sovereignty in

sensitive areas. Liberalisation and increasing the scope of foreign participation can be seen as undermining

these objectives.

When assessing the level of liberalisation and foreign participation in service sectors in Malaysia it is

important to recognise the significant role that the government takes directly through a range of different

interventions, which as a result mean that the major incumbent service providers are not simply local

Malaysian providers but are often Government Linked Companies (GLCs). The government’s presence in

the economy is significant: from 2011 to 2015, the government’s share in the Kuala Lumpur Composite

Index (KLCI) increased from 43.7 per cent to 47.1 per cent (Wan Jan, 2016). The reasons for the heavy

presence of the government in the economy are various and historical, in particular they reflect the

Malaysian government’s attempts to develop Malaysia’s industrial base and increase equity held by the

Bumiputra ethnic group.


In practice, GLCs have in many cases failed to deliver on these objectives. In addition, GLCs have served

to channel resources to well-connected politicians and supporters of the government, including when the

government has nominally divested its holdings through privatisation (Gomez, 2018). It is important to

address the issue of GLCs when considering if further liberalisation of services in Malaysia is likely as they

reflect the government’s belief that direct holdings in these sectors are necessary for policy and suggest

that liberalisation of these sectors can therefore be more challenging. This is further compounded by the

risk that local vested interests connected to GLCs will resist change that allows a greater degree of foreign

ownership or competition. The current government’s future policy with respect to GLC and government

held equities is unclear. On the one hand, Finance Minister Lim Guan Eng has promised divestment of

government held equities to improve liquidity in capital markets and support private sector development.

However, the Mid Term Review of the 11th Malaysia Plan stated the government’s ongoing commitment to

acquiring assets in the interests of promoting Bumiputera equity. In this paper, we will consider the extent

of the government’s presence in the sectors under review and how this might affect the prospects for

further liberalisation.

Methods of liberalisationLiberalisation of services in Malaysia has historically occurred through a combination of unilateral,

autonomous measures by the government and commitments made in bilateral and regional Free Trade

Agreements (FTAs). Unilateral measures have often been taken in order to stimulate economic growth

through attracting higher levels of foreign investment or achieving policy objectives in specific sectors, such

as developing Malaysia as an Information and Technology hub. In practice, the most significant liberalisation

efforts have occurred through this unilateral route. Since 2009, the government has liberalised foreign

participation in the services sector with the objective of attracting more foreign investment. 27 services

sub-sectors were liberalised on 22 April 2009, with no equity conditions imposed. The government then

further liberalised an additional 18 services sub-sectors in 2012 to allow up to 100 per cent foreign equity

participation. These sub-sectors are listed at Annex 1.

In addition to unilateral efforts, Malaysia has made certain commitments to liberalise services through

international trade agreements. The starting point for Malaysia’s international services commitments are its

commitments and exemptions under the WTO General Agreement on Trade in Services (GATS). Malaysia

submitted its schedule of commitments to the WTO in 1994, with subsequent Supplementary

commitments in 1995, 1997 and 1998. As is the case in many countries, GATS commitments represent

the lowest level of liberalisation. For example, Malaysia’s GATS commitments on telecommunications only

allow aggregate foreign shareholding in Malaysian telecoms companies of up to 30 per cent but the ceiling

for participation is in practice much higher (up to 100 per cent for some services) under domestic law. This

significant gap between the level of liberalisation between what Malaysia is committed to under GATS and

offers unilaterally can be attributed to two factors: the first is simply time: major unilateral liberalisation

occurred in 2009 and subsequently, whereas the GATS commitments were submitted in the early ‘90s.

Second, is that the level of unilateral liberalisation remains at the discretion of the Malaysian government

and can be adjusted to suit policy objectives or to offer negotiating partners more attractive terms in FTA

negotiations.

Beyond GATS, the most significant commitments have been taken within ASEAN, through the ASEAN

Economic Community (AEC) and the ASEAN Framework Agreement for Services (AFAS). However, efforts

to deliver concrete progress in liberalising services within ASEAN have continued to disappoint – AFAS is

viewed as the most ambitious effort to date, but, even then, the main benefit is greater certainty and clarity

rather than delivering meaningful new liberalisation (World Bank, 2015). In a 2018 assessment by IDEAS,

we concluded that of the measures related to enhancing trade in services within ASEAN due for completion

by 2018 according to the AEC Blueprint 2025, only 50 per cent of measures were partially implemented

and there was no evidence of significant progress for the remaining 50 per cent (Menon et al., 2018).


Malaysia has also made commitments under other regional trade agreements, most recently the

Comprehensive and Progressive Trans Pacific Partnership (CPTPP). However, as with AFAS, the principal

benefit of the CPTPP with respect to services is in providing additional policy certainty and guarantees of

fair and equal treatment, including through strengthening of Investor State Dispute Settlement (ISDS)

mechanisms, rather than offering substantial new liberalisation, such as the lifting of equity caps or

requirements for foreign service providers to be locally incorporated. Furthermore, Malaysia retains many

explicit exceptions, and there is explicit recognition that Malaysia retains the right to offer improved terms

with regard to investment and cross-border services to ASEAN partners.

Consideration of CPTPP is further complicated by the fact that the Pakatan Harapan government elected

in May 2018 has questioned whether Malaysia should ratify the deal agreed by the previous government.

The issue of providing investor certainty is one that attracts criticism in Malaysia over concerns it risks

national sovereignty. As of 30 December 2018, the CPTPP is in force for those members that have ratified,

however, although the Malaysian government continues to state that it is considering the issue, no

timetable for ratification has been set. The process of ratification will also not be swift, as a range of primary

and secondary legislation will need to be amended in order to facilitate the ratification of the agreement. As

a result, we judge that ratification in the first half of 2019 is highly unlikely, even if a political decision to

support the deal was taken immediately.

The reticence to ratify the CPTPP is also instructive in understanding the wider political context in Malaysia

and the likelihood of significant further steps to liberalise access for foreign entities in the services sector

(and more generally). It is likely that CPTPP represents the high-water mark of what can be agreed by

Malaysia in terms of investment and cross border services as part of an FTA with non-ASEAN states –

which is to say, not meaningful liberalisation, but greater clarity and certainty. And even this is proving

difficult to progress. More generally, Prime Minister Tun Dr Mahathir has expressed concern over

“unbalanced” trade deals that offer favourable terms to developing nations. As a result, progress with

CPTPP, and other possible trade deals such as the EU-Malaysia FTA have been called into question.

However, the Prime Minister has also urged ASEAN Member States to integrate more deeply and reject

trade protectionism. This indicates his preference for deepening trade links within the region over extending

greater freedom for foreign entities from the US or EU. This is also reflected in the government’s decision to

prioritise progress with the Regional Comprehensive and Economic Partnership (RCEP) over other trade

deals. However, outside of broad trade deals, the current government could pursue specific measures to

encourage foreign investors, where they relate to a specific policy objective – for example, development of

a third national car.

We can conclude that the most significant liberalisation occurs as a result of unilateral measures by the

Malaysian government, in particular where this may support a specific policy objective. Whilst the

government does make significant commitments through bilateral and regional FTAs these tend to focus

on providing greater certainty and clarity rather than fundamentally increasing the level of openness and the

most beneficial terms are offered to ASEAN partners.

Throughout the remainder of the paper, we will consider the likelihood of further liberalisation in the chosen

sectors as result of unilateral measures and FTA commitments, focussing on CPTPP (as the high-water

mark for non-ASEAN countries) and AEC/AFAS in particular. It is possible that services liberalisation could

be achieved under the Regional Comprehensive and Economic Partnership (RCEP), but the deal remains

under negotiation and the text has not been made public, so it will not be considered as part of this paper.

We assume that liberalisation under RCEP will not go beyond commitments in CPTPP and certainly not

AFAS.


TelecommunicationsThe telecommunications sector is relatively well developed in Malaysia, contributing revenue shares relative

to GDP above the world average. The government still maintains a significant presence in the

telecommunications sector, but the different development paths of the fixed-line and mobile operators have

led to different levels of competition and market maturity.

Telecommunications companies in Malaysia are primarily regulated by the Malaysian Communications and

Multimedia Commission (MCMC) and must obtain one of three licences to operate:

(i) Network Facilities Provider Licence (NFP), for companies providing the physical infrastructure for

telecommunications;

(ii) Network Service Provider Licence (NSP), for companies providing the basic connectivity or

bandwidth;

(iii) Application Service Provider Licence (ASP), for companies providing services to end-users, such

as voice services, data services, and internet access. Content Application Service Providers

(CASP) are a subset of ASPs which refers to providers of satellite broadcasting, subscription

broadcasting, terrestrial free to air TV or terrestrial radio broadcasting.

Foreign companies, as defined by the Companies Act (1965), are ineligible to apply for the licences listed

above. Licence holders must be incorporated in Malaysia. As part of Malaysia’s GATS commitments,

foreign companies can only operate in Malaysia through a locally incorporated joint-venture corporation

with Malaysian individuals or Malaysian-controlled corporations; or through acquisition of shares of an

existing licensed operator or corporation.

Under GATS, aggregate foreign shareholding is limited to 30 per cent. However, in 2012 Malaysia

(unilaterally) raised the ceilings for foreign equity holdings: to 70 per cent for NFPs and NSP and 100 per

cent for ASPs.

Government, private and foreign participation in the telecommunications sectorThe government’s presence in the telecommunications sector remains very significant. Telekom Malaysia

(TM), the national telecommunications company, was nominally privatised in 1987, but the government still

ultimately controls nearly 70 per cent of the shares through various Government Linked Investment

Companies (GLICs). TM continues to dominate the fixed-line sector, with 95 per cent market share and,

although foreign equity ownership is permitted, the aggregate foreign share permitted is only 30 per cent

or 5 per cent for individual investors. A separate entity, TIME, provides wholesale bandwidth, with the

government ultimately controlling 32 per cent of the company’s shares.

Following privatisation of TM, the mobile division was separated in 2008 into a separate GLC, called Axiata,

in which the government still retains a majority share. Celcom, a wholly owned subsidiary of Axiata, is one

of the four main mobile providers in Malaysia along with Maxis, Digi and U Mobile. Together, these four

operators control 95 per cent of the mobile market (World Bank, 2018). The government retains significant

shares in each of them - with the exception of U Mobile which is wholly owned by Berjaya Group, a

well-established Malaysian conglomerate - although there are substantial holdings by private investors. Of

these, the most significant foreign holding is by Telenor, the Norwegian telecommunications company

which owns 49 per cent of Digi (Gomez, 2018).

Table 11. Government and private/foreign participation in telecommunications sector

1The analysis of the ownership of Malaysian corporate entities included in this paper are taken from the IDEAS GLC Monitor, written by

Professor Terence Gomez and published in August 2018.

Total Government Ownership refers to the total shares held by Government Linked Investment Companies, which in turn are linked to

government ministries.

Axiata

TIME

Maxis

Digi

Telekom Malaysia

Celcom

U Mobile

68.5 %

2

7

3

4

5

6

1

71.4 %

32.2 %

23.5 %

Wholly owned Subsidiary of Axiata

28.9 %

Wholly owned Subsidiary of Berjaya Group

None

None

Afzal Abdul Rashim & Patrick Corso (21.9%)

T. Ananda Krishnan (64.9%)

Telenor (49%)

Source: Gomez et al., Government in Business: Diverse Forms of Intervention, 2018, IDEAS


Besides licencing and ownership restrictions the government also regulates prices through the

Communications and Multimedia (Rates) Rules 2002. However, price controls only apply to fixed line

services and prices for mobile services are not regulated. As a result of the industrial structure and relative

levels of price regulation, the fixed-service sector has the features of a monopoly, whereas the mobile

sector has enjoyed a greater level of competition.

According to the World Bank (2018), Malaysia has become a “mobile-first” country, where mobile service

providers offer competitive packages and regularly upgrade their networks’ technologies while Malaysia

underperforms in the provision of high-quality, fixed-line infrastructure. This has resulted in a low level of

internet adoption by business – only 62 per cent of businesses are connected to the internet and only 46

per cent have access to fixed broadband services (World Bank, 2018). Slow internet connection and lack

of affordable broadband plans are also a problem. Malaysia’s fixed broadband plans were mainly focused

on larger businesses and are too expensive for the majority of small enterprises. Malaysian consumers also

pay higher broadband costs compared to those in the region: Malaysia ranks 74 out of 167 countries for

fixed broadband services and 64 out of 118 for fiber broadband services. In February 2018, Malaysia’s

average download speed was ranked 63 out of 130 countries, with an average download speed of 22.56

Mbps. This is significantly lower than regional comparators such as Singapore, which ranked in top place

(161.53 Mbps) and Republic of Korea, which came in third (129.64 Mbps). Countries at similar levels of

economic development as Malaysia also have significantly faster download speeds. For example, Hungary

has an average download speed of 90.94 Mbps, while Thailand has an average speed of 41.35 Mbps

(World Bank, 2018).

The World Bank (2018) attributes these sub-optimal outcomes to the domination of the fixed-line market

by a single entity: Telekom Malaysia. TM has the most cable landing stations in Malaysia and, instead of

allowing other operators to share the location, TM provides point-of-access connection outside the

stations and charges higher fees to other operators, which then translates into a higher cost of broadband.

The possibility of attracting private investments by other network providers has also been stunted mainly

because TM has been awarded exclusive memorandums of understanding (MoUs) with the government to

set up high-speed broadband (HSBB) and sub-urban broadband (SUBB) plans without competition.

The problems arising from TM’s market dominance are increased by the lack of effective regulation. The

MCMC regulates the telecommunications sector, but it has not been able to ensure fair competition. The

powers of the regulator are restricted to remedies once anti-competitive practices have been proven, rather

than taking steps to ensure a level playing field in the first place. Furthermore, the fines that can be imposed

are relatively low (up to a maximum of RM500,000), which (in the case of TM) is far less than the

international standard of 10 per cent of annual turnover (World Bank, 2018). As noted above, TM is still very

close to the government despite nominal privatisation and there are suggestions that, as a result, TM in

practice is in a position to exercise influence over the regulatory framework and development of

government policy.

In other words, although there is nominally room for competition and foreign participation in the fixed-line

sector, this is limited in practice given the dominant position of TM. By comparison, the mobile sector is

more competitive, and this has benefited consumers but nonetheless remains subject to a number of

restrictions. The lack of competition arising from TM’s dominant market position is further exacerbated by

the relatively weak regulatory framework. The World Bank (2018) recommends increasing competition and

private participation in the fixed-line market to improve broadband services in Malaysia and to strengthen

the role of the regulator to help develop a level playing field.


Universal service obligationsUnder Malaysia’s GATS commitments foreign telecommunication service providers are required to

demonstrate contribution to the goal of universal service, “particularly the extension of services into rural

and other underserved areas as stipulated in the licences”. This remains a policy goal of the Malaysian

government – the most significant manifestation of which is the Universal Service Provision (USP) fund. The

USP fund is administered by the MCMC which requires that all telecommunication license holders

(excluding CASP licensees) are required to contribute six per cent of weighted net revenue to the fund. This

money is then invested by MCMC in programmes to improve service provision. However, the value of the

fund has been called into question. An Independent Evaluation Group established by the World Bank on

the success of Universal Service funds (not specifically in Malaysia) concluded that “targeted efforts to

increase access beyond what was commercially viable have been largely unsuccessful. Support to

universal access programs was largely superseded by the rollout of phone services by the private sector”

(IEG (Independent Evaluation Group), 2011). These sentiments are echoed in Malaysia. One challenge,

common to many USFs, is the inability to spend the accumulated funds.

Chart 1. Disbursement of Universal Service Provision (USP) fund in Malaysia, 2003-14

2500

2000

1500

1000

500

0

US

D m

illio

n

120.00

100.00

80.00

40.00

20.00

0.00

60.00

2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014

Inflows

Accumulated funds

Disbursements

..... Y-o-Y disbursement rate

Accumulated disbursementrate

%

Source: Samarajiva, R., Hurulle, G., Measuring disbursement efficacy of Universal Service Funds: Case studies from India, Malaysia, Pakistan & Sri Lanka, accessed from: http://www.cprsouth.org/wp-content/uploads/2017/08/Rohan-Samarajiva-and-Gayani-Hurulle_paper.pdf

Chart 1, which analyses the income and disbursement of the USP fund in Malaysia, demonstrates that the

USP quickly accumulated funds which MCMC was unable to spend. Although disbursement increased

from 2011, this was only sufficient to match the yearly inflow and did not significantly reduce the stock of

funds which had been accumulated (Samarajiva, 2017). Note, that this analysis has not been updated to

reflect the most recent years’ spending but, according to the annual accounts published by MCMC, the

accumulated funds at the end of 2017 were RM8.5bn (similar to the level in 2014), which suggests they

have continued to be unable to reduce the existing funds, although they have managed to disburse

subsequent income (USP Annual Accounts for 2017).

The other concern in relation to the USP fund is the choice of programmes. For example, the government

has invested large sums in subsidising and distributing personal tablets, rather than expanding the

fibre-optic network, which is what has been advised by industry.


Spectrum allocationFinally, the issue of spectrum allocation is a source of some concern for mobile operators. Malaysia’s

spectrum is allocated via auction, managed by MCMC. However, concerns have been raised over the lack

of transparency of the process, with some reports that allocations have been promised in advance of the

bidding process. The most significant recent auction was undertaken in 2018, for the 700 MHz

frequencies, which will be used in the roll out of 5G mobile services. The auction process was criticised for

its lack of transparency2, and the final outcome has not yet been confirmed.

Prospects for further liberalisationUnder AFAS, Malaysia retains its restrictions on foreign equity ownership and acquisition in the telecoms

sector. This is also the case under the CPTPP. Therefore, regional trade agreements are unlikely to

precipitate significant liberalisation of equity restrctions the telecommunications sector. Although the

CPTPP does include a comprehensive chapter on telecommunications which would provide investors and

foreign entities with greater certainty and clarity.

When it comes to unilateral measures to liberalise, there is perhaps potential for movement under the new

government. In its Manifesto, Pakatan Harapan recognised the issues with broadband prices and speeds.

For now, they have pursued a policy of instructing TM and TIME to improve speeds at current prices

through the direct control they can exert over the services. However, given pressure, including the research

from the World Bank, there is a chance that the new government will turn to liberalisation to develop the

fixed line market. At the more modest end this could entail stricter enforcement of competition provisions

but could also include restructuring of TM and incentivising foreign players to participate in the provision of

fixed-line services.


Financial Services

Financial services in MalaysiaFinancial services in Malaysia can broadly be divided into:

(i) commercial banking, investment banking and capital markets;

(ii) Islamic banking; and

(iii) insurance. The responsible Ministry is the Ministry of Finance and the principle regulator is the

Bank

Negara Malaysia (BNM), along with the Securities Commission in the case of investment banking and

capital markets. The Shariah Advisory Council (SAC) rules on the Islamic law on any financial matter under

the Central Bank of Malaysia Act 2009 (CBA).

BNM is a powerful regulator that monitors the development of the financial services sector closely and

takes a hands-on approach with respect to regulation in order to guide the development of the sector.

Commercial and investment banking licences are issued by the Minister of Finance on the advice of BNM.

Licenses are granted on the basis of what the BNM deems is in the “best interests of Malaysia”. These

interests are not strictly specified, but only broadly defined in the Financial Services Act 2013 (FSA) as:

the effect of the investment on the level and nature of economic activity in Malaysia including the

effect on productivity, efficiency, and quality of financial services;

the contribution towards enhancing international trade and investment linkages between

Malaysia and other countries; and

the effect of the investment on the stability of the financial system, including on conduct and

behaviour that could pose a risk to the financial system; and

the degree and significance of participation of Malaysians in the financial sector.

BNM is also responsible for the granting of Islamic Banking licences, but in this case, they also need to

be satisfied that:

the aims and operations of the banking business of the proposed Islamic bank do not involve

any element which is contrary to the Shariah; and

there must be a provision in the articles of association of the bank for the establishment of a

Shariah committee.

All banking licence holders must be incorporated within Malaysia. Under Malaysia’s GATS commitments,

submitted in 1994 and subsequently updated in 1995 and 1998, a number of restrictions on foreign

financial services companies apply, including:

Entry is limited to equity participation by foreign banks in Malaysian-owned or controlled

commercial banks and merchant banks and aggregate foreign shareholding cannot exceed 30

per cent. Shareholding by a single person individually or jointly with related persons is limited to a

maximum of 20 per cent.

Acquisition by a foreign bank of an aggregate of 5 per cent or more of shareholding in a

Malaysian- owned or controlled commercial bank or merchant bank must meet the following

criteria:

(a) The foreign bank has the ability to facilitate trade and contribute to financial and economic

development of Malaysia;

(b) The country of the foreign bank has significant trade and investment

interests in Malaysia; and

(c) The country of the foreign bank does not have a significant

representation in the Malaysian banking industry.


Other persons are not permitted to acquire 5 per cent or more of shareholding in a commercial

bank or merchant bank if the person already holds 5 per cent or more of shareholding in another

licensed financial institution.

The 13 wholly owned foreign banks at the time of the submission of the Supplementary

Commitments (in 1998) were allowed to remain wholly foreign-owned.

Following the liberalisation of the financial services sector in 2009 and 2011, BNM encouraged greater

foreign participation in commercial banking by inviting applications for new licences. We understand that

the BNM now considers the banking sector to be mature and would not consider any applications for new

licences at this time. Furthermore, locally incorporated foreign commercial banks are limited to eight

branches only with conditions on how far apart they can be.

In terms of foreign equity restrictions in the banking sector, the limit on foreign investment is maintained at

up to 30 per cent for commercial banks (except for the 13 wholly owned prior to 1998) and up to 70 per

cent in the acquisition or establishment of investment and Islamic banks.

InsuranceInsurance companies operating in Malaysia must also apply for a licence from the Ministry of Finance, upon

recommendation from the BNM. Like in the banking sector, approval is dependent on the BNM being

satisfied that the license is in the best interest of Malaysia. We understand that the BNM currently considers

the insurance provision in Malaysia sufficient and would not consider new licences at this time. All foreign

insurance companies must be incorporated in Malaysia, however, reinsurers, retakaful operators, and

international takaful operators can operate through a branch office in Malaysia.

Under Malaysia GATS commitments, foreign equity in insurance companies is limited to 51 per cent. Under

unilateral liberalisation Malaysia subsequently raised the limit to 70 per cent, with exceptions allowing for

higher ceilings on a case-by-case basis. For example, the UK insurance provider Prudential initially held

100 per cent of the equity in its Malaysia unit, but has been subsequently required to divest a 30 per cent

stake in order to comply with the 70 per cent requirement. We are not familiar with the details of this case,

but the BNM has claimed that the original exception offered to Prudential was explicitly on a time-limited

basis. This suggests that BNM is prepared to enforce the restrictions.

Other RestrictionsBeyond licence requirements and equity restrictions, financial service providers are also subject to other

regulations some of which have proved problematic for foreign providers.

In 2015, BNM introduced the Payment Card Reform Framework (PCRF) to encourage migration to

e-payments. A key feature of the PCRF is the direct regulation of interchange fees, the amount charged by

the customer’s bank to the merchant’s bank for card transactions. The PCRF imposed ceilings on these

rates. Research by IDEAS concluded that this initiative created conflicts and inconsistencies within the

economics of the electronic payment system and is likely to have limited impact in promoting transition to

e-payments. In the three years since the PCRF was introduced, progress against the targets set by the

bank (including greater deployment of Point of Sales (POS) terminals) has been mixed. More broadly, this

regulation indicates a willingness on the part of BNM to intervene directly in the market to achieve specific

policy goals (Teo, 2018).

In March 2018, BNM issued the Interoperable Credit Transfer Framework (ICTF), which requires that

financial institutions process credit transfers in Malaysia via an operator of a shared payment infrastructure

that is partially owned by the central bank. There are also requirements for certain transactions to be

processed in Malaysia. These regulations have been a source of concern for some industry players, who

believe the shared payment infrastructure (i.e. PayNet), partially owned by BNM, creates risks for

competition and innovation.


In 2017, BNM released a draft framework on Outsourcing, which implied that all data held by financial

institutions in Malaysia needed to be stored locally in Malaysia. This created significant concerns among

some industry players, in particular given the implications for the use of cloud-based data services which

by their nature tend to operate and process data globally. However, the BNM subsequently released the

final policy document in December 2018, which clarified that data can be stored abroad, but that necessary

risk mitigations – including ensuring timely access and supervision by BNM – are in place. At this stage, we

are not aware of the specific requirements that BNM will require and how difficult it will be for companies to

comply.

Government and private/foreign participation in the financial services sectorThe government’s direct presence in the financial services sector is very significant. There are eight locally

owned commercial banks (many of which have investment and Islamic banking subsidiaries). Through

GLICs, the government holds majority stakes in five of these and substantial shareholdings in the other

three, as detailed in Table 2 below. The most significant foreign stakes are held by the Hong Kong based

Bank of East Asia Limited in Affin Bank (24 per cent), the Singaporean Ministry of Finance in Alliance Bank

(29 per cent) and the Australia and New Zealand Banking Group in AmBank (24 per cent) (Gomez, 2018).

Table 2. Government and private/foreign participation in the financial services sector

CIMB Bank

Malayan Banking Bhd.

RHB Bank

Alliance Bank

Affin Bank

Public Bank

AmBank (M)

57.1 %

2

7

3

4

5

6

1

56.9 %

69.8 %

54.8 %

17.1 %

The Bank of East Asia Limited,Hong Kong (24.0%)

None

None

None

Hong Leong Bank8

68.3 %

26.7 %

17.3 %

Ong Family through OSK Holdings (10.1%)

Australia and New ZealandBanking Group Ltd. (ANZ) (23.8%),

Azman Hashim (13.0%)

Ministry of Finance, Singapore (29.1%)

Quek Family (64.5%)


So, we can see that the government takes a hands-on approach to the development of the industry in

particular through the issuing of licenses and regulation by BNM and retaining a substantial presence in the

sector. The government also operates through a range of Development Finance Institutions, which have

specific policy goals, including the Export-Import Bank (financing export industries), the SME Bank

(financing SMEs) and Agrobank (financing agricultural developments). The institutions are accorded certain

advantages by the government and can sometimes overlap in their activities with private entities, for

example in the provision of business and personal loans.

Prospects for further liberalisationThe CPTPP does not provide significant new liberalisation in terms of the granting of licences or lifting of

equity restrictions. Malaysia’s exemptions specifically include the various requirements detailed above. For

example, the annexes to the CPTPP specifically recognise Malaysia’s right to “grant advantages to one or

more development financial institutions”. Ratification of the CPTPP would not therefore represent significant

new liberalisation of the financial services sector, though it would provide investors with greater certainty

and avenues for arbitration.


Under the 5th package of AFAS, Malaysia made commitments on financial services. However, here again

no significant liberalisation with respect to licences or equity caps was provided. However, deeper financial

integration is envisioned under the AEC 2025 Blueprint, including a number of ambitious initiatives. The

Blueprint includes the gradual removal of restrictions on ASEAN banks, insurance companies and

investment companies to provide financial services in other ASEAN Member States. In banking, ASEAN

plans to introduce Qualified ASEAN Banks (QABs), which will be accorded equal treatment as the domestic

banks in the host jurisdiction.

ASEAN also aims to achieve freer flow of capital by gradually removing restrictions on foreign exchange

transactions including in current account transactions, foreign direct investments and portfolio investments.

These efforts represent a substantial reform agenda, but this level of ambition inevitably means that

progress is relatively slow. In December 2018, IDEAS assessed that of the measures due for completion by

2018 only 20 per cent were fully or partially completed. However, this assessment was based on publicly

available information and we understand that further significant progress has been made than has not been

publicly disclosed (Menon, 2018).

In light of this, autonomous liberalisation remains the most likely route for further significant liberalisation.

We do not judge it likely that the government will offer new licences or amend equity caps in the short term,

although exceptions will continue to be negotiated on case by case bases. The government may consider

divestment of its stakes in the Malaysian banking system, though this is bound up in the wider question of

the government’s strategy with respect to GLCs and GLICs.

It seems likely that the government will wish to continue to take a hands-on approach to regulation in the

financial services sector, in order to deliver on political priorities, for example delivery of affordable housing.

However, it is possible that the approach to regulation will shift – under the previous administration there

was a suggestion that BNM’s approach to regulation often excluded or de-prioritised external input, in

particular from foreign industry. There is some evidence that this has changed following the election, for

example the clarification of the outsourcing requirements. There is also potential for a review of the PCRF.

However, it remains to be seen whether there will be a markedly different approach in general to regulation


Air Transport Services

The Ministry of Transport (MOT) formulates plans and reviews policies regarding air services and is

responsible for granting licenses to aviation personnel, air service providers, airport operators and

maintenance suppliers. The Civil Aviation Authority of Malaysia (CAAM) regulates the aviation sector and is

responsible for providing air traffic services, enforcing airport standards, planning and supervising the

development of air traffic control systems and airport facilities. The most significant aspects of air transport

(including traffic rights) are excluded from GATS.

AirportsFAll airports in Malaysia are owned by the State, except for Tanjung Manis Airport and Kerteh Airport

(Tanjung Manis Airport is owned by Tg Manis Development Sdn Bhd (TMDSB) and Kerteh Airport is owned

by Sanzbury Stead Sdn Bhd). The GLC, Malaysia Airports Holdings Berhad (MAHB), manages five of the

six international airports, plus the 16 domestic airports and 18 of the short take-off and landing airports

(WTO, 2018). All airports owned by the Federal Government are under MAHB except Senai International

Airport, which is managed by the Senai Airports Terminal Services Sdn Bhd, a privately-owned Malaysian

company which has a concession agreement with the Federal Government.

In Budget 2019, the Finance Minister announced the establishment of a Real Estate Investment Trust (REIT)

for Malaysia’s airports. A REIT is a form of public listed corporation which invests its shares in gaining profits

while operating real estate or properties. The profit from rental is then distributed to investors in the form of

dividends back to shareholders. Some of the real estate assets under a REIT could include hotels, office

and warehouse spaces, hospitals and shopping centres. Under the proposal the government intends to sell

off 30 per cent of its airport assets via a REIT to qualified financial institutions and investors. The

government aims to raise RM4 billion through this sale, which will be used for airport upgrades and

expansion. However, this initiative will not affect the management of the airports, which will remain with

MAHB under a mandate agreed with the government until the end of 2035. Instead, investors in the REIT

will benefit from the income based on MAHB user fees. There are concerns however that the profits raised

will be insufficient to fund the required upgrades to Malaysia’s airports.

Air servicesThe Malaysia Aviation Commission (MAVCOM) approves air service licences for the transport of

passengers, mail, or cargo to or from Malaysia on scheduled services, air service permits for unscheduled

services, ground handling licenses, and aerodrome operator licences. The applicant for any licence must

be a company incorporated in Malaysia which is directly or indirectly controlled by a Malaysian person,

specifically:

for an air service licence, the applicant must be more than 50 per cent owned by a Malaysian

person;

for a publicly-listed company applying for an air service permit, a ground handling licence or

aerodrome operator licence a Malaysian person must hold a minimum of 33 per cent of the

applicant's shares. In the case of a non-publicly listed company, the Malaysian person must own

more than 50% of the applicant's shares;

Furthermore, the Malaysian shareholder must have significant power within the applicant business.

Specifically, the Malaysian person must have the power to appoint and remove directions, have power over

business administration and be able to issue instructions to directors and senior officers (including the

CEO). Seven airlines currently hold air service licences to operate in Malaysia: Malaysia Airlines and its

subsidiaries (MASwings and Firefly); AirAsia and its sister airline AirAsia X; Malindo Airways; and Raya

Airways.

Foreign airlines and air service providers need to acquire Air Traffic Rights (ATRs) to operate in Malaysia.


Government and private/foreign participation in the air transport sectorThe government is the majority owner of both MAHB and Malaysian Airlines. The government also owns

a minority stake in Air Asia. Malindo airlines in part owned by private investors in Malaysia and the

remainder (assumed to be 49 per cent) is owned by the Indonesian airline, Lion Air (Gomez, 2018).

Table 3. Government and private/foreign participation in the air transport sector


Malaysia Airlines

Air Asia

Malaysia Airports Holding

Malindo Airlines

Raya Airlines

63.8 %

2

7

3

5

1

69.8 %

8.2 %

None

None

Tony Fernandes & Kamaruddin Meranun(32.2%)

Not publicly listed.Owned by Indonesia Lion Air Group &Sky One Investors Sdn Bhd (Malaysia)

0 % (Privately owned)

0 % (Privately owned) Not publicly listed.

Prospect for future reformAir services are excluded from CPTPP. In general, access for air services is negotiated separately to trade

deals. But – in that context – significant liberalisation can be achieved through separate, dedicated air

service agreements. Malaysia is party to over 105 bilateral air service agreements of which 20 are open

skies arrangements. These agreements provide access to Malaysian routes to foreign carriers according to

so-called “freedoms of the air”. The most substantial liberalisation has been achieved within ASEAN, under

the ASEAN Aviation Single Market (ASAM).

ASAM can be traced back to earlier agreements, but the most substantial liberalisation took place under

three agreements: the 2009 Multilateral Agreement on Air Services (2009 MAAS), the 2009 Multilateral

Agreement for the Full Liberalization of Air Freight Services (2009 MAFLAFS), and the 2010 Multilateral

Agreement for the Full Liberalization of Passenger Air Services (2010 MAFLPAS). The first phase of the

ASEAN Single Aviation Market (ASAM) was completed when the 2010 MAFLPAS was ratified by the 10th

state, Indonesia, in April 2016. These agreements catalysed a rapid growth in air transport capacity in

ASEAN – and commensurate decline in prices (Amirullah, 2018).

In terms of market access, ASAM has achieved liberalisation within ASEAN of the 3rd, 4th and 5th

freedoms, defined by the International Civil Aviation Organisation (ICAO) as below:

Third Freedom of The Air - the right or privilege, in respect of scheduled international air services,

granted by one State to another State to put down, in the territory of the first State, traffic coming

from the home State of the carrier.

Fourth Freedom of The Air - the right or privilege, in respect of scheduled international air services,

granted by one State to another State to take on, in the territory of the first State, traffic destined

for the home State of the carrier.

Fifth Freedom of The Air - the right or privilege, in respect of scheduled international air services,

granted by one State to another State to put down and to take on, in the territory of the first State,

traffic coming from or destined to a third State.

Further development of ASAM will depend on progress in a number of areas, including improving capacity

and regulatory co-ordination. In terms of market access and freedoms of the air, although further

liberalisation is included as part of the AEC 2025 Blueprint, we understand that there is currently no

appetite within ASEAN to move beyond the 5th freedom in the short to medium term.


The other component of liberalisation relates to the ownership and control of airlines, where removal of

ownership restrictions would stimulate greater investment (Tan, 2017). However, we also understand that

there is not significant appetite at this stage to substantially liberalise ownership and control of airlines with

ASEAN. An alternative route to liberalisations within ASEAN is the proposal to introduce “ASEAN carriers”,

whereby carriers designated by one ASEAN Member State can operate in all. Again, although this is an

explicit component of the further development of the ASAM under the AEC Blueprint, the latest indication

from ASEAN is that this initiative has been “de-prioritised”.

The main reason for reticence in further development of ASAM likely does not come from Malaysia, but

other Member States with less developed air transport industries and large internal markets which they do

not want to expose to competition, despite the significant consumer and trade benefits.

In addition to liberalisation within ASEAN, air service agreements have been agreed between ASEAN and

third countries (referred to as Dialogue Partners). Most significantly discussions are ongoing with China, the

EU, India, Japan and South Korea (Lee, 2018).

The EU and ASEAN agreed to commence negotiations in 2015 on a comprehensive air transport

agreement. A prime motivation of this initiative was to counter the formidable Middle Eastern carriers that

capture a significant amount of traffic in the EU–ASEAN market (Tan, 2015). At the same time, the two

parties are negotiating various topics including not only market access but also fair competition (Lee, 2018).

Reflecting these ambitious goals, the initiative has been named the ASEAN-EU Comprehensive Air

Transport Agreement (CATA). Such an agreement would be the first ever region-to-region aviation

agreement and would therefore be a very significant achievement.

It had been hoped that the EU-ASEAN agreement would be concluded by the end of 2018, however this

did not happen. We understand that concerns on the part of some ASEAN Member States mean that

agreement in the early part of 2019 is also unlikely – or that agreement will be less ambitious than the EU

would hope.

We conclude that, unlike in other areas, significant liberalisation of air transport, particular in terms of

market access, is likely to occur through bilateral and regional air services agreements rather than

autonomous liberalisation. In the case of liberalisation of airports, this is likely to occur autonomously,

although given the recent announcement of the REIT it is unlikely that the government would consider

further divestment (or significant liberalisation) of airports in the short term.


Maritime Transport

PortsAll of Malaysia's main ports are owned and regulated by federal or state statutory corporations, while the

ports in Sabah and Sarawak (except for Bintulu Port) are under the direct jurisdiction of the state

governments. Federal ports are administered by dedicated port authorities such as Port Kelang Authority

and state ports are normally administered by the state governments. Port operations have been privatised

through concession agreements, excluding Sarawak's three ports (which continue to be owned and

operated by state statutory corporations). The latest concession agreements for the ports include the 2016

agreement to operate the Port of Tanjung Bruas in Malacca.

In practice many of these concessions are awarded to the same companies, which in turn are ultimately

owned by the government through the GLICs and a small number of very wealthy Malaysians. For example,

several port concessions are ultimately owned my MMC Corporation, which is 37 per cent owned by the

government and 52 per cent owned by Syed Mokhtar, one of Malaysia’s wealthiest businessmen. In the

case of the state ports, the state governments retain significant shares (Gomez, 2018).

The most significant foreign participation is in the Kuantan Port, which is 40 per cent owned by Beibu Golf

Holdings, a Chinese state linked company. The development of Kuantan Port is one of the major projects

under the Belt and Road Initiative (BRI), hence the significant Chinese investment.

Table 4. Government and private/foreign participation in Malaysian ports

Westport Malaysia Sdn Bhd(Operator at Klang Port)

Port of Tanjung Pelepas Sdn Bhd

Penang Port Sdn Bhd

Tanjung Bruas Port Sdn Bhd

Northport (Malaysia) Berhad(Operator at Klang Port)

Johor Port Bhd

Kuantan Port ConsortiumSdn Bhd

(via MMC Corporation)

2

7

3

4

5

6

1

(via Wesatport Holdings)




MMC Corporation (99.1 %)

Westport Holdings (not publicly listed)

MMC Corporation (70 %)(not publicly listed)

MMC Corporation

MMC Corporation

9

14

10

11

12

13

8

(via MMC Corporation) MMC Corporation

Sabah Ports Sdn Bhd

MMC Corporation

Westport Holdings

Bintulu Port Holdings

Bintulu Port Sdn Bhd

IJM Corporation

Suria Capital Holdings

(via IJM Corporation)

(via Bintulu Port Holdings)

(via Suria Capital Holdings Bhd)

36.7 %

41.4 %

13.2 %

61.2 %

93.5 %

IJM Corporation (60 %),Beibu Golf Holdings (Hong Kong) (40 %)

Bintulu Port Holdings (not publicly listed)

Wholly-owned subsidiary ofSuria Capital Holdings Berhad

Syed Mokhtar Albukhary (51.8 %)

Gnanalingam family (45.6 %)

None

None

None

All of Malaysia's main ports are owned and regulated by federal or state statutory corporations, while the

ports in Sabah and Sarawak (except for Bintulu Port) are under the direct jurisdiction of the state

governments. Federal ports are administered by dedicated port authorities such as Port Kelang Authority

and state ports are normally administered by the state governments. Port operations have been privatised

through concession agreements, excluding Sarawak's three ports (which continue to be owned and

operated by state statutory corporations). The latest concession agreements for the ports include the 2016

agreement to operate the Port of Tanjung Bruas in Malacca.



Shipping ServicesThe Ministry of Transport has responsibility for regulating shipping services in Malaysia, governed by the

Merchant Shipping Ordinance 1952. Under Malaysia’s GATS commitments, international maritime

transportation (excluding cabotage) can only be provided by foreign companies through a representative

office, regional office or locally-incorporated joint-venture corporation with Malaysian individuals or

Malaysian-controlled corporations or both and aggregate foreign shareholding in the joint-venture

corporation cannot exceed 30 per cent. To register a vessel in Malaysia, the following conditions must be

met:

1) the owner of that vessel must be a Malaysian citizen or corporation incorporated in Malaysia;

2) majority shareholding must be held by Malaysians;

3) a majority of the board of directors must be Malaysians; and

4) the principal place of business must be in Malaysia.

Under domestic legislation, vessels are required to register on one of two registries:

(i) the Malaysian Ship Registry (MSR) and (ii) the Malaysian International Ship Registry (MISR).

For vessels to be registered under the MSR, certain restrictions apply – specifically:

(i) the owner must be a Malaysian citizen or corporation;

(ii) a majority shareholding (51 per cent) must be held by Malaysians;

(iii) the vessel owner must be incorporated in and have an office in Malaysia; and

(iv) the ship manager must be a Malaysian citizen or corporation.

The MISR is based in Labuan and is designed for vessels owned by foreign entities. It enables vessels

owned by foreign shipping companies to be registered without the need to comply with the Malaysian

majority shareholding requirement specified above. Ships registered under MISR will carry a Malaysian flag

and are considered as Malaysian ships. In order to register:

(i) Ship owners must be companies incorporated in Malaysia (minimum 51 per cent foreign held equity,

100 per cent foreign ownership is permitted) and

(ii) must appoint a Malaysian ship manager.

(iii) Ships must be under a certain age (15 years for tankers and bulk carriers and 20 years for all other

ships) and have a minimum weight of 1,600 GT.

In 2016, there were 5,477 ships registered under the MSR, with a gross tonnage of 11,939. By

comparison, the number of ships registered under the MISR was only 12 but with a gross tonnage of

33,369 (WTO, 2018). Corporate profits from shipping activities using vessels registered under the MSR are

exempt from corporate income tax and employees on board Malaysian vessels are exempt from personal

income tax.

In 1980 Malaysia introduced a “cabotage” policy, under which domestic shipping (between two ports in

Malaysia) is reserved for domestic shipping companies. The policy intention was to develop the domestic

shipping industry. Foreign vessels are only allowed to participate in domestic shipping when there is no

Malaysian vessel available, and the Malaysia Shipowners' Association acts as the authority on the

availability of Malaysian vessels in these cases. Foreign vessels are permitted to call directly to/from any

Malaysian port including ports in Sabah and Sarawak. The shipping of empty containers is treated as cargo

and is therefore also covered under the cabotage policy.

Since 1980, the cabotage policy has been relaxed in a number of cases, allowing foreign vessels to operate

on certain routes, specifically:

(a) between Penang and Port Klang;

(b) Port Klang and Port of Pasir Gudang;

(c) Port of Klang and Port of Tanjung Pelepas to Port of Sepangar, Port of Bintulu and Port of Kuching;

(d) Port Klang and Tanjung Pelepas Port; and

(e) Port of Penang and Tanjung Pelepas Port.

In addition, effective 1 June 2017, the transport of cargo services (including containers) by foreign

vessels is permitted on the following routes:

(a) between Peninsular Malaysia to any port in Sabah, Sarawak, Labuan;

(b) within Sabah; and

(c) within Sarawak.


The decision to relax the cabotage policy for East Malaysia in 2017 attracted significant resistance3 and

subsequent complaint from the domestic shipping industry. The decision to relax the policy was justified on

the grounds of the high prices that emerge as a result of the policy, but the Malaysia Shipowners

Association argue that the relaxation has negatively impacted the local shipping industry.

The government’s main presence in the shipping services sector is through MISC Bhd., a GLC majority

owned (62.7 per cent) by PETRONAS. MISC Bhd is responsible for energy shipping and its related activities

and accounts for about 10 per cent of Malaysia’s maritime trade (WTO, 2018). MISC also runs the

Malaysian Maritime Academy (ALAM) to provide education and training for seamen and maritime

personnel.

Prospects for future liberalisationThe Maritime Transport sector is not liberalised under CPTPP, with explicit exemptions capturing the

various restrictions on foreign participation listed above. Again, the CPTPP is likely to provide additional

certainty and courses of redress but not substantial new market access.

Under AFAS, liberalisation has taken place gradually – foreign equity participation has increased to a

maximum of 70 per cent in a range of sub sectors, listed below:

i. International maritime transportation services excluding cabotage.

ii. Rental of cargo vessels with crew for international shipping.

iii. Rental of cargo vessel without crew (Bareboat Charter) for international shipping.

iv. Vessel salvage and re-floating services (not applicable in harbour).

v. Maritime Agency services.

vi. Maritime Cargo Handling services.

vii. Vessel salvage and re-floating services.

viii. Storage and warehousing services. (Covering private bonded warehousing services only).

ix. Maritime freight forwarding services.

x. Maintenance and repair vessels.

Crucially, cabotage remains excluded and maintenance and repair services also remain subject to a 49 per

cent foreign equity limit. We have not undertaken significant research into the likely future development of

maritime services liberalisation under the AEC 2025 Blueprint so cannot comment on the like development

in the short to medium term.

We are not aware of any specific policy priorities that could motivate the government to further

autonomously liberalise shipping services or seek greater levels of foreign participation. The strong political

reaction to the lifting of the cabotage policy in East Malaysia – and current calls to reinstate the policy –

could act as a disincentive to further liberalisation.

In terms of Ports, as can be seen from Table 4, the current system is dominated by a few players. Foreign

participation is likely to occur only as a result of major agreements with a government-to-government

component, such as the Chinese participation in Kuantan Port, rather than greater liberalisation per se.

Political concern over Chinese participation in Kuantan Port, and the Belt and Road Initiative in general may

disincentivise the government from promoting greater foreign ownership of infrastructure in Malaysia.

3See for example Daily Express “Masa: Review removal of the cabotage policy”, accessed from:

http://www.dailyexpress.com.my/news.cfm?NewsID=126452


Conclusion

Malaysia has undergone gradual liberalisation of its services sectors, although significant

restrictions remain. In particular, the Malaysian government continues to operate a range of foreign

equity caps and also to exercise some licensing and regulatory regimes which create challenges

for foreign industry players.

The government also retains a large presence in the economy through GLCs, even where

privatisation has nominally occurred, which can further create uncompetitive distortions. Ongoing

commitment to the objectives of these GLCs, in particular industrial development and enhancing

Bumiputra equity might act as a disincentive for further liberalisation.

Liberalisation can occur as result of autonomous action on the part of the government, or through

bilateral, regional and multilateral trade agreements. In most cases the most significant

liberalisation occurs through autonomous action by the Malaysian government, driven by

domestic policy considerations. A notable exception is air transport, where liberalisation is more

likely to occur through international agreements.

CPTPP likely represents the high-water mark of what Malaysia will agree with respect to services

liberalisation with non-ASEAN partners. The CPTPP does not offer substantial liberalisation of

equity restrictions or licensing in the telecommunications, financial services, air transport or

maritime transport sectors but does provide investors and foreign service providers in these and

other sectors with greater policy certainty and avenues for redress.

ASEAN agreements offer more extensive liberalisation, but – with the exception of air transport –

still lag Malaysia’s autonomous liberalisation in telecommunications, financial services and

maritime transport.

In the telecommunications sector, the fixed-line sector remains dominated by a single player

(Telekom Malaysia), which has delivered sub-optimal outcomes in terms of internet adoption. It is

possible that the government could pursue greater competition and liberalisation within the

fixed-line sector as a means to address this. The mobile sector is already subject to a greater

degree of competition and so the pressure for further liberalisation is less.

In the financial services sector, the government is unlikely to issue new licenses or ease foreign

equity restrictions but there is a possibility for more transparent and consultative approach to

regulation under the new administration.

In air transport, meaningful liberalisation is most likely to occur within ASEAN or between ASEAN

and its Dialogue Partners. An EU-ASEAN agreement would be a substantial achievement and is

achievable within a 2019 timeframe – though challenges remain. Further liberalisation of Malaysia’s

airports is unlikelyin the short term, given the government’s recent announcement to divest 30 per

cent of its airport related assets through a Real Estate Investment Trust (REIT).

In maritime transport, a number of restrictions on foreign providers continue to apply. We are not

aware of any particular policy factors that might motivate the government to pursue greater

liberalisation in the short term – the political reaction to the lifting of the cabotage policy in East

Malaysia might act as a disincentive for further liberalisation of shipping services.


ANNEX A – Fully Liberalised Sectors

Recognising the growth potential in the services sector, the Government liberalised 27 services sub-sectors

on 22 April 2009, with no equity condition imposed.

These sub-sectors are:

Computer and Related Services

Consultancy services related to the installation of computer hardware;

Software implementation services - systems and software consulting services: systems

analysis services; systems design services; programming services and systems

maintenance services.

Data processing services - input preparation services: data processing and tabulation

services; time sharing services and other data processing services;

Data base services.

Maintenance and Repair Services of Computers; and

Other services - data preparation services: training services; data recovery services; and

development of creative content.

Health and Social Services

All veterinary services.

Welfare services delivered through residential institutions to aged and the handicapped.

Welfare services delivered through residential institutions to children.

Child day-care services including day-care services for the handicapped.

Vocational rehabilitation services for handicapped.

Tourism Services

Theme Park;

Convention and Exhibition Centre (seating capacity of above 5,000).

Travel Agencies and Tour Operators Services (For inbound travel only).

Hotel and Restaurant services (for 4 and 5 star hotels only).

Food Serving Services (for services provided in 4 and 5 star hotels only).

Beverage Serving Services for consumption on the premises (for services provided in

4 and 5 star hotels only).

Transport Services

Class C Freight Transportation (Private Carrier License – to transport own goods)

Sporting and other recreational services

Sporting Services (Sports event promotion and organisation services)

Business Services

Regional Distribution Centre

International Procurement Centre

Technical Testing and Analysis Services - composition and purity testing and analysis

services, testing and analysis services of physical properties, testing and analysis services

of integrated mechanical and electrical systems, and technical inspection services and

Management Consulting Services - general, financial (excluding business tax)

marketing, human resources, production and public relations services.

Rental/Leasing Services without Operators

(i) Rental/Leasing services of ships that excludes cabotage and offshore trades

(ii) Rental of cargo vessels without crew (Bareboat Charter) for international shipping.


Supporting and Auxiliary Transport Services

Maritime Agency services

Vessel salvage and refloating services

The Government had further liberalised an additional 18 services sub-sectors in 2012 to allow up

to 100 per cent foreign equity participation in phases. These sub-sectors are:

Telecommunications for Application Service Provider – ASP licence;

Telecommunication for Network Service Provider – NSP and Network Facilities Provider

– NFP licences;

Courier services;

Private Hospitals;

Medical specialists Clinics;

Dental Specialists Clinics;

Private Universities;

International Schools;

Technical and Vocational Schools;

Technical and Vocational Schools for students with special needs;

Skills Training Centres;

Accounting (including audit) and taxation;

Architectural services;

Engineering services;

Legal services;

Departmental and Specialty stores;

Incineration services; and

Quantity Surveying services.


References

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Services Sector in Malaysia: Domestic Regulatory

Reforms and the Impact on Professional Services,

2016, Journal of International Trade, Volume 1

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Aviation Market, 2018, IDEAS

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8?mid=378

Ferlito, C., Affordable Housing and Cyclical

Fluctuations: The Malaysian Property Market, 2018,

IDEAS

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prehensive-and-progressive-agreement-for-trans-p

acific-partnership-text

Gomez, E. T., Fisal, F., Padmanabhan, T., Tajuddin,

J., Government in Business: Diverse Forms of

Intervention, 2018, IDEAS

IEG (Independent Evaluation Group). (2011). An

evaluation of World Bank group activities in

information and communication technologies:

Capturing technology for development. World Bank.

Washington, DC: World Bank .

Lee, J. W., Strengthening the ASEAN Single Aviation

Market: Implementing the AEC Blueprint 2025 for

Air Transport, 2018, IDEAS

Leong, T. W., Payment Card Reform Framework

(PCRF): A Policy Evaluation Study, 2018, IDEAS

MCMC, Universal Service Provision Annual Report

2017, accessed from:

https://www.mcmc.gov.my/skmmgovmy/media/Ge

neral/pdf/USPAR17_Eng.pdf

Malaysia’s Digital Economy: A New Driver for

Development, 2018, World Bank Group

Malaysia: Investment in the Services Sector, General

Policies, Facilities and Guideline, 2012, MIDA

Malaysia Services Commitments accessed from

http://www.miti.gov.my/index.php/pages/view/421

8?mid=566

Malaysia’s Trade and Economic Information

Booklet, 2018, MITI

Menon, J., Todd, L., Arujunan, D., ASEAN

Integration Report, 2018, IDEAS

Todd, L., Slattery, M., Impacts of Investment from

China in Malaysia on the Local Economy, 2018,

IDEAS

OECD Investment Policy Review: South East Asia,

2018, OECD

Samarajiva, R., Hurulle, G., Measuring

disbursement efficacy of Universal Service Funds:

Case studies from India, Malaysia, Pakistan & Sri

Lanka, accessed from:

http://www.cprsouth.org/wp-content/uploads/201

7/08/Rohan-Samarajiva-and-Gayani-Hurulle_paper.

pdf

Wan Jan, W. S., Lesser Government in Business: An

Unfulfilled Promise?, 2016, IDEAS

World Bank (2015), ASEAN Services Integration

Report: a joint report by the ASEAN Secretariat and

the World Bank, World Bank: Washington, D.C.

World Bank (2018), Malaysia’s Digital Economy: A

New Driver of Development, accessed from:

http://documents.worldbank.org/curated/en/43557

1536244480293/pdf/129777-WP-PUBLIC-sept-11

-1pm-World-Bank-2018-Malaysia-Digital-Economy

-report.pdf

World Trade Organisation, General Agreement on

Trade in Services (GATS), Commitments and

Exemptions of Malaysia, accessed from:

https://www.wto.org/english/thewto_e/countries_e/

malaysia_e.htm

World Trade Organisation Trade Policy Review:

Malaysia, Report by the Secretariat, 2014, WTO

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Malaysia, Report by the Secretariat, 2018, WTO

USTR Trade Barriers Report 2018, 2018, USTR





PUBLIC PROCUREMENT INMALAYSIA, 2018

ABSTRACT

The report examines the features of the system of public procurement in Malaysia. The system to a certain

extent conforms with international standards based on open competition and accountability, but it is also

tailored to reflect the needs and values specific to Malaysia. This is reflected in the protection given to local

companies and in the preferences for the Bumiputera businesses.

The features of procurement system have been reflected in the urban public transport development. The

report focuses on the development of new KVMRT and LRT lines. A balance has been achieved between

the involvement of foreign companies and domestic companies, often in consortium or joint venture

partnerships, while provision has been made for extensive Bumiputera involvement. However, key issues

have arisen with regard to the appropriate procurement management model and the funding arrangements

for the various projects. The report also examines procurement in the development of the rural

infrastructure with the key features being the division of the infrastructure program into small scale projects,

the reservations or set asides for small Bumiputera companies within the locality, and the contribution of

community associations in shaping the projects. Another feature of the procurement system discussed are

the prominence of Chinese companies in infrastructure projects, especially under its Belt and Road

Initiatives, and the benefits and drawbacks in allowing such companies such an influential role in

infrastructure development.

The report covers the accession of Malaysia to the multi-lateral FTA, the Comprehensive and Progressive

Agreement for Trans-Pacific Partnership (CPTPP), which includes public procurement. The accession has

been made possible by concessions to Malaysia to protect domestic businesses and preserve Bumiputera

preferences in the procurement system. The report also examines the relevance of the procurement

chapter in the recent FTA between the EU and Vietnam to Malaysia’s future FTA’s. Lastly, the report

identifies the continuing weaknesses in the system of public procurement, despite the advances referred

to. Amongst them are failings in procurement planning, specification drafting, and selection of suppliers,

contractors and consultants, and the supervision of projects. This often spills over into poor quality

products and works, delayed or unfinished projects and under-utilization of products and fatalities.

Corruption in its various forms also remains a big concern as well as excessive costs and borrowing

requirements in large infrastructure projects. The report suggests strengthening of institutional controls and

accountability and increased will within government and administration to deal with the failings. Lastly the

report suggests prospects for change under the new Malaysian government especially in relation to

corruption, costs of infrastructure development and the role of Chinese companies in the infrastructure

sector.


..................................................................................................................................079

Introduction....................................................................................................................................081

Procurement in the Malaysian economy..........................................................................................081

Types of procurement.....................................................................................................................082

Funding for different types of procurement......................................................................................084

Procurement from Bumiputera companies......................................................................................084

Use of offsets..................................................................................................................................085

The procurement proces.................................................................................................................086

Registration of suppliers and contractors........................................................................................086

Procuring entities and procurement boards.....................................................................................087

Action against defaulting companies...............................................................................................088

Accountability in procurement.........................................................................................................089

Overview.........................................................................................................................................091

KVMRT SBK and SSP Lines...........................................................................................................092

KVMRT Circle Line..........................................................................................................................094

LRT3..............................................................................................................................................094

Improving the rural infrastructure.....................................................................................................096

Sectors in rural infrastructure development.....................................................................................096

Features of rural infrastructure procurement....................................................................................098

Belt and Road Procurements.........................................................................................................100

Other infrastructure procurements..................................................................................................101

Benefits and drawbacks of Chinese involvement in infrastructure projects......................................101

Adjustment of policy........................................................................................................................102

Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP)........................102

Permanent concessions in CPTPP granted to Malaysia..................................................................103

Transitional concessions in CPTPP granted to Malaysia..................................................................104

Relevance to Malaysia of the FTA’s between EU and Singapore and Vietnam..................................105

Weaknesses in everyday procurement identified in AG’s reports......................................................106

The problem of corruption in procurement......................................................................................109

Concerns over costs of infrastructure projects................................................................................110

Summary..................................................................................................................................111

Prospects......................................................................................................................................112

..................................................................................................................................113

CONTENTCONTENT

Introduction

Public procurement of goods, services and public works (including public infrastructure projects) in

Malaysia is governed by the Financial Procedures Act 1957, and the Government Contract Act 1949.

These are amended, supplemented and clarified by a range of administrative instruments, which include

Treasury Instructions, Treasury Circulars, and Federal Central Contract Circulars. The methods of

procurement, procedures to be followed and the guiding principles are laid down in these instruments.

They apply to procurement by all federal and State ministries/department, local authorities within the

States, and federal and State statutory bodies. They do not officially apply to government-linked

companies (GLC’s), but are to a significant extent followed by them.

Procurement policies and regulations are formulated by the Government Procurement Division of the

Ministry of Finance (MOF). Contract awards may be made at the federal level by MOF, or by line agencies

(ministries/departments, statutory bodies, and GLC’s), and in the case of most public works, by the Public

Works Department, known as the contract awarding authority. Day to day procurement management is

undertaken by the line agencies or the Public Works Department, known as the implementing agencies,

but under the oversight of the Prime Minister’s Department. Often (with exception of high value

procurements), the contract awarding authority and implementing agency are one and the same and both

are identified as procuring entities. Procurement is as well undertaken by ministries/departments in the

State government and also State-owned statutory bodies, as well as by local councils within the states.

The principles, types and methods of public procurement in Malaysia both conform to important

international standards but also reflect political values and norms specific to Malaysia. The core objective

is to secure value for money based on fair competition. The other objective is to create business

opportunities for both local and Bumiputera companies and to generate local employment opportunities

and in so doing be a means of developing the Malaysian economy.

1. FRAMEWORK OF PUBLICPROCUREMENT IN MALAYSIA

Procurement in the Malaysian economy

Public procurement plays a significant role in the economic development of Malaysia. In 2016 RM78 billion

was spent on procurement. This comprised 31 per cent of gross public expenditure (combining

development and operating spending), accounting for about 6 per cent of GDP. Although the percentage

is small, the priority given to local companies in contract awards, as mentioned below, and the resultant

chain of sub-contracting and supply services especially in high value contracts generates a good deal of

business and employment.

The impact of procurement is no more evident than in public infrastructure projects. These raise the

productive capacity of the economy. In addition, contractors awarded projects draw upon construction and

product networks. These sustain many other businesses engaged in construction and engineering and in

manufacturing construction materials, equipment and tools. The impact on the wider economy is

maximised by offset packages, mainly provided by large foreign companies offered a government contract,

as discussed below.


Types of procurement As in most countries, the means of procurement in the Malaysian public sector varies according to the

nature and volume of the goods, services and works to be procured, the expected contract value, and the

range and capacity of suppliers and contractors.

Tenders The main means of procurement is the competitive tender applicable to contracts above RM500,000. This

requires prospective suppliers and contractors to submit sealed bids that include both a price offer and an

offer of the types and quality of the goods, services and works to be supplied or undertaken. The bids are

required to conform to the specifications (details of the products, services and works) as laid down by the

procuring entity.

Tenders may be divided into the following:

International open tenders: international companies may bid on their own alongside domestic

companies, or in conjunction with domestic companies in a consortium or joint venture (JV).

International open tenders are adopted if there is evidence that few Malaysian companies on their own

have the capacity to meet the demands of the contract. This could apply to high value procurements

of specialised products, services and works (MOF, 2010).

Domestic open tenders: only domestic companies may bid. Domestic tenders are adopted if there is

evidence that sufficient Malaysian companies are capable in terms of resources, expertise and

experience of meeting the demands of the contract. The Treasury Circular PK1 emphasises the priority

that should be given to procurement from local manufacturers or local distributors (MOF, 2015).

Bumiputera reserved tenders: only Bumiputera companies may bid as further discussed below.

Selective tenders: they can be adopted in international, domestic, and Bumiputera tenders, in which

bidders are required to be screened in a pre-qualification test, making only those who are pre-qualified

eligible to bid. The pre-qualification attests to the track record of a bidding company (recent history of

similar projects), its financial health (assets, liabilities, cash flow etc), technical resources (especially in

works procurement), current and impending work commitments, competence and qualifications of key

management and technical staff, and occasionally testimonials from a third party to verify the suitability

of the company to tender. Selective tendering is adopted in high value and complex procurements

(MOF, 2010).

Restricted tenders: specific supplies/contractors are specially invited to submit bids. Such tenders

can be adopted if there are few suitable suppliers/contractors available to undertake the project, or the

products, services and works are required urgently given that selection in this type of tender is less time

consuming (Rohana et al, 2010). In some cases restricted tenders are adopted following the failure of a

supplier/contractor to complete a contract satisfactorily. In 2013, the contractor appointed for building

a police training center in 2008 was terminated due to unsatisfactory progress in completing the project

and was replaced by another contractor through a restricted tender. The project was eventually

completed in 2016 (AG, 2016b).

Requests for proposals In certain public procurements in Malaysia, mainly relating to planning and management services and the

design of infrastructure and buildings, undertaken by consultancy firms, the procuring entity may not

provide details of the scope and specifications of the project. Instead, the entity issues a request for

proposals (RFP). It is then left to the bidders (proponents) to develop a detailed set of proposals regarding

the services and designs required. The proposals may be submitted with or prior to a price offer. The RFP’s

usually involve negotiation to fine tune both the proposals and price offer. Like normal tenders, RFP’s may

require a pre-qualification, and may be open to foreign companies or restricted to domestic companies, or

reserved for Bumiputera businesses (Ismail et al, 2014).



Direct negotiationIn a number of high value procurements direct negotiation is undertaken with a single pre-designated

company or consortium/joint venture (JV). This may be justified if the procurement is urgent or there are

few if any reputable and suitable suppliers/contractors to undertake the contract. Negotiations focus on

such matters as the price, scope and specifications, the technical proposals, delivery or completion

schedules and contract variation. There is no selection through competitive tender (Wee et al, 2011; GAN

Integrity Solutions [GAN], 2018).

Direct negotiation is sometimes favoured too in selecting companies to undertake a design and build

infrastructure project. An example was the second part the upgrading project in 2014-2015 of the Pantai

Regional Sewage Treatment Plant near Bandar Baru Sental. The project was procured by direct

negotiation between the Ministry of Energy, Green Technology and Water and the pre-designated

company, BEWG (M) Sdn. Bhd., on a design and build method (AG, 2016b).

QuotationsFor low value procurements (above RM50,000 up to RM500,000 for goods and services, and above

RM20,000 up to RM500,000 for works), the procuring entity calls for a quotation (known as a request for

a quotation or RFQ) rather than a tender. Quotations require a company just to quote a price and

demonstrate its compliance with specifications. The company offering the lowest price wins the contract

(providing it is compliant with the specifications). This is a useful means of procurement for readily available

off-the-shelf goods, standard products or services or small-scale public works of limited value, with simple

and straightforward specifications. The key features are that price is the dominant and in some cases the

exclusive consideration (Wee et al, 2011).

Two types of quotations may be adopted. One is the open quotation in which the RFQ is advertised and all

companies within specified categories (usually SME’s) may respond to the invitation with at least 5

quotations required. The other is a restricted quotation in which 5 or more suppliers or contractors are

specially invited to submit a price offer for the goods, services or works to be procured. Many quotations

in Malaysia are reserved for Bumiputera SME suppliers and contractors, as illustrated in rural infrastructure

procurement discussed below. (MOF, 2010; Rohana et al, 2010; Khairul & Chamhuri, 2012).

BallotingAlso applicable to low value procurements is balloting. Small local or Bumiputera suppliers and contractors

are invited to express an interest in delivering a product, service or works. After screening of the applicants

for their suitability and the price they offer, those considered most suitable or offering the lowest prices are

put into a pool from which a random draw is made. The company or companies drawn from the pool are

then awarded the contract (Government Procurement Division, 2014). Balloting is practiced in selecting

Bumiputera contractors for small value projects in the construction of the KVMRT rail network and in rural

infrastructure contracts, as will be discussed below.

Direct purchasingIn some cases, a procuring entity may consider only one supplier and contractor – a procedure known as

direct purchasing or single sourcing. This is allowable and most commonly used for supplies and services

up to RM50,000 and for small scale works up to RM20,000. Of course, the supplier/contractor chosen for

a direct purchase must deliver at an acceptable quality and charge a reasonable price. There have been

occasions, arguably in contravention of the procurement regulations, when a supplier/contractor has been

selected for a direct purchase even though the contract value is above the thresholds for direct purchasing

(MOF, 2010; Khairul & Chamhuri, 2012).

Local content Whatever type of procurement of goods and works is adopted, there is a strong emphasis on promoting

local production and manufacturing. According to Treasury Circular PK1. Procuring entities must ensure

that suppliers provide goods with as much local content as possible so long as they accord with Malaysian

Standards (MS). Foreign produced goods, components and supplies which are required can only be used

if none are locally produced. Specifications should be tailored to suit locally produced goods, components,

and supplies. In works procurement, contactors are likewise required to use locally sourced suitable

materials, equipment and tools when available (MOF, 2015).

E-procurementA major change to public procurement in Malaysia has been the adoption of E-procurement (ePerolehan).

This enables suppliers, service providers and contractors and procuring entities to conduct on-line the

different aspects of a procurement transaction from quotations to tenders and RFP’s. The main platform is

the ePerolehan portal. The portal allows procuring entities to advertise procurements, while companies can

download tender documents and undertake pre-qualification if necessary, and can submit their quotations,

tenders and proposals on-line with the ability to check the status of their applications after submission.

Furthermore, through the ePerolehan portal, businesses can undertake procurement registration or renew

their registration with the MOF and pay their registration fees. In addition, on the MOF website are found

soft copies of Treasury Circulars providing information about the rules and procedures governing

procurement. Also disclosed on-line on the same website and/or the websites of certain procuring entities

are bid outcomes (lists of companies recently awarded contracts).

Another platform of E-procurement is the Construction Industry Development Board (CIDB) E-services

portal, which performs many of the functions stated above with respect to construction contractors. It can

be appreciated that the adoption of E-procurement serves the underlying principles of procurement policy

in Malaysia by widening competition, increasing transparency and ensuring better value for money

(Maniam et al, 2009; Khairul & Chamhuri, 2012; MOF, 2018a; CIDB, 2018).

Funding for different types of procurement Many low value procurements involving direct purchasing and quotations for products with a useful life of

less than one year are funded from the operating budget of the Government. The majority of procurements

are funded from the development budget. A further source of funding may be a ‘soft loan’ (low interest) from

the MOF to the procuring entity. For high value tenders such as costly infrastructure projects worth billions

of RM, the funding may be secured by short and mid-term debt issue including Sukuk issued by a Special

Purpose Vehicle, DanaInfra Nasional Bhd (DanaInfra), as discussed below (DanaInfra, 2018a; Saadiah,

2014). In addition, in one forthcoming infrastructure project, examined below, the contractors are required

to initially fund the project and only receive payment over a number of years and not when the project is

completed.

Procurement from Bumiputera companies Special treatment is accorded to the Bumiputera business community in public procurement through a

range of preferences (Economic Planning Unit [EPU], 2016a). The preferences are indicated in Treasury

Circular PK1.

The main preference are set-asides in which the procurement of certain goods and services are reserved

only to Bumiputera suppliers and contractors. These include goods and services up to RM100,000, and

any works project up to RM50,000, and other goods, services and works when it is evident that

Bumiputera companies can be suitable suppliers and contractors. Furthermore, in works procurement, set

aside quotas exist. At least 50 per cent of works projects with a value between RM50,000-350,000 within

a financial year are set aside for Bumiputera contractors, while the quota is 30 per cent for projects worth

more than RM350,000 (McCrudden & Gross, 2006; Rohana et al, 2010; MOF, 2015; Grier, 2015; Ministry

of Trade and Industry [MITI] 2015).



Use of offsets

The second type of preference are preferential price margins for goods provided by Bumiputera suppliers.

The extent of the margin of price (MOP) varies according to the value of the procurement and whether the

supplier is a distributor or a manufacturer of the goods. In tenders for goods manufactured as well as

supplied by a Bumiputera company, the MOP is 10 per cent for contracts worth up to RM10 million, 5 per

cent above RM10 million up to RM100 million, and 3 per cent above RM100 million. If the Bumiputera

company is the supplier of the goods and not the manufacturer and also the supplier of services, the MOP’s

are 10 per cent in contracts worth above RM100,000 up to RM500,000 (below RM100,000 there is an

automatic set aside for Bumiputera companies), 7 percent above RM500,000 up to RM1.5 million, 5 per

cent above RM1.5 million up to RM5 million, 3 per cent above RM5 million up to RM10 million, and 2.5 per

cent above RM10 million up to RM15 million, with no MOP above the last threshold (McCrudden & Gross,

2006; MOF, 2015; Grier, 2015; MITI, 2015).

Under Malaysia’s public procurement regime, when a foreign or a large local company is awarded a high

value procurement contract, the procuring entity may require offsets under the Industrial Collaboration

Programme (ICP) as outlined in the Treasury Circular PK1/2013. These are additional measures the

company (the offset provider) is required to undertake in return for being awarded the contract, and are

designed to benefit local smaller businesses and agencies in different sectors and build local capacity and

expertise. The recipients of offsets may be businesses or agencies linked to the procurement (direct

offsets), but other businesses and agencies not linked to the procurement may benefit (indirect offsets)

(MOF, 2013; Zailani. 2014).

Offsets may include the transfer of technology and knowledge. In such cases the offset provider shares

with offset recipient’s information about its technology, and when the technology is under patent relaxes the

restriction and allows the recipients under licence to reproduce and use it. Offsets may too include training

programs conducted by the offset provider and participation of recipients in the research and development

programme of the provider. The offset package may further entail a requirement for sub-contracts to be

awarded to local businesses and for a procured product to be locally assembled, with components to be

locally purchased or manufactured. Other offsets are the permission for local business to participate in the

global market and supply network of the offset provider, and the purchase by the provider of the equity and

debt of local companies (MOF, 2013, 2015; Zailani, 2014).

Offset programmes are managed by two bodies, the Offset Management Unit (OMU) in the procuring

entity and the Technology Depository Agency (TDA), and sanctioned by a special Offset Committee (OC)

of the procuring entity set up for each procurement to which an offset may be relevant. At the initial stage,

the OMU decides if a procurement should attract any offsets. If so, the bidders are then invited to provide

offset proposals along with their bid submission. These may be fine-tuned through negotiation with each

bidder, and are then vetted by the OMU of the procuring entity and the TDA. The evaluation is forwarded to

the OC for endorsement. After this, the OC sends an evaluation report of the various offset packages to the

tender evaluation committee and/or the Procurement Board of the procuring entity. The evaluation is taken

into account as one of the criteria in selecting the successful bidder (MOF, 2013; Zailani. 2014).

The contract for an offset package is distinct from the main procurement contract and is signed separately.

The implementation of the offset programme is monitored by the OMU/TDA. The use of offsets has figured

previously in the award of defence contracts and more recently in rail construction and rolling stock

procurement. In addition, the tenderer and the procuring entity must agree on the value of the offset.

However, this value in cash terms and as a percentage of the contract value (often publicly disclosed) is not

the actual cost to the provider, but its so-called credit value. The actual cost to the provider is determined

and then notionally multiplied by credit multiplier to reach a notional amount and percentage of the contract

value (the multiplier could be 2, 4, 6 or any number). The more important the offset is to the recipient the

greater the multiplier. The notional credit value of the offset is the value agreed by the provider and recipient

at the outset.

The procurement process

As in most countries, the initial stages in the procurement process are the identification by a procuring entity

of the need for each procurement anticipated for the forthcoming financial year, following which it draws up

an annual procurement plan. After this it is necessary to obtain funding approval for each procurement from

the MOF, and in the case of procurements over RM50 million, approval of the project plan from the

Economic Planning Unit (EPU) in the Prime Minister’s Department, especially with regard to cost and

necessity (EPU, 2018). The plan may include specifications which detail the delivery time or period,

quantity, and specific features of the product and services to be acquired and works to be undertaken the

drafting of specifications is conducted by the specifications committee linked to the Procurement Board. In

the case of RFP’s in place of specifications a statement of broad requirements is drawn up (MOF, 2010;

Government Procurement Division. 2014). the specifications may also be vetted by the EPU.

The following stage is advertising the tender, RFP or quotation as widely as possible in the interest of fair

competition and transparency. The traditional outlet has been newspapers. For domestic and Bumiputera

reserved procurements, advertising in one Malay language daily is required. In the case of international

tenders and RFP’s, it is necessary to issue notices in one Malay language and one English daily. As in most

developed and emerging economies, a more important advertising outlet are the internet portals,

particularly the websites of the procuring entity, the ePerolehan portal, E-services portal of the CIDB, and

in the case of international tenders and RFP’s international procurement advertising websites, an example

being global tenders.

After this, registered companies and where necessary those which have pre-qualified submit their tenders,

proposals and quotations. The evaluation committee then assess the submissions and make

recommendations to the Procurement Board. While in quotations, price is the dominant consideration as

mentioned above, in tenders, various criteria are applied. These include price and compliance with

specifications. Whether included or not in the specifications, the quality factor is of prime importance

covering the functionality, durability, upgradability, after sales service and warranties and ease of usage of

the product, service and works to be provided. Further considerations are, as mentioned above, the extent

of local content and other offsets.

Often procuring entities in the Malaysian public sector put price above the quality factor, so the lowest

bidder is awarded the contract even when the quality offered may not be the best. The weightage given to

price is frequently due to budget constraints in the procuring entity. When the selection is made, the

winning bidder is required to put down a performance bond ranging from 2.5 to 5 per cent of the contract

value depending on the nature and value of the procurement (MOF, 2010; Skrine, 2012; Government

Procurement Division, 2014).

Registration of suppliers & contractors

Suppliers of goods and services to public agencies and contractors for public works and infrastructure

projects are required to be registered for that purpose, which shows that a company has met basic criteria

as a viable and sustainable business. All companies must first be registered with the Companies

Commission of Malaysia (CCM). Suppliers of goods and services must then be registered with the

Government Procurement Division of the MOF. With the registration indicating the type of goods and

services that a company can supply (field code) (Government Procurement Division, 2014).

Contractors for public works and infrastructure projects must first obtain an overall registration certificate

that covers public and private contracts. The main registration authority is the CIDB. The contractors are

registered for a particular work head(s) (e.g. civil engineering, building, mechanical & electrical and given a

grade to indicate tendering capacity (the maximum value of the contracts they can be awarded), from

Grade 1 (contracts not exceeding RM200,000) to Grade 7 (unlimited) (Malaysia Productivity Corporation

[MPC], 2016; QADKAM Worldwide, 2018).



Furthermore, those who wish to quote or tender specifically for a construction and engineering project with

a public agency must have an additional registration, viz. a Government Procurement Working Certificate

(SPKK), also issued by the CIDB. The grades for the SPKK, are slightly different from the general

registration grades, and are limited to six, ranging from the lowest Grade F (only allowing a tendering

capacity up to RM200,000) to the highest, Grade A (allowing a tendering capacity above RM10 million).

In addition, Bumiputera contractors are required to have a Bumiputera Status Certificate (Sijil Taraf

Bumiputera or STB) issued by the Contractor and Entrepreneur Development Division of the Ministry of

Works (MPC, 2016).

To be eligible to bid in international tenders foreign companies normally must have a Malaysia business

registration and/or be incorporated as a Malaysian company. They then can be registered with the

Procurement Division, or with the CIDB if they are construction companies. However, in some cases,

exemption from local registration or local incorporation is allowed for large foreign companies tendering for

extensive construction projects (MPC, 2016).

Procuring entities and procurement boards

Value thresholds & procuring entitiesIn keeping with procurement reforms in most modern states, the government has delegated responsibility

for contract awards of low to medium value to ministries/departments at the federals level, as mentioned

above. These comprise contract awards for goods and non-consultancy services up to RM50 million. In

the case of works, the contract value threshold is RM100 million. The thresholds are higher for statutory

bodies and GLC’s owned by the Minister for Finance Inc. These may make contract awards for goods,

non-consultancy services, and works up to RM300 million. The PWD usually assumes responsibility for

contract awards up to RM100 million on behalf of line ministries/departments.

In addition, line agencies and the PWD may make awards to professional consultancy services for

infrastructure projects valued up to RM300 million, and/or if the value of the research and survey is no more

than RM5 million (MOF, 2011).

High value awards are the responsibility of the MOF as the contracting authority viz. goods and

non-consultancy services above RM50 million, and works above RM100 million. In the case of statutory

bodies and GLC’s owned by the Minister for Finance Inc., the MOF makes awards for contracts above

RM300 million. It also makes awards to professional consultancy services for infrastructure projects valued

above RM300 million, and/or if the value of research and survey work is each more than RM5 million (MOF,

2011).As mentioned above, even when MOF has awarded a contract, the PWD or the line agency may be

designated as the implementing agency.

Procurement boardsWithin the procuring entities, Procurement Boards are set up, whose function is to make contract awards.

Members are appointed by the Minister for Finance (Chief Ministers of the respective States appoint the

State Procurement Boards). The Head of the Board is usually a Head of Department or a Controlling Officer,

who is responsible for the overall management of funds earmarked for procurement.

In most procuring entities, there are two Procurement Boards: A and B. They are supported by a group of

committees each dealing with a particular stage in the procurement process, e.g. drafting specifications,

opening tenders, proposals and quotation submissions, and evaluating them. The Procurement Boards

decide on the terms of the contract and the companies to be awarded contracts.

Procurement Board ‘A’ is empowered to decide on tenders up to the maximum of RM50 million for goods

and non-professional services (the maximum allowed for a line agency), and up to the maximum of RM100

million for works (the maximum allowed for the PWD). The line agency and the PWD may make awards to

professional works consultants if the infrastructure project is valued at no more than RM300 million and

the research and survey work are each valued at no more than RM5 million. The membership of

Procurement Board A includes a permanent representative from the MOF to ensure that all procurement

principles, policies, rules and regulations and procedures are adhered to.

Procurement Board B is authorised to decide on procurements at or below RM20 million for goods,

non-professional services and works procurements. It may also make awards to professional works

consultants if the works project is valued up to RM20 million and/or the research and survey works is

valued up to RM2 million. Procurement Board B can make awards without the presence of a representative

from the MOF (MOF, 2010; 2011; 2015). Any decisions of Procurement Boards which are not unanimous

must be forwarded to the MOF for final approval.

Common user items The purchase of common user items (standard products readily usable across the board in the public

sector) is not undertaken by line agencies but centrally through the Procurement Division of the MOF, being

designated as Federal Contracts. These are awarded through local tenders, and occasionally through

direct negotiation.

When such a contract has been awarded for a particular common user item, all ministries/departments

whether federal or State are required to use the common user item. Common user items include foodstuff,

office furniture and vehicle spare parts (MOF, 2015).

Action against defaulting companies

Infringements In the event of default (infringement of contractual obligations and procurement regulations), suppliers and

contractors incur penalties. The body responsible for deciding if default has occurred, and, if so, what the

penalty should be is the Disciplinary Action Committee (DAC) in the MOF. This can only be done on receipt

of a formal complaint of infringement from the procuring entity with supporting evidence (MOF, 2018b).

A range of infringements outlined in Treasury Circulars come under the purview of the DAC. Amongst them

are the rejection of a quotation or tender award, failure to carry out a contract or to carry it out for the whole

of the period specified in the contract, and non-compliance with product, design, service and work

specifications. Equally serious, are false declarations and submission of false information in registration, in

pre-qualifications and in quotation, tender, and proposal submissions.

Other serious infringements are a failure to comply with the terms of the registrations or to renew them

during the period of a contract. Specific reference in the Treasury Circulars is made to false disclosures by

a company to secure Bumiputera status, lack of subsequent compliance to the Bumiputera registration

criteria and a failure to renew the registration during the period of the contract. Further defaults which incur

penalties are the assignment of a contract to another business without the consent of the procuring entity

(novation) and a failure to pay the performance bond (MOF, 2018b).

Penalties for default44 defaulting companies against which penalties were levied between 2013 and 2017 are listed on the

MOF website. The most common type of default committed by 20 companies was a failure to accept a

contract or quotation award or to provide any of the goods specified in the contract at all. 14 of the 44

companies were found to have defaulted by non-compliance with the specifications of the product or

service procured.



This entailed not supplying goods of the specified type and standard, providing a lesser quantity than

specified, and providing a service for a shorter period than required. A further 9 of the companies were

penalised for false disclosures especially for registration and pre-qualification purposes (including falsely

amending certificates). One company committed default by failing to repay a debt under a court order

(MOF, 2018).

A range of penalties exist from warnings of 6 months or 1 year, to suspensions of the procurement

registration (maximum of 5 years), and in the most serious cases cancellation of the procurement

registration (maximum 5 years). The suspension prevents companies and partnerships from submitting

quotations, tenders and proposals for the period of the suspension, after which the eligibility to do so is

restored. Cancellation likewise prevents a company from participating in a procurement, but when the

period of cancellation expires, it is not guaranteed that eligibility would be restored. In addition, when a

suspension and cancellation take effect, the directors, partners and owners cannot register a new

company for procurement purposes. In addition, when a registration is cancelled, they may be blacklisted,

this means that any company or partnership to which they are connected as directors, partners and

owners is also debarred from participating in any procurement (MOF, 2018).

Of the 44 defaulting companies referred to above, 10 companies had their procurement licence cancelled

for 2-5 years, 16 companies were suspended usually for 1-2 years, and 18 companies were given warnings

of 6-12 months. Refusal of a contract when awarded or failure to undertake it attracted the least severe

penalties usually a warning, Non-compliance gave rise to suspensions of 1-2 years and occasionally a

cancellation of the registration for 2 years, while fraud and dishonesty in submissions lead to cancellation

of the registration for 3 years or more with the CEO and directors blacklisted (MOF, 2018).

Accountability in procurement

Government Procurement Division Procuring entities are accountable for the way procurements are conducted and for the outcomes

achieved. One agency of accountability is the Government Procurement Division of the MOF, which, among

its many functions, monitors the way procurements are managed, enforces procurement rules based on

the Treasury Circulars, and provides guidance to procuring entities on how to implement those rules. It also

vets and amends if necessary contract awards of Procurement Boards A, which are of high value, or those

decided without the unanimity of Board members, as mentioned above.

Malaysian Anti-Corruption Commission (MACC) The second agency of accountability is the MACC whose functions and powers are provided under the

Malaysian Anti-Corruption Commission Act, 2009 (MACCA). One power is to investigate evidence of

corrupt practices by public official’s as well private individuals and organisations. These include corrupt

practices in procurement transactions.

In doing this the MACC is further supported by the Witness Protection Act of 2009 and the Whistle-blower

Act of 2010, which encourage disclosures of information relating to possible corruption and provides

protection to those who report such evidence. Also supporting the efforts of the MACC is the Anti-Money

Laundering and Anti-Terrorism Financing Act, 2001.

Actions which are corrupt are stipulated in the MACCA, in the Penal Code and in other instruments and

include solicited and unsolicited bribery by officials, fraudulent actions and embezzlement of funds

earmarked for a procurement. It is also obligatory for members of Procurement Boards and

procurement-related committees to declare any conflict of interest in a procurement. When a member (or

a person in his/her family) has a private or financial interest in any company participating in a tender, RFP,

quotation or direct purchase, must disclose that interest and in consequence must withdraw from the

Board or committee and take no further part in its proceedings. The types of ‘interest’ are not specified but

presumably include shareholdings, bond holdings, directorships, and the promise of future employment or

a future directorship, amongst others.

In addition, members of Procurement Boards and procurement-related committees are required to sign an

Integrity Pact, along with both bidders and also consultancy firms hired to manage a procurement. By

doing this, they undertake not to engage in corrupt practices such as bribery, collusion or embezzlement,

and to declare any conflict of interest with companies or partnerships participating in a procurement. If

sufficient evidence is assembled, the investigation papers are forwarded to the Legal and Prosecution

Division of the MACC. Its brief is to assess the evidence to determine if there are grounds for a prosecution

and if so, with the consent of the Public Prosecutor, to conduct case trials, including appeals. The courts

in which many corruption cases are heard, including appeals, are the Special Anti-Corruption Courts set up

in 2011 mainly to expedite the prosecution process. While both the MACC and the Special Anti-Corruption

Courts deal with the whole range of alleged corrupt practices, cases involving procurement transactions

and procurement officials are an important aspect of their work.

Auditor General (AG) The third agency to which procuring entities are accountable is the National Audit Department under the

AG. In addition to the attestation and compliance audits, it also conducts performance audits of different

ministries/departments and statutory boards to check if ‘the Federal Government’s

activities/programmes/projects have been carried out efficiently and economically to achieve their desired

objectives/goals’ (AG, 2016a). Another type of audit, the Government Companies’ Management Audit, is

designed to evaluate whether ‘the Federal Government Companies have been managed in a proper and

efficient manner as well as achieving their objectives’ (AG, 2016a).

These audits often focus on procurement, and over the years have revealed several weaknesses in the

procurement system, which will be discussed below. A recent initiative of the AG is to implement an

Accountability Index This rates the compliance to financial regulations, including the management of

procurement expenditure of ministries/departments and thus acts as a measure of the extent of control of

procurement funding (National Audit Department, 2018).

Prime Minister’s Department Procuring entities are accountable as well to the Prime Minister’s Department (PMD). In the procurement of

projects worth more than RM50 million, the planning, designs, method of procurement and system of

implementation are submitted to the EPU of the PMD for vetting and approval, as indicated above, The Unit

is particularly concerned in its value laboratory programme to appraise both estimated costs and the

contract value after tender or negotiation to ensure they are within expectations and ensure value for money

(EPU, 2018). Furthermore, the implementation of a project is monitored by the Development Division of the

PMD, which is authorised to intervene if implementation is unsatisfactory and impose remedial measures.

During 2014 and 2015, the Development Division intervened in 6 projects where the progress was

unsatisfactory and undertook measures to remedy the problems or expedite the project. This included

re-tendering of 2 projects with damages levied against the defaulting contractor (AG, 2016b; PMD, 2018).

Malaysia Competition Commission (MyCC)A further agency should be mentioned, viz MyCC. The agency does not hold procuring entities to account

but rather suppliers and contractors if they have engaged in collusion or bid rigging when tendering for

contracts. It is the responsibility of the procuring entities to report any such evidence so that investigations

can take place. Collusion in public procurement in Malaysia is discussed below (MyCC, 2014).



Overview

Much attention has been given to procurement in the urban public transport (UPT) sector. Developing this

sector has been identified as a continuing priority in the 11th Malaysia Plan (2016-2020) currently in force,

as it was in the preceding Plan (10th Malaysia Plan 2011-2015). The priority underpins the commitment

to developing UPT in both the Government Transformation Programme 1.0 and 2.0, in the Economic

Transformation Programme and in the Strategy Paper No. 13. The detailed framework for developing UPT

is elaborated in the National Land Public Transport Master Plan, 2012-2030. The Land Public Transport

Commission (SPAD) was set up in 2010 as a statutory body to oversee the implementation of the Master

Plan and to plan and regulate the UPT sector and enforce the relevant laws and regulations.

The development of the UPT is concentrated in the Greater Kuala Lumpur/Klang Valley area but UPT is

being enhanced in other urban areas in Malaysia such as Penang and Johor Bahru. Under the Master Plan

the three aspects of urban transport (rail, buses and taxis) have been and continue to be extended,

upgraded and integrated.

The ownership of both the operating assets (e.g. buses, taxis, and in the case of rail services trains, power

supply equipment, cables, and signalling systems) and the non-operating assets (e.g. for rail services

tunnels, viaducts, tracks, depots and stations, and for buses interchanges, depots and termini) are vested

in the three UPT companies: Keretapi Tanah Melayu Bhd (KTM), Prasarana Malaysia Bhd (Prasarana), and

MRT Corp, although there are other smaller public transport companies.. All three are GLC’s wholly owned

by the Minister for Finance Inc. Two of the companies, KTM and Prasarana, as well, operate their own

assets through wholly owned subsidiaries such as KTM Komuter (KTM), Rapid Rail Sdn Bhd (Prasarana)

and Rapid Bus Sdn Bhd (Prasarana). Prasarana through Rapid Rail operates the assets of the MRT Corp,

as mentioned below. As owners and operators they are subject to the licensing, regulatory control and

performance standards laid down and administered by SPAD (Prasarana, 2018; MRT Corp, 2018a; KTM,

2018).

As asset owners, the three companies undertake their own procurements though subject to Government

control, in which members of the Government head or sit on the Procurement Boards. In recent years,

KTM, Prasarana, and MRT Corp, have each been active in procurement with regard to building new rail

networks, upgrading existing ones, purchasing new train vehicles and buses, and building new passenger

facilities in the rail and bus networks.

Their procurement practices are broadly aligned with government procurement policy. Where the

procurement is high value and specialised and could not be delivered by a Malaysian company, then an

international tender is held. One example is the purchase of modern rail locomotives and multi-train sets

from foreign manufacturers. In these tenders, Chinese, German and Japanese rail engineering companies

have been prominent (Railway Gazette, 2010; 2017). Where a local company cannot deliver a high value

contract on its own (such as a major rail works package), but has the resources and expertise to contribute

to it, then a consortium/JV with a foreign company is favourably considered. When the UPT procuring entity

is confident that a sufficient number of local companies have the track record, resources, liquidity, and

expertise to deliver a contract, then a domestic tender is held. With many UPT contracts categorised as

works, then the quota system for Bumiputera companies is applied and set asides are authorised for those

companies. When large foreign companies are awarded contracts for major packages, they may be

required to provide offsets for local companies and agencies, referred to below.

Examples are given below of procurement and contract management in the development of two new rail

networks in the Kuala Lumpur conurbation: the KVMRT and the LRT3.

2. PROCUREMENT INURBAN PUBLIC TRANSPORT

KVMRT SBK and SSP Lines

A centrepiece of the UPT development is the building of a Mass Rapid Transit network in the Klang Valley

and greater Kuala Lumpur conurbation, known as the KVMRT. The KVMRT network as presently planned

consists of three lines: Sungai Buloh-Kajang Line (SBK), Sungai Buloh-Serdang-Putrajaya Line (SSP), and

the forthcoming Circle Line. The building of the first line (SBK Line) is completed and the line is now

operational. The second line (SSP Line) is currently being built, while the third line (the Circle Line) is being

presently planned and is subject to a feasibility study.

Separation of asset ownership and operational responsibilityMRT Corp was set up in 2011 as a GLC to develop the network and to own the assets. These comprise

the operating assets (e.g. trains, power supply equipment, cables, and signalling systems) and

non-operating assets (e.g. tunnels, viaducts, tracks, and station structures). The operator of the completed

SBK Line and the SSP Line is a separate company, Rapid Rail Sdn Bhd, the subsidiary of Prasarana, as

already mentioned (MRT Corp 2017a).

Procurement and funding model for the SBK and SSP LinesAs a developer and owner, MRT Corp is responsible for the procurements required in building and

operating the lines. The consideration of tenders and the award of contracts is the responsibility of the

One-Stop Procurement Committee (OSPC). Some of its meetings have been chaired by the Prime Minister,

which indicates direct Government involvement in the procurement process.

A conventional procurement model has been adopted for both lines, rather than a

design-build-operate-transfer mode (in which a partner in the consortium/JV responsible for the

construction is a given a concession to operate under a lease) (The Star Online, 2017). However, a key

feature of the procurement model is the use of a project development partner (PDP). The PDP plays a

central role in drafting designs and specifications and in supervising the implementation of the work and

ensuring its timely completion. It is paid a fee of 6 per cent of the contract value if the final cost is equal or

lower than the targeted cost, with a lesser percentage if it is above. The PDP chosen for both lines is a local

JV, MMC Corp and Gamuda, The procurement of the goods and works for both lines is divided into work

packages, each dealing with a specific aspect of the development through a separate tender (Lokman &

Ooi, 2016).

The procurement for the SBK line was divided into 91 work packages. Many of the tenders were

international open tenders, a number of which involved a partnership with a Malaysian registered company.

Others were domestic tenders in which only Malaysian registered companies were eligible to bid, of which

some were Bumiputera reserved tenders. Nearly all were subject to pre-qualification (CMC Group, 2012).

In the construction of both KVMRT lines, the funding is obtained from a Special Purpose Vehicle, DanaInfra

mentioned above. It was set up in 2011 as a finance company wholly owned by the Minister for Finance

Inc. Designated as an Infrastructure Financing Entity (IFE), its remit is to issue Sukuk to fund costly

infrastructure projects. For the KVMRT construction works for both lines, DanaInfra has issued Islamic

Commercial Papers (short-term up to one year) and Islamic Medium Term Notes in total worth RM46

billion. The debt is guaranteed by the Government (DanaInfra, 2018a, b).

International and local participationIn the 91 tenders for main works packages of the SBK Line, 18 contracts went to foreign companies: 8 of

these were awarded to foreign companies in a consortium or JV and 10 were awarded to a single foreign

company or its Malaysian subsidiary. In the 46 tenders for main works projects for the SSP Line (up to

December 2017), 9 were awarded to foreign companies as part of a consortium/JV, 7 of which involved

a partner local company and 2 comprised just foreign companies. None were awarded to a single foreign

company. This represented a slight proportionate increase in the engagement of foreign companies

compared to the SBK Line (MRT Corp, 2017b).



These figures suggest that foreign companies played and continue to play a significant but not the major

role in the development of the KVMRT network. The large majority of contracts still go to local companies,

either as sole contactors, contractors in a consortium/JV and as well as sub-contractors. Local

companies have achieved a leading role either because the tenders are restricted to them or they are given

additional points in the evaluation by virtue of being local. In fact, in the construction of the SSP Line, the

MRT Corp stated that it ‘encourages’ participation of Malaysian-owned companies or JV’s in the

international open tenders, indicating ‘they will get a competitive edge, where they will receive additional

points in the evaluation’ (Go, 2016). Moreover, with a few exceptions, in the tendering for the construction

of the SSP Line, foreign companies in order to pre-qualify were required to form a consortium or JV with a

local company, with the weightage of the work undertaken by the local company to be at least 30 per cent.

The award of high value contracts to local companies, together with offset packages mentioned below,

indicates the use of procurements to develop the national economy and in creating business and

employment opportunities (Go, 2016).

Bumiputera participation Alongside the commitment to the participation of local companies in the construction work, measures have

been in place to ensure significant involvement of Bumiputera companies in line with the Government’s

Bumiputera preference policy in procurement. In the construction of the SBK Line, the Government

stipulated that at least 43 per cent of the total value of the contracts was to be awarded to Bumiputera

companies (MRT Corp, 2017c). By May 2016, 43 of the 91 main work packages awarded went to

Bumiputera companies, comprising 50 per cent of the total value of the contracts.

In the construction of the SSP Line, the Government has increased the Bumiputera stake to 45 per cent.

By December 2017, half of the 46 main work packages awarded and 48 per cent of their total value went

to Bumiputera companies (MRT Corp, 2017b, c). As an example, in the construction of the SBS a key work

package for a viaduct construction was reserved for a Bumiputera company (MRT Corp, 2012).

Priority has also been given to involving small and medium Bumiputera companies in the construction of

the lines. For the SBK Line, the Bumiputera applicants for the minor works packages were restricted to

those in registration grades 1-4 (the last being eligible for projects not exceeding RM3 million). By

September 2016, a total of 265 work packages worth RM182 million for small scale works and acquisitions

of necessary products had been awarded to Bumiputera companies (MRT Corp, 2017c).

For the SSP Line, Bumiputera eligibility for small works contracts was extended to include companies in the

higher grades of 5 and 6 (the latter being eligible for projects up to RM13 million). Expressions of interest in

small works packages were advertised in December 2015 for contractors in Grades 1-4 with 1,222

contractors responding, of whom 892 passed the screening test. Expression of interest in work packages

for companies in Grades 5 (not exceeding RM5 million) and Grade 6 (not exceeding RM10 million) were

advertised in September and October 2015. 165 companies submitted applications of which 115 passed

the screening test (MRT Corp, 2017c).

In some selections a balloting system has been adopted involving suitable Bumiputera applicants with

CIDB grades 1-4. In the construction of the SBK Line, balloting began in 2013. In the case of the SSP Line,

balloting began in June 2017 (5 ballots were held in 2017). The process begins with an invitation to

Bumiputera construction and engineering firms registered with the CIDB to express interest in a project.

Applicants are screened and those who are validated by the screening are balloted. A ballot is carried out

for each project and the company whose name is drawn is awarded the project (MRT Corp, 2017d). For

example, in the fifth ballot held in October 2017, 404 contractors were shortlisted and a ballot was drawn

for 8 contracts worth RM2 million. The balloting will continue until the Line is completed in 2022 (MRT

Corp, 2017d).

KVMRT Circle Line

Procurement and funding modelIn the construction of the Circle Line, the turnkey model has been adopted in preference to the PDP/works

package model used in the construction of the SBK and SSP Lines. The turnkey model requires only a

single overarching main contractor to be selected in an international tender, which will be responsible for

the entirety of the project, the procuring entity will not hire a PDP to oversee the project and will not divide

the project into conventional works packages. Instead, the turnkey contractor itself will undertake part of

the work and sub-contract other parts, as well as managing and supervising the work and delivering the

entire project at the agreed date (Azman, 2017; MRT Corp, 2018b).

An international tender was held with four bids received - all from consortiums/JV’s, with Malaysian

companies being one or more of the partner firms in three of the cases. Two bids have been shortlisted:

the Malaysian MMC-Gamuda-GK Consortium, and the China Communications Construction Company

Limited/China Communications Construction Company (Malaysia) Sdn Bhd JV. The choice was made on

the basis of the technical capability of the bidders, given the demanding technical requirements of the

tunnelling work of the project Azhar, 2018a).

Another feature of the Circle Line procurement is that the successful contractor is not to be paid the bulk

of contract sum during or at the end of the building work. The aim is, if feasible, for 90 per cent of the

payment (estimated to be RM30 billion) to be spread over 30 years with the first payment 8 years from the

completion of the project. Thus, a bidder to be selected must raise a loan and thus obtain a financing

partner who is able to raise the capital required. Reportedly, the MMC-Gamuda-GK consortium may raise

capital from DanaInfra, while the Chinese consortium may raise it from Chinese banks (DanaInfra, 2018b;

Azhar, 2018a).

If no satisfactory financing partner can be obtained by any of the bidders who otherwise can meet the

requirements of the project, then it is possible the Government will resort to its previous funding model of

payment to the contractor on completion with the capital raised through a Sukuk issue by DanInfra or from

the development budget (Leong, 2017).

LRT3

Another important component of the urban transport system in the Kuala Lumpur conurbation are Light

Rapid Transit (LRT) lines. The Ampang Line was opened in 1996 and the Sri Petaling Line opened 1998,

with both recently expanded. Importantly, a third line is currently being constructed from Kota Damansara

to Cheras (LRT3). The owner of the assets is Prasarana. Rapid Rail as a subsidiary of Prasarana, will

operate the LRT3. Unlike the KVMRT, asset ownership and the operating franchise in the LRT are vested

in the same company group (Azhar, 2017; Tee, 2017).

Use of offsets With the involvement of major overseas engineering companies in the construction of the MRT, priority has

been given to ensuring benefits accrue to local companies, agencies and industries so as to enhance the

development of Malaysia’s economy, human capital and technology. As an example, the award in 2013 of

six main works contracts in the construction of the SBK Line has been accompanied by an agreement by

the successful bidders to provide a series of offset packages. These include the award of sub-contracts,

training programmes, technology and knowledge transfer, local assembly of products, investment in

domestic companies, global market access and the use of local components. The offset packages had a

credit value of RM3.53 billion (CMC Group, 2012; EE, 2013; Malaysia Digest, 2013; Gho, 2016).



Tender and funding model for the LRT3The tender model adopted for the LRT3 is the same as that in the construction of the SBK and SSP lines

of the KVMRT, viz. the use of a PDP (MRCB George Kent Sdn being chosen in a tender comprising 7

bidders) and the division of the project into work packages with a separate tender for each. As a central

feature of this model, major responsibility in designing the scope and specifications has been assigned to

the PDP which will too monitor and evaluate the construction of the line, and ensure that it is completed

on time at the agreed contract value. In return, MRCB George Kent Sdn as the PDP will receive 6 per cent

of the cost of the project if it is equal to the targeted cost, and a lesser percentage if it is above the targeted

cost. On the other hand, it will receive a bonus on top of the 6 per cent if the cost is less than the target.

The PDP model separates, as with the SBK and SSP Lines, the design function from the construction work.

The alternative model of a turnkey project without a PDP was not adopted (Sharidan, 2015; LRT3, 2016a;

Tee, 2017).

The works for LRT3 have been divided into 59 main packages. The dominant component are the civic

works consisting of 12 packages. In evaluating tender submissions, priority is given for the first time in rail

construction to the use of green technology, including the implementation of rainwater harvesting

technology, noise reduction systems, better energy management system and natural ventilation in the

design of stations (LRT3, 2016b).

In line with government policy in international tenders involving specialised high value products or works,

the evaluation will give particular consideration to any submission from a consortium/JV which includes a

local company. This has been reflected in the procurement through an international tender of rolling stock

(42 driverless trains). The contract was awarded to a consortium of CRRC Zhuzhou, Siemens China, and

Malaysian partner Tegap Dinamik with a contract value of RM1.56 billion (Smith, 2018). In addition, in eight

major civic works packages, the contracts were awarded to local construction companies, not to foreign

companies. It was evident that these companies had the experience, resources and expertise to undertake

the work (Azhar, 2017). This reflects the Government’s priority in hiring local construction engineering

companies in large infrastructure projects when they have proven experience, expertise, resources, cash

flow and funding. The local orientation is further reflected in the allocation of minor works packages which

are reserved for Bumiputera companies, as discussed below (LRT 3, 2016b; Azhar, 2017; Tee, 2017).

Bumiputera participation The involvement of Bumiputera contractors varies between the main and minor work packages. In the

award of the first 8 main work packages, only one package went to a Bumiputera company with a contract

value equal to 11 per cent of the total value of the LRT3 main contracts. This was a lower percentage than

in the contract awards for the SBK and SSP Lines. However, as with the KVMRT construction, a significant

number of 120 minor work packages have been set aside for Bumiputera contractors. 164 of these

companies in CIDB grades G2-G4 have been pre-qualified to tender for these contracts. The aim is that

45 per cent of the minor work packages will be allocated to small and medium Bumiputera companies.

They will be allowed to tender for projects from RM200, 000 to RM3 million, depending on grade. However,

unlike the award of Bumiputera reserved contracts for the KVMRT, the awards will not be by balloting but

through competitive bidding by the pre-qualified Bumiputera companies (LRT3, 2016b; Azhar, 2017; Tee,

2017).

Penalties for late completion According to media reports, an additional provision is to be introduced into the work packages for LRT3,

involving heavier penalties for late completion, known as Liquidated and Ascertained Damages (LAD),

ranging from RM100,000 to RM200,000 per day. It is feared that the small companies with minor contracts

or sub-contracts could ill-afford to pay LAD penalties. A particular concern is that the main contractors will

pass on the damages to the smaller sub-contractors. It has been suggested that this may put off small

Bumiputera contractors from participating in the works packages despite the commitment to ensuring that

a significant percentage of the minor contracts and sub-contracts are awarded to them (Azhar, 2017; Tee,

2017).

Improving the rural infrastructure

3. PROCUREMENT IN RURAL INFRASTRUCTURE DEVELOPMENT

Policy commitments A key objective in Government policy is to upgrade the standard of living and generate business and

employment opportunities in rural Malaysia, which have lagged behind those in the urban areas. This has

been mapped out in various Malaysia Plans since the early 1970’s including the present 11th Malaysia

Plan (section 7), as well as in the Government Transformation Programme 2.0, the Strategy Papers Nos. 4

and 15, and the Rural Development Master Plan of 2010.

Central to this objective is the comprehensive development of the physical infrastructure in the rural

communities, covering roads, water supply, sewerage, electrification, housing, and public amenities. In

each of these sectors, the necessary provision has been limited or lacking, seriously retarding

development. To remedy this, a great deal of rural infrastructure procurement has been undertaken and

continues to be carried out.

Main agenciesThe main procuring entity in rural infrastructure development is the Ministry of Rural and Regional

Development (KKLW). The Procurement Division of the Ministry through its Tender Boards and

procurement-related committees is responsible for the management of the procurement process including

drafting of specifications, award of contracts and supervision of projects. However, it is normal for the

Procurement Division to work in conjunction with other relevant ministries/departments and statutory

boards within the States and with the Public Works Department.

For example, in the rural electrification scheme in Sarawak, the Ministry of Public Utilities, Sarawak

determines the list of electrification projects. The KKLW and its appointed consultants draft the designs

and specifications, which then must be approved by the Sarawak Electricity Board (SEB). The KKLW

awards the contracts, and, together with its consultants, monitors the implementation of the projects.

However, at the end of the process the SEB tests and commissions the new installations and equipment.

Sectors in rural infrastructure development

Village and rural roadsUnder the Village Roads Program (JPD) and Rural Roads Programme (JALB), extending tarmacked road

coverage in rural areas has been and continues to be given high priority. The focus is to connect villages,

link villages to towns and main highways, and provide access to key amenities such as health care centres,

schools, mosques and recreational centres (EPU, 2016a; Performance Management and Delivery Unit

[PEMANDU], 2011; 2013; 2017). During the 10th Malaysia Plan (2011-2015), rural road coverage

expanded by 11.7 per cent from 45,905 kms in 2009 to 51,262 kms in 2014.

During the period of the 11th Plan (2016-2020), the goal is to build a further 3,000 kms particularly in Sabah

and Sarawak as well as in Orang Asli areas in Peninsular Malaysia. In 2017, the target was to build 787 kms

of rural roads, but 828 kms were eventually built exceeding the target by 5 per cent (Civil Service Delivery

Unit [CSDU], 2017),


Rural water supply and sewerageA further objective of the rural infrastructure program is to maximise the supply to the rural population of

clean and treated water. This has involved laying more pipelines, replacing old ones, installing better

pumping equipment, the building or upgrading of treatment plants, installing water meters and water

storage tanks in household plots (EPU, 2016b, c; PEMANDU, 2011; 2013; 2017). During the 10th

Malaysia plan period, 24 treatment plants were built and 38 upgraded, 10,000 water meters were installed,

and 4,288 kms of pipelines were replaced.

This has been complemented by improving the infrastructure for treating and conveying sewerage. The

provision of an increased supply of treated water and better sewerage management are still on-going. In

2017, the target was to deliver safe water to 3,000 additional households but by the end of the years 4,306

had benefited, the target being exceeded by 44 per cent (CSDU, 2017).

Rural electricity supplyAnother aspect of rural infrastructure procurement is the provision of reliable electricity supply to remote

villages, especially in Sabah and Sarawak. This involves developing the grid network in rural areas through

improving connectivity and building sub-stations to ensure 24 hour reliability. It also entails installing

renewable sources of energy such as solar-based generating panels and micro hydro plants (Nasrudin et

al, 2010; Borhanazada et al, 2013; Mahmud & Blanchard, 2016).

The renewable sources are especially important in the States mentioned above as dense rain forest and

unfavourable topography create major obstacles to extending the grid network into the remote areas so

creating dependence on local renewable sources (EPU, 2016b; PEMANDU, 2011; 2013; 2017).

For example, in 2014 a procurement was undertaken to install a range of solar hybrid panels and

equipment in the villages of Sugut in Sabah. The procurement was by open tender in which large

contractors with a G7 grade were eligible to bid, and who were then subject to a pre-qualification. The new

solar power systems were intended to benefit the housing schemes in the villages (KKLW, 2018).

A similar procurement was undertaken in 2017 in the villages of Long Pasia in Sabah, again restricted to

G7 contractors, with similarly a pre-qualification test. In 2017, the target set was to provide reliable

electricity supply to 8,271 extra households but as it turned out 8,110 households were provided for, just

below the target by 2 per cent (CSDU, 2017).

Rural housingThe KKLW has been concerned to tackle continuing sub-standard housing of many rural households. The

aim is to provide better housing for vulnerable groups such as senior citizens, single mothers with

dependents, people with disabilities and infirmities, those affected by natural disasters and other poor

households.

The programs involve building new houses, upgrading those in disrepair, and repairing houses affected by

flooding and storms (KKLW, 2018). The aim is to construct and repair 47,000 rural houses by 2020. In

2017, the target was to build or repair 12,524 rural houses, but the number achieved was only 8,429 which

was 67 per cent of the target (CSDU, 2017). The erection and repair of rural houses is closely linked to the

other infrastructure schemes such as the provision of water supply, electrical supply and new or upgraded

roads (PEMANDU, 2017).


Features of rural infrastructure procurement

Quotations and ballots A wide range of procurement methods have been employed in improving rural infrastructure including

quotations, balloting, tenders and direct negotiation.

Table1: Total number of rural infrastructure procurement notices issued by KKLW and percentage in each category of procurement, 2014-2018+

2015

2016

2017

2018

2014

24

15

10

18

0

70

79

83

66

93

6

6

7

16

7

100

100

100

100

100

365

582

464

170*

220

+ the Table does not include procurements through direct purchase and direct negotiation.

* 2018 figures from 9 January – 16 May 2018.

Source: Calculated from procurement notices, KKLW, 2018b.

As indicated in Table 1, the large majority of infrastructure procurements in rural development implemented

by the KKLW are quotations for small scale contracts with a value of no more than RM500,000. They are

based on a simply stated scope or specifications of works to be undertaken within a small locality.

Contractors in specific categories discussed below are invited to quote a price as well as signify

compliance to the work scope or specifications. The company submitting the lowest compliant offer wins

the contract. Unlike tenders, the price offer or quotation is the dominant consideration. From 2014 to May

2018, quotation notices comprised annually between 66 per cent and 93 per cent of all procurement

notices (excluding direct purchase and direct negotiation).

A significant minority of small infrastructure procurements involved balloting of applicants, with a random

draw made from a pool of eligible and suitable applicants to determine who is to be awarded a contract.

Those selected in the ballot cannot participate in any further ballot during the year of the award. Balloting

began in 2015 and since then the proportion of ballot notices per year varied from 10 to 24 per cent of all

procurement notices. Works procured through ballots were repairs and upgrading of houses, while the

procurements for building and upgrading of village and rural roads were based on quotations.

The division of rural infrastructure procurement into small projects procured through small quotations and

ballots allows opportunities for local small businesses to participate in the procurement process. In

quotations, a set aside is stipulated reserving the contract to those companies with CIDB grades G1 and

G2, indicating a limit on their tendering capacity up to RM200,000 and RM500,000 respectively. In the

case of ballots, the contract is reserved for contractors with only a G1 grade indicating contract value up

to RM200,000. In both G1 and G2 procurements, eligible participants are all small construction companies

with limited resources and expertise (KKLW, 2018b). If by contrast large work packages were put together

(instead of small projects), covering a bigger geographical area and subsuming a greater range of

construction activities, then local small construction companies would be squeezed out.

In addition, almost all the quotations and of course all the ballots advertised specify that only Bumiputera

contractors were eligible to participate, with priority given to those who are locally based in the district or

State. The set asides in favour of small, Bumiputera construction companies are the result of the desire to

maximise the opportunities for such businesses, to generate local employment opportunities and thus to

foster a Bumiputera business community in rural localities.


Tenders Of course, for particularly large and technically specialised projects, tenders are unavoidable. From 2014 to

2017, tender notices averaged 6 to 7 per cent of yearly procurement notices issued by the KKLW, but in

the first four months of 2018 the figure jumped to 16 per cent of all notices. About 30 per cent were for

consultancy tenders rather than direct construction tenders. More than half of the construction tenders

involved medium value contracts, and were reserved for contractors with a particular CIDB grade within

the range from G3 (tendering capacity of RM1 million) to G6 (tendering capacity RM10 million), depending

on the size of the contract (KKLW, 2018b).

The companies who were eligible to participate in high value tenders (above RM10 million) were required to

have the highest CIDB grade of G7 which allows no limit on the tendering capacity. In some cases, they

were required to be pre-qualified with a strong emphasis on being financially healthy. For example, from

2014 to 2016, several projects were undertaken to develop grid lines in Sabah (6 areas) and Sarawak (9

areas). The procurement was conducted through a domestic open tender, with only companies with a G7

CIDB grade allowed to bid. The bidders were subject to a pre-qualification. To pass the pre-qualification

each company was required to have assets which were net of liabilities of more than RM5 million or capital

in excess of RM2.5 million or liquid assets in excess of RM1.5 million. Also required was a track record of

similar projects over 5 years with an average annual value in excess of RM7.5 million (KKLW, 2018b).

Awards to Bumiputera companies The construction tenders issued by the KKLW for medium value projects (companies with CIDB grades G3

to G6) were reserved for Bumiputera companies, which as well were to be based if possible in the local

district or State. In nearly all of the high value construction tenders (grade G7), the Bumiputera requirement

was still specified but not the requirement to be based in the immediate district or State (KKLW, 2018b).

For example, those tenders referred to above with respect to installing hybrid solar generating equipment

and expanding the grid networks in Sabah and Sarawak were all reserved for large Bumiputera contractors

with a G7 CIDB grade. It is evident that the tender procurements undertaken by the KKLW, like the

procurements through quotations and ballots, are intended to provide opportunities for the local

Bumiputera construction companies and the local workforce, and to likewise foster the development of a

rural Bumiputera business community.

A few of the tenders of the KKLW did not relate directly to construction work but concerned the hire of

consultants to advise and manage construction procurements, while a few more related to the hire of

companies providing specialist services. It should be pointed out that some of the high value procurements

involve direct negotiation with a pre-designated construction company without any tender. For example,

the rural electrification schemes comprising 751 projects for Sarawak between 2009 and 2014 entailed

procurement through both tender and direct negotiation. However, no published record is kept of the

number of direct negotiations which the KKLW engages in.

Local participation In rural infrastructure procurement, there is a commitment to involving local communities in the initial

stages. This can help to identify the problems or the shortfalls in the existing infrastructure, how the local

people are affected as a result, and what is required to overcome these problems. For example, in the rural

electrification project in Sarawak, district representatives and the Development and Security Committee are

involved in identifying and planning the electrification projects (AG, 2015).

In rural housing schemes, the district authorities apply for a housing assistance program to the KKLW and

State agencies. If approval is given, the needs of the community are discussed in district focus groups

(DFG’s) which also receive applications for low cost houses from individual households. The findings and

applications are then conveyed to the KKLW and other relevant agencies at which point if the request is

approved the procurement process may begin (KKLW, 2018a).


Belt and Road ProcurementsA number of high value infrastructure procurements in Malaysia in recent years have involved Chinese

companies, many under China’s Belt and Road Initiatives. This is a program implemented by China to

promote connectivity across Southeast Asia and other regions to facilitate free flow of trade and people.

They cover railways, ports, tunnels and bridges and may be listed as follows:

East Coast Rail Line: the construction tender was awarded to the state owned China

Communications Construction Company (CCCC) – this is most prominent project and extends

over 600 kms; the reported project cost is RM55 billion which may be increased to over RM80

billion (the project is currently under review). (Yen, 2017; Jaipragas, 2017).

The Melaka Gateway port development: construction tenders awarded to Chinese firms

PowerChina, Shenzhen Yantian Port Group and Rizhao Port Group; the reported project cost is

RM15 billion.

Kuala Linggi International Port development, a gas and oil storage terminal: the construction

tender awarded to the China Railway Group; the reported project cost is RM12.5 billion.

The Kuantan Port expansion: project was awarded to a joint venture, Malaysia’s IJM and China’s

Guangxi Beibu International Port Group (GBIPG), in partnership with the Federal Government,

(with a further award of an operational concession to IJM and CBIPJ); the reported project cost is

RM4 billion.

Penang undersea tunnel connecting Penang to mainland Malaysia: project awarded to China

Railway Construction Corporation; the reported project cost is RM3.7 billion.

Penang second bridge: project awarded to China Harbour and Engineering Company; the

reported project cost is RM4.5 billion.

The supply of driverless trains in the LRT3 project mentioned above: project awarded to CRRC

Zhuzhou and Siemens China; the reported work package cost is RM1.56 billion (Palma, 2018a;

Jaipragas, 2017; Straits Times, 2017).

4. INVOLVEMENT OF CHINA IN INFRASTRUCTURE PROCUREMENT IN MALAYSIA

Other infrastructure procurements Additional infrastructure procurements in which Chinese companies are prominent outside the Belt and

Road initiatives include a land reclamation project in Penang, resort development in Sabah, two residential

developments in Johor, the building of specialist business parks in Pahang and Sarawak, the development

of a methanol and methanol derivatives plant in Sarawak, the construction of power plants in Selangor and

an hydro-electric dam at Bakun in Sarawak, and the laying of oil and gas pipelines in Peninsular and East

Malaysia (now under review) (Palma, 2018a; Jaipragas, 2017; Straits Times, 2017).


Benefits and drawbacks of Chineseinvolvement in infrastructure projects

The value of these infrastructure projects is estimated to be above RM400 billion but which may turn out to

be significantly higher. The award of the projects to Chinese companies is partly due to their experience and

expertise as large-scale infrastructure providers, and equally their ability to raise finance through loans from

Chinese banks (Azhar, 2018b).

For example, the East Coast Rail Link will be financed by the contractor China Communications

Construction Company, on the basis of ‘soft’ loans from the Chinese Export-Import Bank, while the Kuala

Linggi International Port will be financed by the contractor the China Railway Group (Yen, 2017; Jaipragas,

2017). However, as noted below, certain of these projects together with other infrastructure projects are

currently under review as to their commercial viability and cost.

However, it is feared that such projects in which Chinese companies are prominent may squeeze

opportunities for local engineering companies, are too dependent on foreign credit, and are excessively

costly and thus may not pay their way (Bevins, 2018; Palma, 2018a; Palma, 2018b). Equally, it has been

muted that the Chinese companies have not provided anywhere near enough offset packages (e.g. the use

of locally manufactured materials and products and the employment of local professional personnel).

Moreover, many infrastructure facilities such as pipelines, ports and rail networks are strategic assets which

arguably should be as much as possible under national sovereign control even at the construction stage of

the project. Also construction and management of ports raised geo-political questions in view of the

tensions over Chinese expansionism in the South China Sea.


Adjustment of policyAn important challenge facing Malaysia is whether to incorporate public procurement in an FTA either

bi-lateral or multilateral. Until recently the various FTA’s Malaysia has been signatory to did not cover public

procurement. These include 6 bi-lateral FTA’s, and of lesser scope the multi-lateral FTA with the ASEAN

Free Trade Association (as well as the various FTA’s between ASEAN and a small number of countries)

(MITI, 2018).

Furthermore, Malaysia did not join the WTO’s Government Procurement Agreement (GPA) which was set

up in 1995 to create a common procurement market covering medium and high value contracts amongst

the signatory states. The reason for this is the desire to protect the public procurement market in Malaysia

so as to retain maximum opportunity for domestic and Bumiputera suppliers and contractors. Malaysia

though has now observer status in the GPA.

However, in 2016, Malaysia was a signatory to the Trans-Pacific Partnership Agreement, which

incorporated public procurement. Even though the TPPA has been abandoned due to the unwillingness

of the US government to ratify it, it has been revamped with certain modifications under the name

Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP), without the US and so

far South Korea. Public procurement is covered in Chapter 15 (Ministry of Foreign Affairs and Trade, New

Zealand, 2018).

5. PUBLIC PROCUREMENT IN MALAYSIA’S FREE TRADE AGREEMENTS (FTA’s)

Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP)

Core principles and provisionsThe CPTPP Chapter 15 to a significant extent replicates provisions in the WTO’s GPA. The key principle is

non-discrimination, which guarantees:

Goods, services and suppliers from any member country (Party) will receive treatment no less

favourable than the treatment that the Party, including its procuring entities, accords to: (a) domestic

goods, services and suppliers; and (b) goods, services and suppliers of any other Party.

Moreover,

no Party, including its procuring entities, shall: a) treat a locally established supplier less favourably than

another locally established supplier on the basis of degree of foreign affiliation or ownership; or (b)

discriminate against a locally established supplier on the basis that the good or service offered by that

supplier for a particular procurement is a good or service of any other Party’ (WTO Centre (2018a).

The CPTPP Chapter 15 prescribes tendering as the means of procurement which includes open, selective

and limited tendering (the last only under certain clearly defined circumstances). Negotiation is permitted if

‘no tender is obviously the most advantageous’, providing after the conclusion of the negotiation, that

opportunity is given for ‘the remaining participating suppliers to submit any new or revised tenders’ (WTO

Centre, 2018a).

The Agreement also stipulates requirements in drafting specifications, criteria in evaluating bids, tender

documentation, setting time periods for bid submission, and publicising contract awards. Importantly, it

mandates the names of successful bidders to be published and that on request explanations be given to

unsuccessful bidders on why their bids failed. A further provision requires Parties to create a bid review

mechanism to enable appeals against a bid outcome to be made (WTO Centre, 2018a)



Permanent concessions in CPTPP granted to MalaysiaTo enable Malaysia to reconcile it national interests to the requirements of the CPTPP Chapter 15, it has

been granted certain concessions allowing it to derogate from certain aspects of the CPTPP and to

preserve its preferential systems. These are elaborated in the Schedule of Malaysia (Annex 15-A).

Bumiputera and local preferencesIn the Malaysian schedule to CPTPP Chapter 15, the Bumiputera price preferences have been retained,

varying inversely with the value of the procurement as follows:

a) The MOP’s accorded to Bumiputera suppliers who manufacture their own goods remain the

same. Thus, in the procurement of such goods valued up to RM10 million, a 10 per cent MOP is

applied, 7 per cent for procurements from RM10 million up to RM100 million, and 3 per cent for

procurements above RM100 million.

b) Likewise, the Bumiputera suppliers who import their goods from CPTPP countries retain the same

MOP’s as currently applicable to all Bumiputera suppliers. These vary from 7 per cent for goods

worth above RM500,000 up to RM1.5 million, to 2.5 per cent for goods worth above RM10

million up to RM15 million. Above that value, no MOP can be applied to Bumiputera companies.

c) Bumiputera suppliers which import goods from countries outside the CPTPP can only claim a

price preference which is half that of each MOP accorded to goods from CPTPP countries. The

significantly lower MOP’s for goods from outside the CPTPP is designed to incentivise Bumiputera

suppliers importing goods, to acquire them from CPTPP countries (WTO Centre, 2018b).

A further concession is to grant local non-Bumiputera companies small preferential margins equal to the

MOP’s accorded to Bumiputera companies importing goods from countries outside the CPTPP, as stated

above. The same MOP’s are also accorded to companies in CPTPP countries bidding for public contracts

in Malaysia. In both cases the companies will enjoy a price advantage over companies from outside the

CPTPP but still much lower than the price advantage of Bumiputera companies importing goods from

CPTPP counties (WTO Centre, 2018b).

Exemption of certain goods and programsAs is normal in FTA’s which include public procurement, the Malaysian Government has negotiated

permanent exemption from the CPTPP Chapter 15 of certain goods, services and works and of certain

public programs. For example, included in the exemptions is any procurement in rural development

programs in areas with less than 10,000 residents and poverty eradication programs for households

earning below Malaysia’s Poverty Line Income.

Also exempted are construction services that are carried out to maintain or improve hillside surfacing for

periodic maintenance, or to improve existing slopes or construct new slopes due to natural disaster, flood,

landslide, ground subsidence and other emergency and unforeseen circumstances. Of course, goods and

services with a security-related component are exempted to. All told 15 categories of goods and service

and public programs are exempted (WTO Centre, 2018b).

Exemption of sub-central public entities and other government entitiesFor the time being, Malaysia has excluded sub-central entities from the CPTPP Chapter 15, which

comprise State entities and local authorities (city, municipal and district authorities). A possible reason is to

retain access of companies within the State and local authority jurisdictions, which otherwise could not

compete against companies from other Parties, and thus to preserve business and employment

opportunities at the State and local level. Also exempted are statutory boards (with the exception of four

mentioned in Malaysia’s Schedule, Section C), as well as GLC’s (WTO Centre, 2018b).

Transitional concessions in CPTPP granted to Malaysia

Thresholds for covered procurementThe CPTPP Chapter 15 as with most FTAs which include procurement, lays down value thresholds at or

above which non-discrimination applies (referred to as covered procurement). Below these thresholds the

provisions of Chapter 15 do not apply. This restricts the coverage to medium and high value procurements.

However, the value thresholds allowed for Malaysia indicated in its Schedule are initially much higher than

allowed for several other Parties (mainly developed economies), and will only be gradually reduced to those

of these Parties.

For Malaysia the covered procurements of goods have been accorded a threshold value from the first year

at or above 1.5 million Special Drawing Rights (SDR) (RM8.49 million) which will be reduced to SDR800,000

(RM 4.528 million) at the beginning of the fifth year. This will be further reduced to a final threshold of SDR

130,000 (RM735,800) at the beginning of the eighth year. In the case of services, the initial threshold is

SDR2 million (RM11.32 million), reduced to SDR1 million (RM5.66 million) at the beginning of the fifth year,

and reduced further to SDR500,000 (RM2.83 million) at the beginning of the eight year, to finally settle at

the threshold of SDR130,000 (RM735,800) at the beginning of the tenth year.

For construction services, the initial threshold is SDR63 million (RM 356.58 million) which will be gradual

reduced in four stages to SDR14 million (RM79.24 million) at the beginning of the 21st year. These final

thresholds will then bring Malaysia into line with those of Australia, Brunei, Canada, New Zealand and

Singapore and slightly higher than those allowed for Japan and Chile (WTO Centre, 2018a).

OffsetsThe CPTTP stipulates that ‘with regard to covered procurement, no Party, including its procuring entities,

shall seek, take account of, impose or enforce any offset, at any stage of a procurement’. However,

transitional arrangements have been agreed for Malaysia whereby it can require offsets from companies of

the other Parties which will be gradually reduced over several years. Initially the credit value of the offset

may be equivalent to 60 per cent of the contract value, dropping in stages to 40 per cent and 20 per cent

until the beginning of the thirteenth year when no offset is permitted (WTO Centre, 2018a, b).

The permission given to Malaysia to be exempt from the thresholds of other Parties and to require offsets

for several years enables domestic suppliers and contractors to gradually adjust to the competition for

government contracts from bigger and more resourceful companies from these Parties, which have larger

economies of scale and more advanced technology. In the meantime Malaysian suppliers and contractors

can develop their capital resources, expertise, technology and production methods to equal or exceed

those of the other Parties. (WTO Centre, 2018b)0.

Appeals and dispute resolutionTwo other transitional measures have been incorporated into Malaysia’s schedule of the CPTPP. It is

exempted for three years from setting up an impartial judicial and administrative authority, independent of

any procuring entity, whose function is to review complaints from companies who have failed to secure a

government contract. In addition, Malaysia is not required to be subject to the CPTPP dispute settlement

mechanism for five years (WTO Centre, 2018b).



Relevance to Malaysia of the FTA’s between EU andSingapore and Vietnam

Thresholds for covered procurementAn FTA between EU and Malaysia may be reconsidered in view of two recent FTA’s between the EU and

Singapore and Vietnam (both not yet ratified), each of which include a chapter on public procurement. The

FTA between the EU and Singapore is a straightforward and comprehensive one but contains few special

concessions either permanent or transitional to either Party. The FTA between the EU and Vietnam is also

comprehensive but contains a number of transitional and permanent concession to protect businesses in

Vietnam being a less developed economy. This might be a pointer to how Malaysia could arrive at an FTA

with the EU (European Commission, 2016; Grier, 2016).

The EU Vietnam FTA sets higher initial thresholds for covered procurement in favour of Vietnam: for goods

it is initially SDR1.5 million to be lowered eventually to a permanent threshold of SDR130,000; for

construction the initial threshold is SDR40 million to be scaled down to a permanent threshold of SDR5

billion. The transitional period to reach the final threshold in goods is 5 years and in construction 15 years.

For goods the thresholds for covered procurement are the same as Malaysia’s thresholds in the

procurement chapter of the CPTPP, but for construction the initial and final thresholds are lower than

Malaysia’s thresholds in the CPTPP. Moreover, the transition period to reach the permanent threshold is

much shorter in the EU – Vietnam FTA: for goods it is 5 years (compared to Malaysia’s transition period of

10 years, and for construction it is 15 years (compared to Malaysia’s transition period of 21 years). The

transitional concessions for covered procurement and the final threshold for construction are thus less

generous in the EU – Vietnam FTA than in the Malaysia’s Annex to the procurement chapter in the CPTPP

(European Commission, 2016; Grier, 2016).

Another transitional concession to Vietnam is the allowance given to its procuring entities to request offsets

(measured in terms of credit value) ‘in any form, including price preference programs, up to 40 per cent of

the contract value, going down to 30 per cent after 10 years until the end of the 18th year’. Although the

initial offset value is lower than Malaysia’s in the CPTPP, the interim contract values are higher during the

transition period. However, the transition period leading to no offsets is 18 years in the FTA compared to 13

years secured by Malaysia in the CPTPP. Overall the concession relating to offsets are more generous to

Vietnam in the FTA than allowed for Malaysia in the procurement chapter of the CPTPP.

The EU – Vietnam FTA provides for a dispute settlement mechanism only after 5 years. This is the same as

provided for Malaysia in the procurement chapter of the CPTPP. However, under the FTA, Vietnam is

required to set up a domestic review body from the outset whereas Malaysia under the procurement

chapter of the CPTPP is required to do so only after three years.

Under a permanent concession in the EU – Vietnam FTA, Vietnam may provide preferences to benefit

SMEs, in bidding for government contracts to supply goods and services (excluding construction) whose

value is estimated at SDR260,000 or less. To qualify for the preference an SME must employ 500 or fewer

permanent employees. However, the type and degree of the preferences are not stated in the text of the

Agreement. Furthermore, the procurement chapter of the EU – Vietnam FTA exempts fewer Vietnamese

products, programs and agencies from its provisions than those exempted for Malaysia under the

procurement chapter of the CPTPP. The key programs exempted for Vietnam include ‘measures for the

health, welfare and the economic and social advancement of ethnic minorities’ ((European Commission,

2016).

Could the procurement chapter of the EU – Vietnam FTA serve as a template for a procurement chapter in

a future FTA between Malaysia and the EU and other large economies? This is hard to tell. The provisions

in the FTA on offsets would likely be acceptable to Malaysia. But the lower thresholds on covered

procurement and the shorter transitions to permanent thresholds may be unacceptable given Malaysia’s

desire to protect local businesses and construction companies. In addition, the preferences for SME’s and

ethnically based business in the FTA lack specific guidelines and are perhaps too general to be acceptable

to Malaysia with its focus on getting a clear-cut set of preferences for the Bumiputera community. Malaysia

would perhaps seek the type of precise preferences laid down in its annex to the procurement chapter of

CPTPP, in line with its longstanding preferential policy. This may prove to be an issue not easily resolvable

in negotiations with the EU.

Weaknesses in everyday procurement identified inAG’s reports

In the foregoing analysis of public procurement in Malaysia, several problems and challenges were

revealed. These weaknesses are mainly referred to in the activities reports of the AG, and enumerated in

Table 2, with some also mentioned in the list of defaulting companies published on the MOF website.

6. PROBLEMS & CHALLENGES INMALAYSIAN PUBLIC PROCUREMENT

Pre-planning and specification draftingAn important failing in procurement is the lack of sufficient planning. As shown in Table 2, in 11 out of 53

procurement programs/projects audited in the AG’s 2015 and 2016 activities reports, prior planning of the

procurement did not occur or was inadequate. The plan framework includes the purposes of the

procurement, the uses and benefits to the end user agencies the estimated costs, types of product,

services or works to be procured, the evaluation criteria, types of product, services or works to be

procured, the evaluation criteria, the type of companies best able to deliver, the time frame for delivery, and

post-contract responsibilities of the chosen supplier/contractor.

In the Industrial Training Institute Upgrading Project undertaken by the Ministry of Human Resources, the

AG made a point in 2016 that ‘detailed planning should be done before procurement to ensure the

equipment and facility can be used optimally’ (AG, 2017).

A related concern is the lack of cooperation in the planning of multi-agency procurements. The conclusion

of the AG’s activities report in 2015 concluded that in such cases ‘integrated planning … needs to be

carried out at the early stage of project implementation in particular for gigantic programmes/activities/

projects’. The report further urged that the relevant agencies ‘need to be consulted before projects are

implemented. Such consultations are needed to ensure all basic facilities are provided and

programmes/activities/projects are implemented smoothly’ (AG, 2016b).

A further shortcoming identified by the AG, as shown in Table 2, is poor specification drafting, also part of

the planning framework, identified in 6 of the programs/projects. As a result, specifications are: a) too

vague and general, b) do not take into account all aspects of the goods, services and works to be procured

(including the all- important quality factor), c) indicate an insufficient amount or quantity to be procured,

and d) fail to meet the precise needs of the end users.

Poor specification drafting by procurement officials may itself arise from the lack of comprehensive

pre-planning, from insufficient attention to the needs of the end users, lack of familiarity with the goods,

services and works to be procured, and a lack of expertise in procurement management.



Table 2: Weaknesses in procurement of goods, services and works identified in AG’s activities reports, 2015 and 2016

1

Poor drafting of specifications

Poor selection of consultant, supplier,or contractor

Weak supervision of procurement projects

Non-compliance to scope, specifications& terms of contract

Little of no prior planning of procurement

1

8

6

10

5

4

2

3

18

3

6

14

15

26

11

12

3

9

53

9

0

4

5

8

1

5

0

1

13

1

5

2

4

8

5

3

1

5

22

5

Delayed completion or non-completion of delivery or project

Splitting of contracts

Under-utilisation of products andfacilities procured

No of procurement projects/programs whichwere audited in 2015 & 2016

Non-compliance to scope, specifications & terms of contract

2 1

Source AG, 2016a, b; 2017.

Selection of consultants, suppliers and contractors and supervision of projects Table 2 shows that in 14 of the audited projects, the AG referred explicitly to the poor selection of

consultants, suppliers and contractors. Those selected whether by direct negotiation or tender or other

means did not offer best value for money in terms of cost, quality, and reliability in completing the project,

and lacked the capability to deliver at the standard required in a government contract.

On the matter of consultant selection, the AG in the 2016 activities report referred to the construction of a

vocational secondary school stating:

MOE (Ministry of Education) should ensure that the appointed consultants are qualified and

experienced in order to avoid any construction and furniture design flaws, delay in determination of

electrical load for workshop and low quality of construction works (AG, 2017).

With regard to contractor selection, the AG audit of the construction of a Technical Service Centre for

military aircraft maintenance in 2015, stated that the Ministry of Defence as the procuring entity should

‘ensure the appointment of contractors is made based on their experiences, qualifications and capabilities

to execute the project’ (AG, 2016b).

The AG in the 2015 and 2016 activities reports identified, as well, 15 cases of poor supervision and

monitoring of the procurement project. When goods were received, sometimes no assessment was

undertaken to determine if they were compliant with specifications and in good working order. In works

projects, it was pointed out that in certain cases the contractor’s performance was not monitored, which

resulted in his failure to adhere to the scope of the project, follow the designs, use materials and equipment

specified, and maintain good standards of workmanship. The conclusion of the 2015 activities report saw

as a major weakness ‘lack of monitoring/supervision by responsible parties (and) and lack of technical

expertise’(AG, 2016b). Moreover, the reports further indicated that not all suppliers and contractors who

were unsatisfactory were subject to disciplinary action.

The responsibility for weak supervision was not only that of the procuring entity but also in the case of

works projects that of the consultants. It was observed that on occasions the consultant for the project

failed to monitor the contractor properly. Amongst the shortcomings were a failure to require improvements

in the quality of workmanship, corrections of deviations from design plans, and the remedy of defects after

completion of the project.

Compliance with specifications and contractual terms and low quality of product and works According to the AG’s activities reports and the MOF list of defaulting companies mentioned earlier, the

most serious problem in public procurement in Malaysia is the failure of certain suppliers/contractors to

comply with the product, service and scope/design specifications or with the terms of the contract. As

indicated in Table 2, the AG’s 2015 and 2016 reports referred to 26 procurement programs/projects where

this occurred. Non-compliance related to the features, attributes and quantity of goods to be procured.

Typically, in works projects, as evidence of non-compliance, fewer facilities were built than in the agreed

scope, design drawings were not properly followed, and the materials and equipment used deviated from

those specified.

Linked to non-compliance was the low quality of goods procured and also in works projects poor

standards of construction. The issue of quality was explicitly raised in 9 procurement projects in the 2015

and 2016 audits and in the conclusion of the 2015 report, specific references was made to ‘unsatisfactory

works quality’ (AG, 2016b).

Delays and non-completion of projectsAs indicated in Table 2, the AG activities reports also highlighted 12 procurements, mainly works projects,

which were delayed beyond the scheduled date of delivery/completion or not completed at all. An example

of delayed completion was the construction of the Rawang Bypass in Bandar Rawang, started in 2005, the

scope of which was increased in 2011. Six extensions of time (EOT) were granted to the contractor

covering nearly 6 years. The project was only completed in November 2017, eliciting the comment from the

AG that ‘the project took a long time to complete’ (AG, 2017). Delays may arise for various reasons:

slowness of the procuring entity to sign contracts or agree variations, changes in design, the contractor’s

poor organisation, his lack of resources and expertise and inability to maintain an adequate cash flow, and

the tardiness of sub-contractors.

In some cases, contractors were unable to continue a project, which was then re-assigned to another

company (novation). An example was the construction of a police training centre at Bentong, Pahang. The

project was delayed for more than 7 years, and was completed in 2016. Although most of the construction

had been completed, the contractor could not continue in 2013 and another contractor appointed by

restricted tender to complete the work (AG, 2016b). Non-completion may be due to the absence of

technical resources and expertise in the construction company or its inability to undertake the work at the

tendered or negotiated price.

Utilization A further concern in the procurement system is the extent to which the goods procured and facilities

created are utilised. As shown in Table 2, the AG in the 2015 and 2016 activities reports identified 8

instances of under-utilization of newly constructed facilities and newly purchased items and equipment.

Amongst these is the Herbal Products Development Project undertaken by the Ministry of Agriculture and

Agro-based Industry. The 2015 report pointed out that 25 building units constructed in the Pasir Raja

Herbal Park, Dungun, Terengganu valued at RM3.84 million were not utilized for 2 years 4 months from the

date of completion, while laboratory equipment and assets valued at RM1.14 million in the Institute for

Medical Research were not used for 4 to 5 years



The 2015 audit of the Ministry of Health’s Orthopaedic Treatment Programme found that the stock of

implants purchased were under-utilised (AG, 2016a). Three reasons may be given for non- or

under-utilization. One is poor project planning, in which end user needs were not sufficiently considered,

lack of proper specification drafting which results in facilities and equipment of little practical value, and lack

of conformity to designs and specifications with the same result. A further factor is the lack of a system of

on-going maintenance and repair so that facilities and equipment fall into disrepair and become obsolete.

Provision for maintenance and supplier guarantees are important aspects of the procurement plan and

specifications.

Splitting of contracts A further concern raised by the AG in the activities reports of 2015 and 2016 was the splitting of contracts

in contravention of the procurement regulations prohibiting it. Splitting involves dividing a project or product

into several smaller projects or quantities. The value of the procurement of each case is thus reduced to the

extent that a less a competitive form of procurement is permissible such as quotations or direct purchases.

For example, in the works procurement for the Industrial Training Institute Upgrading Project, undertaken

by Ministry of Human Resources, worth RM10.42 million, the contract was split into 48 quotations and 17

direct purchases to avoid a competitive tender process, Another procurement by the KKLW (Desa Lestari

Programme), in 2015 and 2016 amounting to RM2.08 million was split into 6 quotations to avoid a tender.

In the two cases identified above, the AG called for disciplinary action to be taken against the procurement

officials involved (AG 2016; 2017).

Direct negotiationAs mentioned above significant procurement contracts continue to be awarded through direct negotiation.

GAN Integrity which assesses corrupt and anti-competitive practices in different countries, recently noted

that in Malaysia, ‘the awarding of major infrastructure and public works contracts is often done without

competitive bidding or open tenders’ (GAN, 2018). The AG’s activities reports in 2015 and 2016 indicate

that in 17 of the 53 procurement programs/projects which were audited direct negotiation was adopted,

direct negotiation may be justified if there is a need to hire a domestic company and only one is capable of

undertaking the contract. The risk is that the absence of any competition could lead to less value for

money, lack of transparency and even corruption, and may be adopted when an open tender is feasible.

The AG in her 2016 activities report expressed the opinion that the practice of ‘direct negotiations without

clear justification should cease immediately’ (AG, 2017).

Corruption continues to be a concern in public procurement. As stated by the GAN Integrity report on

Malaysia in 2016, ‘the public procurement sector presents businesses with high corruption risks’ (GAN,

2018). The World Economic Forum in The Global Competitiveness Report, 2017-2018 rated the responses

to its executive survey of businesses which indicated a moderate but not an extreme amount of corruption.

These included the ‘diversion of public funds to companies, individuals, or groups due to corruption‘,

‘undocumented extra payments or bribes’ for government contracts, and ‘favouritism to well-connected

firms and individuals when deciding upon policies and contracts’ (World Economic Forum, 2018). In

addition, of 1,000 firms surveyed in the World Bank’s Enterprise Surveys in 2015/2016, 51.4 per cent

stated that they were ‘expected to give gifts to secure government contract’ (World Bank Group, 2016).

Two recent cases of alleged corruption in procurement entailing bribery, embezzlement, fraud and

cronyism/nepotism may be mentioned. One is the alleged embezzlement of funds earmarked for

development projects to be carried out by the Sabah Water Department. RM114.5 million of embezzled

money has been confiscated by the MACC. The embezzlements were combined with kickbacks or bribes

worth 27 to 30 per cent of the value of projects and as well with the award of contracts to cronies and family

members. Three senior managers and a spouse of one of them are being currently prosecuted (The Straits

Times, 2017; Avila, 2018). The other case concerns the RM6.3 billion undersea tunnel project of Penang

State Government and the hiring of a consortium for the feasibility study and design work.

The problem of corruption in procurement

The high cost of the study and design work (RM305 million) has led to a corruption probe by the MACC.

This has raised fears of irregular payments, bribery, embezzlement and fraud. The payments include

potentially profitable land allocations for development purposes to the consultancy firm. Senior politicians

and administrators in the State, the chief executive and an engineer of the consultancy firm, and various

business leader are involved in the investigation (Muhammad & Ilah, 2018).

Collusion or bid-rigging is another form of corruption engaged in by certain suppliers and contractors. They

form a collusion ring arranging among themselves to restrict competition in tenders and to drive up the

price. Typical forms of collusion are: a) cover pricing – bidders in the collusion ring disclose to each other

their proposed bid price for a tender to enable one of them to submit a slightly lower but still high bid and

win the contract; b) bid suppression – bidders withhold or withdraw bids or submit invalid or non-compliant

bids except one bidder who then submits a compliant but high bid and wins the contract; c) rotational

bidding - bidders agree to take turns to submit a bid for each of a series of tenders over a number of

years, with the other bidders at each tender withholding their bids; d) segmented bidding – bidders in the

collusion ring segment the procurement market by regions or types of goods and allow each bidder

exclusive access to a specific segment. Rewards for firms who deliberately fail to gain a contract or do not

bid at all may include a percentage of the contract sum or a sub-contract (Rohana et al, 2010; MyCC,

2014; The Star Online, 2013; Jones, 2016).

It is difficult to tell how much collision occurs in public procurement in Malaysia. MyCC has held a number

of forums on collusion in public procurement, signifying it was an area of concern. At one forum in

November 2017, the Chief Executive Officer of MyCC stated that it had received and was investigating a

‘number of complaints which involved bid rigging issues’. He further noted: ‘the risk of bid-rigging tended

to be higher in relation to high value government contracts, especially in industries where there are only a

few suppliers, where government procurement occurs on a regular basis and where there is little innovation

in the products’ (Borneo Post, 2017).

There has been concern over the capital and operation costs of the large infrastructure projects. This issue

has been given top priority by the new Pakatan Harapan coalition Government in Malaysia, under Prime

Minister Mahathir Mohamad, but was raised during 2017 as well. The East Coast Rail Link has now been

suspended with a view to reducing its ‘excessive’ costs. The contract value was set at RM55 billion but a

detailed review by the new Government indicated the cost to be in excess of RM80 billion taking into

account land acquisition, interest and other fees.

The new finance minister Lim Guan Eng has stated that ‘the ECRL project will only become financially and

economically feasible if there is a drastic price reduction of the project by CCCC (China Communications

Construction Company)’ (White, 2018; Palma, 2018a). The LTR3 will continue if costs are slashed from

RM31.65 to RM16.63 billion, while the oil and gas pipeline projects in both Peninsular Malaysia and East

Malaysia have been suspended and will only be reactivated if the costs are also decreased (Tan, 2018;

Palma, 2018a; Palma, 2018b). The proposed high speed rail link between Singapore and Malaysia is on

hold too with the possibility of cancellation because of the costs involved (Tan, 2018).

The fear is that the borrowing to meet the capital costs and also the operating costs of these projects will

be in excess of the revenue they generate and will have to be met ultimately from the Government budget.

For example, operating costs of the East Coast Rail Line has been cited by the Minister for Finance in the

Malaysia Parliament as RM600 million to RM1 billion annually, well above the breakeven point (Straits

Times, 2018). This could add to the budget deficit and ratchet up the national debt (already recalculated by

the new Government at about 80 per cent of GDP, a significantly higher than previously disclosed).


Concerns over costs of infrastructure projects


Summary

The foregoing analysis discusses the system of public procurement in Malaysia. To a certain extent but not

totally, it conforms to the standards of public procurement which are internationally recognised. However,

the system has been adjusted to reflect the particular values and needs within Malaysia. Noticeable are the

degree of protection given to domestic suppliers and contractors and the promotion of the interests of the

Bumiputera business community through a system of preferences such as set asides and MOP’s.

Many of the features of the procurement system are reflected in the development of the urban public

transport system such as the KVMRT and LRT3 networks. A conventional model of procurement has been

adopted instead of the design-build-operate-transfer model. In the construction of the SBK, SSP and LRT3

Lines, the model has been based on a PDP/work package arrangement. In the construction of the Circle

Line, the alternative less expensive turnkey arrangement is to be used. While there is a significant

participation of large foreign companies in the construction work, domestic companies play a key role

especially in consortiums/JVs in domestic-foreign partnerships. The interests of the domestic economy are

further enhanced by the provisions of offset packages by foreign companies. The Bumiputera business

community has benefited mainly by set asides and sub-contracts in many of the work packages.

The funding is partly based on the development budget and partly based on sukuk debt issue. However, in

the case of the forthcoming Circle Line, payment of the contractors is to be delayed for several years and

spread over subsequent years. This places an onus on bidders to show an ability to raise capital and avoid

burdensome servicing costs before payment is made.

Aspects of the public procumbent system are also exemplified in the procurements relating to the

development of the rural infrastructure. The areas of infrastructure development cover rural road building

and upgrading, increasing clean water supply, improving management of sewerage, ensuring reliable

electrical supply to remote villages and settlements, and the building of affordable housing in rural areas.

The highlights of rural infrastructure procurement are the number of small scale projects based on

quotations and balloting, and the reservation of nearly these projects for Bumiputera business located in

the State and the district. It was evident that the infrastructure program was in part designed to promote a

rural and village based Bumiputera business community.

A particular feature of infrastructure procurement is the involvement of China in the construction of so called

Belt and Road and other high value projects. These projects have drawn upon the know-how and

resources of Chinese construction and engineering companies and their ability to raise finance through

Chinese financial institutions, but concerns have been raised in relation to costs and affordability, offsets

packages and other issues.

An important advance has been Malaysia’s recent accession to the CPTPP (though not yet ratified) which

includes public procurement. This may increase the degree of competition and transparency in the

procurement system whilst opening up opportunities for Malaysian companies to access lucrative

procurement markets in the other Parties. To protect the Malaysian business community, concessions have

been granted to cushion the impact of greater competition from more resourceful suppliers and contractors

in the other Parties. Some concessions are permanent whilst others are transitional. Amongst them are the

preferences for Bumiputera companies. This may provide a template for the incorporation of procurement

in other FTA’s.

Despite the advances in public procurement through E-procurement, greater accountability, clearer and

more coherent rules, and attempts to tackle corruption, several weaknesses remain, many highlighted by

the AG. These include inadequate pre-planning, poor drafting of scope and specifications, and poor

selection of suppliers, contractors and consultants, as well as weak supervision of projects by procuring

entities and consultants.

7. CONCLUSION & PROSPECTS

A further problem is the failure of suppliers and contractors to comply with scope, specifications and

contractual terms, and the delivery of below standard goods and works. Other weaknesses include delays

in delivery of goods and in the progress of works, in some cases non-completion of projects, under or

non-utilisation of goods procured and facilities built, the splitting of contracts to avoid competition, and too

many instances of direct negotiation. Corruption remains an on-going problem including bribery,

embezzlement, cronyism and nepotism, fraud, and collusion, while the alleged excessive costs of key

infrastructure projects has also become a critical issue.

These problems can only be tackled by combination of initiatives. These may include better training of

procurement officials, more commitment to pre-planning, more accurate costing, improved internal

controls and internal audits of the procurement process, and increased priority to evaluating the quality of

goods delivered and the standard of works completed. This must be accompanied by stricter penalties

against procurement officials who fail to adhere to the procurement regulations and suppliers and

contractors who fail to follow scope, specifications and contract terms. The staffing and expertise in the

MACC may be increased given that high level cases of procurement corruption are complex and require a

great deal of investigative work. Underpinning such initiatives is the necessary will to improve the system of

procurement and enforce controls at the highest levels of government and the bureaucracy.

PROSPECTS

The new Government in Malaysia, has indicated likely changes in procurement policy. The prospects are

that continuing corruption in procurement, as well as in other areas of public administration, will be tackled

more effectively and alleged malpractice will be more vigorously investigated without political interference.

The catalyst for this is the exposure and investigation of suspected corruption in 1MDB. A more effective

anti-corruption program in part depends on equipping both the MACC and the Public Prosecutor with

greater capacity such as improving software systems to manage and retrieve data, and increasing the

administrative and legally qualified personnel with expertise to investigate cases, assemble evidence and

conduct a prosecution. As part of the effort to reinforce accountability in the procurement system, it is also

possible the National Audit Department will be given a stronger remit to expose possible corruption and

waste in procurement. This again will depend upon further capacity building in the National Audit

Department.

The second likely change in procurement is to ensure costs of infrastructure projects are affordable and do

not lead to unmanageable debt. The review and suspension of East Coast Rail Line, the high speed rail

link between Malaysia and Singapore, and the oil and gas pipeline projects, and the review of the LTR3

all point to a more cautious and realistic approach to infrastructure development (Tan, 2018; Palma, 2018a;

Palma, 2018b)).

A third possible change in procurement policy may be to reduce the role of Chinese companies in

infrastructure projects and if and when they are appointed as contractors, to ensure that their costs are

realistic and they provide better offset packages. A further aim is that their prominence in infrastructure

development does not compromise Malaysian sovereignty or accentuate contentious geo-political issues.

However, it is expected that the emphasis on local and Bumiputera protection in procurement will remain,

and the set asides and price preferences in favour of Bumiputera companies will not be reduced. This is

reflected in the procurement concessions won by Malaysia in the CPTPP in favour of local and Bumiputera

companies.


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LRT3 (2016b), Pre-Q Successful Contractors: Driving Bumiputera Participation, Kuala Lumpur, available at https://www.lrt3.com.my/bumi-participation/.

Mahmud, A.M., & Blanchard, R.E. (2016), ‘Assessing a rural electrification program in Malaysia: system performance analysis on 11 solar PV-diesel hybrid systems’, paper presented at: 4th International Conference on Development in Renewable Energy Technology (ICDRET), Dhaka, Bangladesh, 7-9 January.

Malaysia Competition Commission (2014), Help Us Detect Bid Rigging’, Kuala Lumpur,available at http://mycc.gov.my/sites/default/files/handbook/MYCC_Handbook_HelpUs Detect BidRigging.pdf.

Malaysia Digest (2013), ‘Klang Valley MRT offset scheme to contribute RM3.5b’, Kuala Lumpur, 13 November, available at http://malaysiandigest.com/business/479141-klang-valley-mrt-offset-scheme-to-contribute-rm3-5b.html.

Malaysia Productivity Corporation (MPC) (2016), Reducing Unnecessary Regulatory Budens on Business: Constructions, Petaling Jaya.

Maniam K., Halimah A., & Murali, R. (2009), ‘Government purchasing: A review of E-procurement system in Malaysia’, The Journal ofKnowledge Economy & Knowledge Management 4 (Spring): 27-41.

McCrudden, Christopher & Gross, Stuart G. (2006), ‘WTO government procurement rules and the local dynamics of procurement policies: A Malaysian case study,’ The European Journal of International Law, 17, (1): 151-185.

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Ministry of Finance (2011), Treasury Circular PK 3.2: Manual Perolehan Perkhidmatan Perunding, Putrajaya.

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MRT Corp (2012), Media Release - 4 New Tenders Awarded for Sg Buloh-Kajang MRT Line, Kuala Lumpur, available at https://www.mymrt.com.my/wp-content/uploads/2012/05/MR_090512_4-NEW-TENDERS-AWARDED-FOR-SG-BULOH-KAJANG-MRT-LINE_eng. pdf.

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EMPOWERING WOMEN IN THEMALAYSIA CORPORATE SECTOR

Executive Summary

The aim of this study is to shed light on the key issues faced by women working in the corporate

sector in Malaysia with the goal to address the barriers and deterrents of career advancement. The

study ultimately hopes to demonstrate that women empowerment will bring a positive impact not

only to the Malaysian society but the economy as well.

The study explores three objectives:

(a) To understand how to retain women in the Malaysian corporate sector by enabling a better

work-life balance is beneficial for the society and the economy.

(b) To examine the key issues faced by corporate women in Malaysia that has become barriers

to their success.

(c) To investigate which measures and strategies can be deployed to create a gender-balanced

work environment to encourage retainment of our female talent and fair career advancement

opportunities.

Besides secondary research, primary research was carried out. Several females currently working in

the corporate sector and entrepreneurs, as well as relevant companies and associations have been

interviewed. This was necessary in order to provide relevant practical information and a realistic view

on the subject matter.

Women make up half the nation’s population and account for over 62% of enrolment in local

universities. Latest statistics show that Malaysian women have a labour force participation rate of

55% (Department of Statistics Malaysia, 2018). However, they tend to exit the workforce in their late

20s to early 30s usually due to family commitments such as child-bearing or caring full-time for a

family member. Unlike other developed nations, these women do not re-enter the workforce.

Malaysia’s major hurdle is the outflow of female talent during their prime years. This is particularly

concerning since women make up majority of public university graduates. As a consequence,

Malaysia is losing a significant amount of talent by them leaving the workforce. This lack of human

capital is a critical constraint in Malaysia’s ambition to become a high-income economy.

Statistics have shown that more women in the workforce could potentially increase Malaysia’s GDP

by between MYR 6 billion and MYR 9 billion (McKinsey, 2012). While there are a number of Malaysian

employers already offering extended maternity leave, more companies should make greater efforts

to retain and facilitate the return of talented women to the workforce.

Today, women have been recognised by the Malaysian government as a pivotal resource to drive

economic growth. The implementation of a 90-day paid maternity leave in the private sector and the

12-month individual income tax exemption scheme are steps that have been taken.

The government’s affirmative efforts in 2011 to increase the number of women directors on

corporate boardrooms is in line with actions taken by other nations in the EU such as Norway and

Iceland. However, in 2018 the figure still stands at only 15.4% (30% Club Malaysia, 2018), a far cry

from the target set despite Malaysia being ahead of other ASEAN countries for having the highest

number of women in the boardroom.

The following issues are analysed: Flexible work arrangements - Employers that provide flexible work arrangements, childcare

centres as well as family care and maternity leave, will benefit from better talent retention, as top

employees going through new phases in life (such as starting a family) are happy to stay in

companies that choose to adapt to their evolving circumstances.


Pay gap - Evidence has shown that women are paid less than men for the same work (Department

of Statistics Malaysia, 2017). Women in Malaysia hold more than half of “professional occupations”,

yet their monthly salary is lower, even in professions where men are outnumbered. Older women in

their 50s and 60s in particular are also more susceptible to greater pay gaps. Additionally, research

has shown that women are far less likely to negotiate their salary or request for a pay raise, under

the perception that they would be seen as pushy and demanding.

Gender discrimination – According to Women’s Aid Organisation (WAO), more than 40% of

Malaysian women revealed that they had experienced job discrimination due to their pregnancy.

Women have had their job applications rejected or job offers revoked after they had disclosed their

pregnancy.

Gender stereotypes – Traditional gender roles are reinforced with women carrying the burden of

domestic duties and child-raising. This in turn may cause women to turn down senior management

positions in favour of less involved roles.

Sponsorship/mentorship - Women experience barriers in finding a mentor especially in

male-dominated organizations where mentoring opportunities are limited, as they have been socially

excluded from informal meeting relationships and thus, have greater difficulty when it comes to

acquiring informal mentors in the same extent as their male colleagues. Additionally, they have

found it harder to find sponsorship - advocates in positions of authority who use their influence

intentionally to talk about their accomplishments behind closed doors, give them visibility and

promote them for opportunities. Mentorship and sponsorship are essential to ensuring career

advancement and professional development.

Sexual harassment - Sexual harassment is considered a workplace problem in Malaysia and there

are no specific standalone laws to combat sexual harassment. The culture of victim-blaming is

prevalent in Malaysia and is one of the reasons why victims do not speak up and suffer in silence.

Business organisations in Malaysia appear to provide equal opportunity for employment to women.

However, women do not perceive equal opportunities for advancement after recruitment, especially

those in lower level positions.

The skills that the women are trained in in government programmes do not appear to match the

labour market or human capital needs in Malaysia. Moreover, the entrepreneurial skills training

provided also tend to support the capacity development of subsistence entrepreneurs who only

earn subsistence income, rather than transformative entrepreneurs, who are able to go beyond

earning subsistence income and provide jobs and income for others.

Focus on higher female labour-force participation with steps to address unpaid care work as a

priority to boost economic growth. More companies need to embrace flexible and family-friendly

working environments, as well as embrace women who are coming back to their careers.

Including women in a nation’s economy should be more than providing childcare centres and

allowing for flexible working arrangements as this is not feasible for all job types, and may become a

barrier for companies.

Promote measures and strategies that can be deployed to create a gender-balanced work

environment for the benefit of both men and women.

To obtain the full report, please contact EU-Malaysia Chamber of Commerce and Industry.


APPENDICES

TOTAL

123456789

10

11

Beverages and tobacco

Crude materials, inedible, except fuels

Mineral fuels, lubricants and related materials

Animal and vegetable oils, fats and waxes

Chemicals and related prod, n.e.s

Manufactured goods and classified by materials

Machinery and transport equipment

Miscellaneous manufactured articles

Commodities and transaction n.c.e

Food and live animals

Other

2017201620152014

135,579121,460118,760101,016

9,1238,5478,5347,627

272263277238

2,9642,3132,6972,709

1,9241,7701,5541,624

5,3164,5284,7564,922

12,56710,95711,5538,756

7,8446,9836,9776,291

62,84654,75053,46843,728

32,02129,77228,22323,372

401367407442

2991,2113141,289

IMPORTSValue Mio €

2017201620152014

91,77286,09283,20178,746

4,9384,9184,4294,095

2,0541,8591,8971,794

2,1621,8441,6381,478

5,6534,2093,2133,134

168147151124

13,55612,76712,19811,041

7,7107,3947,7997,979

44,41142,22741,27640,064

8,6618,2127,6996,822

1,4251,5511,9801,519

1,034963920696

EXPORTSValue Mio €

Source: Eurostat, October 2018

A3: Destination of EU-28 exports of goodsto ASEAN, 2015

Source: Eurostat 2017

Singapore,35.8

Thailand,16.1

Malaysia,16.1

Indonesia,12.0

Vietnam,10.2

Philippines,7.4

Other ASEANMember States,

18.6

A2: Origin of EU-28 exports of goods to ASEAN, 2015


Germany,27.7

France,16.5

United Kingdom,13.3

Netherlands,10.3

Italy,8.5

Belgium,5.1

Other EUMember States,

18.6

of EU-28 exports

of goo

United K ingdom

Netherlands


Vietnam,25.3

Malaysia,19.2

Thailand,16.5

Singapore,16.0

Indonesia,13.0

Philippines,5.7

Other ASEANMember States,

18.6

A4: Origin of EU-28 imports of goods fromASEAN, 2015

A5: Destination of EU-28 imports of goodsfrom ASEAN, 2015


Germany,21.6

United Kingdom,16.2

Netherlands,18.2

Belgium,9.4

France,8.3

Italy,6.4

Other EUMember States,

19.9

A1: Trade flows by STICsection 2014 - 2017


A6: International trade in services with ASEAN, EU-28, 2010 and 2015 (million EUR)


Maintenance and repair services n.i.e

Transport

Travel

Constructions

Insurance and pension services

Financial services

Charges for the use of intellectual property n.i.e

Telecommunications, computer andinformation services

Other business services

Manufacturing services on physical inputs owned by others

Personal, cultural and recreational services

Credits BalanceDebits

Services trade with ASEAN - Total

Analysis by type of service (1)

Government goods and services n.i.e

Services not allocated

37,194

896

305

8,361

6,648

294

538

3,689

4,546

1,387

7,950

2017

317

114

4

22,767

379

144

6,767

4,381

364

576

1,855

54

1,432

5,189

2016

96

190

6

42,441

481

455

6,861

2,599

764

1,357

2,337

6,140

6,831

11,906

2015

161

203

367

24,305

1,170

248

5,113

1,821

319

919

1,567

3,036

3,046

4,907

2014

213

288

12

2015

5,247

-416

150

-1,500

-4,050

470

819

-1,352

1,595

5,443

3,955

-156

89

363

2014

1,538

791

103

-1,653

-2,560

-44

342

-287

2,982

1,614

-282

117

98

6

A7: Origin of EU-28 exports of services to ASEAN, 2015(% share of EU-28 exports to ASEAN)


Netherlands23.4

United Kingdom20.4

France15.0

Germany12.0

Denmark6.1

Luxembourg3.0

Other EUMember States

20.1

A9: Origin of EU-28 imports of services to ASEAN, 2015 (% share of EU-28 imports to ASEAN)


Singapore57.7

Thailand15.3

Malaysia,8.8

Philippines,6.0

Indonesia,5.7

Other ASEANMember States

6.5

A10: Destination of EU-28 imports of services to ASEAN, 2015 (% share of EU-28 imports to ASEAN)


Germany,22.2

United Kingdom,14.6

France,11.2

Luxembourg,7.5

Denmark6.9

Netherlands,10.1


27.5

A8: Destination of EU-28 exports of services to ASEAN, 2015 (% share of EU-28 exports to ASEAN)


EU-28 exports

of goods

ited K

ingdom

Netherland

Netherlands23.4

France15.0

Germany12.0

Denmark6.1

Luxembourg3.0


20.1


A11: International trade in services with ASEAN, EU-28, 2012 and 2017 (million EUR)

Source: ASEAN Secretariat

[I] Accommodation and food service activities

[J] Information and communication

[K] Financial and insurance activities

[L] Real estate activities

[M] Professional, scientific and technical activities

[N] Administrative and support service activities

[O] Public administration and defence; compulsorysocial security

[P] Education

[Q] Human health and social work activities

[R] Arts, entertainment and recreation

[S] Other services activities

[H] Transportation and storage

[B] Mining and quarrying

[C] Manufacturing

[D] Electricity, gas, steam and air conditioning supply

[E] Water supply, sewerage waste management andremediation activities

[F] Construction

[G] Wholasale and retail trade; repair of motor vehiclesand motocycles

[A] Agriculture, forestry and fishing

[Z] Unspecified activity

SectorSource

country

Total EU [EU]

8,860.08

-391.95

811.30

3.47

- 4,057.41

364.46

130.25

53.04

- 2.32

4.37

5.84

228.32

741.56

182.45

- 14,557.01

78.49

- 18.94

4,900.91

636.75

6,376.20

- 191.33

245.93

24.75

- 911.35

272.34

182.83

28.25

33.52

9.54

15.57

4.35

73.13

3,832.97

2,137.70

8,099.46

300.01

94.88

4,232.59

0.01

2012 2017

STATENUMBER OF GERIATRICIANS

PUBLIC PRIVATE TOTAL

Selangor

Johor

Perak

Sarawak

Kedah

Penang

Sabah

WP Kuala Lumpur

Kelantan

Pahang

Negeri Sembilan

Melaka

Terengganu

Perlis

WP Labuan

WP Putrajaya

(%) NOTEAGED 60+

(’000)

4

1

2

1

1

1

1

11

0

1

1

1

0

0

0

0

2

1

2

1

0

2

1

3

0

0

0

1

0

0

0

0

6

2

4

2

1

3

2

14

0

1

1

1

0

0

0

0

518.9

397.6

372.5

306.8

252.7

224.8

217.5

187.4

180.5

175.7

135 110.2

107.3

33.3

6.9

3.4

16.1%

12.3%

11.5%

9.5%

7.8%

7.0%

6.7%

5.8%

5.6%

5.4%

4.2%

3.4%

3.3%

1.0%

0.2%

0.1%

+1 retired Geriatrician

(the geriatrician visits from Selangor)

25 13 38 3,230.50 100%

A12: Trade flows by STIC section 2014 - 2017

Source: ASEAN Secretariat


Address : Suite 10.1, Level 10, Menara Atlan, 161B Jalan Ampang, 50450, Kuala Lumpur Malaysia

Tel : +603 2162 6298 Fax : +603 2162 6198 Email : [email protected]

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