Proceedings of 5th Asia-Pacific Business Research Conference
17 - 18 February, 2014, Hotel Istana, Kuala Lumpur, Malaysia, ISBN: 978-1-922069-44-3
PPP/PFI in Malaysian Development Plans: Purpose,
Structure, Implementation, Financing and Risk Transfer
Nooriha Abdullah, Azlinor Sufian, Darinka Asenova and Stephen J.Bailey
Public-Private Partnership/Private Finance Initiative (PPP/PFI) in
developing countries are seen as an instrument for utilizing private
sector capital and management expertise for infrastructure
investment. In Malaysia, the introduction of PPP/PFI in 2006 under
the Ninth Malaysian Plan (2006-2010) was to streamline and enhance
the efficacy of the privatization program. The Tenth Malaysian Plan
(2011-2015) which aims to improve the living standard of Malaysian
citizens, raising it from a middle-income to a higher-income economy
by 2020, further enhances this objective. Within that context, this
paper examines the purpose, structure, implementation, financing and
risk transfer of PPP/PFI in Malaysia and their evolution through the
two Malaysia Plans. Qualitative research design via snowball
technique was applied to get access to the selected respondents,
which include members of Special Purpose Vehicle companies
(SPVs), financiers, public sectors representatives, PPP/PFI
government officers, a politician, consultants and a construction
company. The data collection conducted from December 2011 to
March 2012, included semi-structured interviews. The findings
highlighted some unique aspects of implementation of PPI/PFI
procurement in Malaysia in terms of purpose, structure,
implementation, financing and risk transfer. Examples include
utilization of Islamic finance instead of conventional finance, which
entails key differences in approach to financial risk. The use of
Independent Checker Engineers (ICE) and the close monitoring of the
PPP/PFI projects by all parties to ensure viability and completion of
the buildings and other infrastructure on time, which mitigates
construction risk. The paper argues that overall implementation of
PPP/PFI procurement of Malaysian practice has several distinctive
aspects, which benefits the Malaysian citizens and enhances the
sustainability of Malaysian Infrastructures.
1.
Introduction
A country‟s development plan is a means to execute the nation‟s aims and
objectives. Malaysia, like other developing countries requires sound and effective
development plans to achieve its socio-economic objectives. With a total population
of 28.3 million, Malaysia aims to provide better and efficient public services to all its
citizens. Malaysian multi-ethnic citizens that consists of Bumiputera (67.4%)
[Bumiputera is a term used for the ethnic Malay and other native ethnic groups of the
Sabah and Sarawak states, who made up of 2/3 rd of the Malaysian people], Chinese
(24.6%), Indian (7.3%), and others (0.7%) (Malaysia CENSUS 2010), have created
________________________________________________
Mrs Nooriha Abdullah, Department of Law, Economics, Accountancy and Risks/Department of Insurance,
Glasgow Caledonian University, Glasgow /Universiti Teknologi MARA, Shah Alam, Email:
Nooriha.Abdullah@gcu.ac.uk
Associate Professor Dr Azlinor Sufian, Women College, Prince Sultan University, Riyadh. Email:
ASufian@pscw.psu.edu.sa
Professor Darinka Asenova, Department of Law, Economics, Accounting and Risks, Glasgow Caledonian
University, Glasgow. Email: d.asenova@gcu.ac.uk
Professor Emeritus Stephen J Bailey, Emeritus Professor in Public Sector Economics, Glasgow Caledonian
University, Glasgow. Email: S.J.Bailey@gcu.ac.uk.uk
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Proceedings of 5th Asia-Pacific Business Research Conference
17 - 18 February, 2014, Hotel Istana, Kuala Lumpur, Malaysia, ISBN: 978-1-922069-44-3
multi-religious and multi-cultural environment. The existence of different races has
influenced the lives of Malaysian citizens‟ in many ways. This requires the
government to formulate sound infrastructure policies and allocate of resources for
infrastructure development that meet the requirement of all races in Malaysia.
In the past development of infrastructure in Malaysia received the largest share of
public sector development expenditure in the Malaysian five years plans. In early
1990s due to resource constraints faced by the public sector, Malaysian Government
decided to encourage and facilitated private sector participation in its infrastructure
development. Since then, the involvement of the private sector has promoted
PPP/PFI procurement under subsequent Malaysian development plans.
In recent years, there have been an increasing market of PPP/PFI for the
development and operation of infrastructure projects in Malaysia. However, very little
empirical studies have been conducted in the area of its overall implementation and
in the issue of risk transfer. This paper attempts to develop an understanding of the
Malaysian PPP/PFI procurement in relation to its purpose, structure, implementation,
financing and risk transfer. The preliminary analysis study found that Malaysia
practises close monitoring of PPP/PFI projects by all parties and some SPVs opted
for Islamic financing to finance their projects. The key question is, do existing
practices in implementing PPP/PFI procurement in Malaysia Development Plans
benefit Malaysian citizens and can the governance model of close monitoring
enhance the sustainability of Malaysian infrastructure?
This paper is structured as follows: it begins with a brief explanation of the Malaysian
Development Plan, which traces the evolution of the PPP/PFI procurement. This
includes the rationale for utilising PPP/PFI procurement in Malaysia, its structure,
implementation, financing and risk transfer. Next, the method used for the study is
explained followed by the findings and discussion on the analysis of the interviews,
which covers some key practices and the utilisation of Islamic financing models of
PPP/PFI in Malaysia. The final section summarises the main conclusions.
2.
Literature Review
2.1 Malaysian Development Plans, and the Evolution of PPP/PFI Procurement
As stated in various documents, the Malaysian government believes that economic
growth is not an end in itself but a means to bring prosperity and better development
planning. Hence, the principle of “growth with equity” has underlined most of
Malaysian development efforts since the 1970s, and is embodied in all Malaysian five
years plans. The evolution of PPP/PFI procurement in Malaysia began with the
introduction of privatisation. The
Privatisation Masterplan (1991), defined
privatisation as the transfer of activities and functions of the public sector to the
private sector that applies only to enterprises owned by the government and to new
projects implemented by the public sector (3PU 2010a). While, privatisation
programmes defined by Vickers and Yarrow (1991), Burnes et al., (2004) consist of
three types:
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Proceedings of 5th Asia-Pacific Business Research Conference
17 - 18 February, 2014, Hotel Istana, Kuala Lumpur, Malaysia, ISBN: 978-1-922069-44-3



Privatisation of competitive firms: the transfer of state enterprises operating in
competitive product markets to the private sector, for instance aircraft
companies and state-owned cars.
Privatisation of monopolies: transfer to the private sector of state-owned
enterprises with substantial market power, for example water,
telecommunications and electricity utilities.
Contracting-out public services such as information technology and facilities
management.
The history of privatisation in Malaysia can be traced back to 1983 when the
government first launched its Privatisation Policy. This included some policies in
Malaysian Incorporated Policy 1981, which provides the framework for closer
cooperation between the public and the private sectors. Prior to launching of
Privatisation Policy, contracting-out services by municipalities and other government
organisations had been practised (EPU 2009). The methods of implementing
privatisation can include a single method or a combination of sales of equity or
assets, lease of assets, management contract, Built-Lease-Transfer (BLT) and buildoperate-transfer (BOT) or build-operate. Sectors, which utilise these methods,
include Agricultural & Forestry; Construction; Electricity, Gas & Water; Transport,
Storage & Communications, and government services. Referring to the Ninth
Malaysian Plan (2006-2010), large numbers of privatised projects were in the
construction sector (42.9%). Hence, the concept of PPP/PFI in the provision of
Malaysian infrastructure has been applied since the Malaysian Incorporated Policy
and Privatisation Policy era (Khairuddin 2009). Not all projects implemented under
the privatisation policy were successful, which motivated Malaysia government to
enhance its privatisation concept.
In the Ninth Malaysian Plan (2006-2010) the government decided to streamline
privatisation by adopting new approaches such as the PPP/PFI model and
mechanisms to enhance the efficacy of the privatisation programme. PPP/PFI
involves transferring responsibility to finance and manage capital investment and
services from the public sector to the private sector in return for lease charges that
are commensurate with the quality of services and an amount sufficient to ensure
commercial returns on investment (Azmi 2008).
Rationale of utilising PPP/PFI procurement in Malaysia is to combine the resources
of the public and the private sectors to provide better and more efficient public
services (Takim et al 2008). Due to the high value and capital-intensive nature of
PPP/PFI infrastructure projects, Leng (2007) claimed that the Malaysian government
utilises them to fulfil the social and political agenda of rising Bumiputera equity
ownership also fostering the Bumiputera industrial and commercial community. This
agenda is found in the Tenth Malaysian Plan as one of the major „thrust‟ of
Malaysia‟s economic policy (EPU 2010), intended to encourage the development of
Bumiputeras‟ entrepreneurship to embark on private projects under PPP/PFI
procurements (PEMANDU, Annual Report 2011).
In 2009, in order to elucidate the key principles of PPP/PFI procurement the Public
Private Partnerships Unit (3PU) issued PPP/PFI Guidelines aiming to address some
of the key attributes of the PPP/PFI model. The conceptual framework of PPP/PFI in
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Proceedings of 5th Asia-Pacific Business Research Conference
17 - 18 February, 2014, Hotel Istana, Kuala Lumpur, Malaysia, ISBN: 978-1-922069-44-3
Malaysia is similar to that of the UK PPP/PFI (Takim et al., 2009). For instance, the
concession period of between 20 to 30 years requires the private sector to deliver
public infrastructure-based service, while the private sector is compensated through
lease rental charges commensurate with the levels, quality and timeliness of the
service provision throughout the concession period. The structure of the lease rental
payment for PPP/PFI projects guarantee a total return to the concessionaire‟s capital
investment expenditures including financing cost repayment and profit of investment.
Payment is based on Key Performance Indicator (KPI) for the services. At the end of
the concession period, most of the assets are usually transferred to the public sector
(3PU 2010b).
Concerning the process flow of PPP/PFI projects in Malaysia, 3PU has issued basic
Guidelines for the private sector companies. According to these Guidelines, the
process flow in implementing PPP/PFI project involves eleven steps. The first step
begins when a circular on national development plan issued to all ministries or
agencies, who then submit the PPP/PFI proposals in the second step. In the third
step, the proposal is considered and evaluated. If it is accepted then it will be
submitted to the Cabinet for approval and proceed to the fourth step where ministries
or agencies prepare the bidding documents and the invitation to bidders. If it is
rejected, the proposal will be considered for conventional or privatisation approach.
The fifth step involves the short-listing of three companies for submission to 3PU
where it will be evaluated and endorsed in the sixth step. The Cabinet before
negotiation of terms and conditions in the seventh and eight steps approves the
selected companies. A memorandum to the Cabinet on finalised terms and
conditions is agreed in the ninth step before proceeding to the tenth and eleventh
steps, which include signing of PPP/PFI agreement and project implementation (3PU
2010b).
The financing of PPP/PFI projects is provided by a combination of equity and debt.
The SPVs raise funds for developing the PPP/PFI projects via senior debt long-term
financing provided by the external financiers (3PU 2010b). During the early years of
implementation and financing of PPP/PFI procurement under the Ninth Malaysian
Plan (2006-2010), Jayaselan and Tan (2006); Netto (2006); Takim et al., (2008);
Gunasegaram (2006) criticised the PPP/PFI projects for being funded by the
Employee Provident Fund (EPF) (that is the nation's retirement savings institution).
This according to them was not a standard concept of PPP/PFI as practises by other
countries, which also indicates that the objective of risk transfer to the private sector
deviates as both counter parties to the contract are government entities. Currently,
the PPP/PFI funding is provided from banks and other financial institutions such as
Malaysia Building Society Berhad (MBSB). Since 1993, Malaysia practises on a dual
banking system, which allows a full operation of Islamic banking system in parallel
with the conventional banking system (Bakar, 2008). Apart from that, a Facilitation
Fund of RM20 billion is also being provided by the Malaysian government to help
the private sector to finance PPP/PFI projects (3PU 2010b).
The principles of risk transfer according to Treasury Committee (1995), maintain that
risk should „not transfer for its own sake‟ as risk should be allocated to whoever party
is best able to manage it. Two forms of risk transfer according to Thompson and
Perry (1992) cited by Li (2003) are: transfer of activity that creates the risks and
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Proceedings of 5th Asia-Pacific Business Research Conference
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transfer of the financial losses arising from the occurrence of the risks. Therefore,
risks in relation to contractual transfer refer to risks that are accepted by a party,
which would normally be borne by other party via an agreement between them at the
inception of the contract. Risks in relation to insurance transfer relates to those risks
that are transferred to the insurance company via insurance contract. On the other
hand, Asenova (2009 p.116) alleged “all financial service providers tended to transfer
exogenous (project) risks to other project partners and endogenous risks across the
financial sector via their hedging policy”. For examples, those risks that can be
transferred to other parties include performance related risk, technological risk,
construction risk, design risk, etc. Although, there are various risks associated with
PPP/PFI procurement, not all are transferred to the private sector. As highlighted by
Akintoye et al (1998), the government should not perceive that the private sector is
willing to accept all risks associated with PPP/PFI projects. In fact, according to
Hardcastle and Boothroyd (2003), the government as a party to the PPP/PFI contract
could also bear more risks.
In Malaysia, the government has highlighted the importance of optimal distribution of
risks between the public and private sector in its Ninth Malaysian Plan (2006- 2010),
aiming to enhance the viability and sustainability of PPP/PFI projects. Although the
full impact of risk transfer is yet to be seen, nevertheless, there are certain types of
risk that needs to be borne by the private sector such as the supply-side- operation
risks and construction risks. Risks associated with legal and political issues should be
entirely borne by the Malaysian government while demand-side-operational risks are
being allocated to the private sector with some guarantees from the government
(3PU 2010b). Therefore, PPP/PFI procurement under Ninth Malaysia Plan (20062010), emphasises streamlining at the implementation process and enhancing
viability through appropriate risk distribution. The Tenth Malaysia Plan (2011-2015)
continues with these objectives under its five strategic „Thrusts‟.
3. Method
This study examines the purpose, structure, implementation, financing and risk
transfer of PPP/PFI in Malaysia and their evolution within the context of the Ninth and
Tenth Malaysian Plans. A „Snowball technique‟ was used where according to Potter
(1996), a researcher might select a person (or persons) with whom contact has
already been made and they use their social networks to refer to other people who
could potentially participate in the study. Snowball technique is often used to find and
recruit “hidden populations”, that is, groups not easily accessible to researchers
through other sampling strategies. The adoption of snowball technique in this study is
appropriate, as it is not easily accessible to interview respondents in Malaysia.
Data was primarily collected from 15 in-depth interviews conducted with the
individuals directly or indirectly responsible for planning and executing of PPP/PFI
procurement in Malaysia. The interviews were conducted with members of the SPVs
companies, financiers, public sector clients, PPP/PFI officers from 3PU, a politician,
consultants from both governmental and non-governmental bodies, and a
construction company. The interviews were held over the period of three months from
December 2011 to March 2012 in Malaysia. Each interview, except with one of the
PPP/PFI officer from 3PU, was tape-recorded and lasted between forty-five minutes
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Proceedings of 5th Asia-Pacific Business Research Conference
17 - 18 February, 2014, Hotel Istana, Kuala Lumpur, Malaysia, ISBN: 978-1-922069-44-3
to one and a half hour. Most interviews were conducted in mix languages of English
and Malay.
Semi-structured questions were designed to obtain information on the
implementation of PPP/PFI procurement in Malaysia, which included questions such
as the financing of the PPP/PFI projects, their implementation and issues of risk and
risk transfer. To assist in managing and analysing the data, Bloomberg and Volpe
(2008) suggested that it can be done via computer software programmes such as
ATLAS ti, NUD.IST, NVivo, which enables a researcher to store, categorise, retrieve
and compare data. A researcher can also manually managed and analyse data,
which is a matter of personal preference. In this study, the analysis of interviews was
conducted with the help of NVivo9 software programme to identify patterns, in-depth
insights and irregularities of evidence gathered from the transcriptions, field notes
and interview reflection notes (Bloomberg and Volpe 2008), were later used in
generating rich description and interpretive meaning (Miles and Huberman 1994).
A post- interview analysis of the transcripts were conducted through close reading of
the entire transcriptions of the interviews in order to search for underlying themes in
the evidence collected. A coding scheme was intuitively developed to assist in
identification of the themes emanating from the analysis. These initial themes were
then compared and grouped under broader overarching themes (Bazeley, 2007),
which were then summarised into several pages synthesis of the main findings that
made extensive use of direct quotations from the transcripts. Analysis of these key
issues reflects the implementation, structuring, financing and transferring of risks in
PPP/PFI projects executed in Malaysia.
The interviews aimed at gathering deeper insights on PPP/PFI procurement in
Malaysia, as such details were not available in the literature. Hence, the objective of
this particular research design was to develop understanding of issues surrounding
the implementation of PPP/PFI projects in Malaysia in particular to gain information
on its structure, methods of financing being utilised, how risks are transferred as well
as to analyse the governance model.
4. Analysis of Interviews
The analysis of the interviews resulted in several key findings that are related to the
implementation of PPP/PFI projects in Malaysia as follows:
 Purpose and Rationale of Using PPP/PFI Procurement
Many of the respondents consider utilising PPP/PFI procurement in the development
of Malaysia infrastructures a good idea, which allows the private sector to become
the key driver for economic growth. It is the intention of the government to move
forward in providing good and efficient public services by encouraging the private
sectors to form partnerships. This according to the government officer can „enhance
the cost service‟, which means giving responsibilities to the private sector to
efficiently and innovatively manage the public facilities in a sustainable way. In
addition, other respondents alleged that using PPP/PFI procurement could save
government money compared to the traditional way. In PPP/PFI, the government do
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Proceedings of 5th Asia-Pacific Business Research Conference
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not have to provide any capital at the inception of building and is not concerned with
the maintenance of the public facilities or any defects for the duration of the
concessionaire. Other purposes according to some of the respondents relate to
providing business opportunities to the Bumiputera private sector.
 Structure of PPP/PFI Procurement in Malaysia
PPP/PFI projects in Malaysia adopted PPP/PFI model, which has similar structure of
the UK model. A typical SPV- based structure includes the key players of a PPP/PFI
project such as the financiers, construction companies, facilities management
companies, suppliers, subcontractor and contracting with the client/ public sector.
The period of concession is 23 years that consist of 3 years construction phase plus
20 years of maintenance of the buildings. At the end of the concession period, the
buildings will be handed to the clients/public sector at zero costs. However, since
PPP/PFI procurement using PPP/PFI model is relatively new in Malaysia, most of the
projects are still in the construction stage. On the other hand if the PPP/PFI projects
use Built-Least-Transfer (BLT) model, the concession period is still 20 years but
some projects excluded the facilities management by the private sector.
 Financing of PPP/PFI Projects
Majority of PPP/PFI projects in Malaysia are financed via bank loans, which provides
80% to 90% of senior debt long-term loans for 15 years. The remaining 10% to 20%
is financed internally, by the SPVs own investment. So far, in the PPP/PFI projects in
Malaysia, no other equity shareholders are involved. This is due to SPVs refusal to
allow any third party to become an equity shareholder in the project for instance, the
construction company. The reason is that the SPVs foresee this as creating a
problem as the construction company can have a conflict of interest, which may
jeopardise the progress and completion of the PPP/PFI projects.
Currently, two main financial institutions provide the funding to the PPP/PFI projects
in Malaysia. Other commercial banks are yet to get involved as they are not used to it
and can only provide a long-term loan for a maximum of 10 years. In order to
encourage implementation of private sector projects, the Malaysian government has
created a facilitation fund under the Economic Stimulus Package in the Ninth
Malaysia Plan (2006-2010). This according to some of the respondents includes
provision of land for the PPP/PFI projects. If any of the SPVs are both the landowner
and the promoter of the PPP/PFI projects, than the government will pay for the land,
through the facilitation fund.
Another interesting finding concerns the financing of PPP/PFI projects in Malaysia,
which can be either using Islamic financing or through conventional methods.
Although the Malaysian government encourages the use of Islamic financing in
funding the PPP/PFI projects, it is left to the SPVs to decide.
 Implementation and Risk Transfer in PPP/PFI Project
Though there are Guidelines on the process flow of how PPP/PFI procurement
should be implemented, in practice it sometimes work differently. For instance,
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Proceedings of 5th Asia-Pacific Business Research Conference
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concerning the process of tendering, it was revealed that some PPP/PFI projects
involved direct negotiation with the relevant parties, hence, eliminating the
competition. While, not all respondents confirmed the lack of competition in the
tendering process, they emphasised the existence of close monitoring and
cooperation among the parties involved in the PPP/PFI projects. For example, there
is a third party Independent Checking Engineer (ICE) at the construction site to
ensure what is being claimed by the SPVs on the progress of the construction is
justified before the financier can release any payment. So ICE helps to monitor that
the claims made to the bank are genuine. Other examples include close monitoring
conducted by client and SPVs, who make regular visits to the construction site to
ensure that the PPP/PFI project is progressing as planned. Not only that, this
includes the Malaysian government (3PU) is involved in thoroughly planning,
evaluating, coordinating, negotiating and monitoring the implementation of PPP/PFI
projects. This contributes to the mitigation of financial and construction risk by the
respective parties.
Most construction risk in the PPP/PFI projects is transferred from the public sector /
government to the SPVs. Nevertheless, the SPVs who have contractual agreement
with other parties such as with Construction Company and consultants normally
transfer the construction risk to them. Quoting a statement made by one of the SPV
members, risks that are „passed down‟ to them by the government, they will try to
mitigate these risks by transferring them to the main contractor and the consultant via
agreements between them. For instance, if there is a fault in design, the design
consultant will be responsible for the loss, which they try to reduce by purchasing
Professional Indemnity Insurance policy. Hence, insurance is part of the mechanism
to transfer risks in PPP/PFI projects. Apart from that, a completion guarantee
agreement is also signed with the financier, to ensure that the contractor is to bear
the construction risk. On the other hand, SPVs that fail to complete the buildings on
time or cause a delay will be penalised in terms of monetary charges. This affects
their KPI that permits the government to reduce payments made to the SPVs. Other
risks, which could not be transferred such as legal risk, political risk and the land
used for PPP/PFI projects are to be retained by Malaysian government.
 Islamic Financing for PPP/PFI Projects
Financial institutions in Malaysia either local or international, have coming up with few
Islamic financing products for various types of project. There are three common types
of Islamic financing that may be suitable for PPP projects; (a) Ijarah [contract-based
sukuk], (b)Musyaraka [shared risk sukuk] and (c) Murabaha [limited liability sukuk]
Sukuk. It is very interesting to note that in Sukuk, partners in project that is in
partnership contract are the shareholders where they will share gain profits and
assets. For instance in a partnership between the financier and the company, both
will share the risks and responsibilities. Sukuk is one of the modes of financing that is
granted based on the nature of project and it is available for Syariah compliant
contracts.
Sales or al-bay’ (which include a contract of al-istisna’, salam and murabaha) is a
kind of sukuk where the investment manager is allowed to finance the purchase of an
asset through sukuk, and then sell it to the borrower who then will repay the debt
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according to the period that agreed by the parties. However this kind of Sukuk isn‟t
allowed to be traded in the stock market because it consists of debts that are
prohibited according to the Syariah.
While another type of sukuk are musyaraka and mudharaba . These types of sukuk
will create a contract of partnership between the holder and the issuer of sukuk. In
this context, the holder becomes a partner with the issuer of sukuk, where the issuer
can be a government or private entity.
Next, is the ijarah (rental) contract. It is quite similar to conventional Build Operate
Transfer (BOT) projects where an investor can issue Sukuk to finance the
construction of a public utility and later rent it to the state for a certain period.
The last type is related to investment funds. These types of sukuk are pooled
together and invested for a defined period of time by a fund manager where the
owner later will reimburse the investors.
PPP/PFI projects would require large amount of capital and in this regards, sukuk
mudarabah issuance would be appropriate method of financing. The modus operandi
of this type of financing is summarised as follows; (Zaharudin, 2012):

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

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

Customers or companies which own a project to construct an airport (as an
example), are in need of USD1 billion (as an example) for the purpose. They
submit application to the bank to find suitable investors for sukuk mudarabah
issuance.
The bank identifies interested subscribers, followed by negotiation process, and
this is important, so that several primary subscribers are already giving their
approval to invest in the project.
Consequently a mudarabah agreement will be signed between parties involved.
A specific company for the sukuk issuance will be created, then the capital
provider executes mudarabah contract with the company (entrepreneur) on the
agreement of profit sharing rate for example 10:90 (Company: Capital provider)
As a result of the binding contract, the company or its agent will issue sukuk
mudarabah for representing the investor‟s right in business which forms the
foundation of the said mudarabah contract. This sukuk has its maturity period.
The investment money worth USD 1 billion will be utilised by the company to
finance the construction of airport.
At the maturity date, the government will pay the profit from the airport business
(based on the example earlier), such as from the rental, advertisement and sale
to the company, say for instance USD 200,000 million, and the company will
distribute 90% of it to the investor. Meanwhile the company will take 10% from
it. The bank usually, gets the agreed payment as commission from the company
as the arranger or as the person who arrange the task from the beginning.
If the loss occurs without the company‟s negligence, all the capital loss will be
borne by all investors.
This type of financing is becoming popular in Malaysia and the legal landscape in
Malaysia has allowed its growth.
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Proceedings of 5th Asia-Pacific Business Research Conference
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5. Discussion of Findings
The Malaysia development plan in particular the Ninth Malaysia Plan (2006-2010)
and the Tenth Malaysia Plan (2011-2015) have clearly articulated the rationale for
promoting PPP/PFI procurement as the „engine of growth‟ in development of
Malaysian Infrastructures. As infrastructure development is a key component to
unlock potential economic activities and support sustainable economic growth, the
Malaysia Government will continue to place emphasis on infrastructure development
as part of the economic transformation. Hence, 3PU was establishment in April 2006
to spearhead private sector participation and stimulate private sector investment
through public-private partnership in the national development agenda. Coincide with
this, is the government agenda to increase the Malaysia economy standard of middle
income to upper income by year 2020. Thus, giving priority to Bumiputera private
sector to enter the PPP/PFI procurement projects, this according to Ragayah (2012)
could reduce the relatively high poverty level among the Bumiputera.
In 1970, the economic growth in Malaysia was very encouraging with a growth rate of
average 6.0 percent per annum. However, due to insufficient emphasis on
distributional aspects, there was a socio-economic imbalance among the ethnic
groups, which saw the Bumiputera only owned slightly over 2.0 percent of corporate
equity. Hence, in 1971, New Economic Policy (NEP) was launched to increase the
percentages of corporate equity owned by the Bumitutera to 30 per cent by the year
1990. Although, this target was not achieved in 1990 (EPU 2011), the government
agenda to help the Bumiputera, continues via the National Development Policy
(1991-2000), National Vision Policy (2001-2010), the Ninth Malaysia Plan (20062010) and currently in the Tenth Malaysian Plan (2011-2015).
The structure of PPP/PFI model in Malaysia is similar to the UK PPP/PFI, however,
its usage is meant to fit with Malaysian agenda and purposes. This can be seen in
the utilisation of Islamic financing to finance the PPP/PFI projects. Islamic finance
can be described as finance under Islamic Law (or Shariah). A contract, which is
deemed Shariah compliant include (Kateb 2011):

Prohibits the payment and receipt of interest (Riba);

Rules out uncertainty (or Gharur) about the subject matter and terms of the
contract;

Prohibits investments in undesirable businesses and unethical causes;

Excludes speculative and gambling transactions and encourages earnings
through profit sharing investments.
Hence, investment vehicles through the Islamic finance structure are based on
shared business risk. Risk sharing in the Islamic financial system, according to Mohd
Sultan (2008) constitutes sharing of both the risk and return in a transaction, in
contrast with the interest-based loans in conventional banks. As mention by Kateb
(2011) Islamic finance is not only an interest free system but also offers promotion of
entrepreneurship, safeguarding property rights, practise transparent transaction and
honouring of contractual obligations. In addition, Umar et al (2012) claimed that Islam
being community welfare-oriented encourages the social and economic development
of humanity, hence compatible with the idea of PPP/PFI to provide public services.
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Proceedings of 5th Asia-Pacific Business Research Conference
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Other features of PPP/PFI structure in Malaysia seem similar to the standard
PPP/PFI procurement used in other countries such as the concession period of 20 25 years, the key players in a typical SPV-based structure, etc. Nevertheless, in
Malaysia, the process of tendering is sometimes conducted via direct negotiation and
some of the PPP/PFI using the BLT model omits the use of facilities management
companies. The successful implementation of PPP/PFI procurement, relates to KPI
of SPVs to complete the PPP/PFI projects on time. Otherwise, a heavy penalty is
imposed on them. As reported by NAO (2003), the majority of PPP/PFI projects were
delivered on time but, in case of failure, the contractor would be penalised and risk
payment made to them. Hence, allocation of risks to the appropriate parties is crucial,
which the Malaysian government emphasised in its Ninth Malaysia Plan (2006-2010).
In addition, transfer of risks to the party, which can best manage them, can yield
Value for Money (VFM). This is because, the Malaysian government will only
consider a PPP/PFI proposal if certain criteria are fulfilled which include socioeconomic impacts, VFM and cost savings to the government, quick delivery of the
project, service enhancement and also increased level of accountability, efficiency
and effectiveness (3PU 2009).
Due to the above factors, Malaysian government perceived close monitoring of the
PPP/PFI projects by all parties is essential to ensure successful implementation of
the projects. In addition, encouraging most SPVs to use Islamic financing in
implementing PPP/PFI projects, perhaps may lead to new perspective towards the
concept of risk transfer that exists in the PPP/PFI projects and for improved risk
sharing. Nevertheless, the long-term impact of risk transfer via PPP/PFI model is yet
to be seen in Malaysia, as the implementation of this model is relative new. Hence,
the modus operandi of working and conducting close monitoring by each party of the
PPP/PFI projects is a new practise that is being implemented in the PPP/PFI
procurement in Malaysia.
6. Conclusion
This paper has analysed the evolution of PPP/PFI procurement in Malaysia through
its various development plans in particular the Ninth and Tenth Malaysia Plan.
Beginning with Privatisation Policy, in 1983 many mega infrastructure projects have
been executed by the private sector, which has successfully attracted private sector
companies to Malaysia. Nevertheless, some of the projects implemented failed and
needed to be bailed-out by the government, led to the introduction of PPP/PFI model
in 2006 to undertake as part of the new modes of procurement.
The distinctive aspects of Malaysian PPP/PFI procurement are as follows:

In terms of the PPP/PFI structure, although they consist of similar features as in
the standard PPP/PFI used in other countries, the rationale of utilising PPP/PFI
procurement is that is in line with the government‟s development plans and
objective to raise the Malaysian economy from middle income to higher income
and to have positive impacts on the poverty level of the Bumiputera. This is
reflected in the priority of awarding the PPP/PFI projects to Bumiputera private
sector organisations.
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Proceedings of 5th Asia-Pacific Business Research Conference
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



Facilitation Funds initiated by the government also promotes and encourages
the private sector to participate in the PPP/PFI projects, hence, accelerated the
infrastructure development in Malaysia.
The dual banking system implementation in Malaysia, that allows both Islamic
financing and conventional methods to be used in PPP/PFI projects, has led to
a different financial perspective for implementing PPP/PFI procurement via
Islamic financing. This emphasises the difference in the attitudes and
approaches towards risk sharing and perhaps may lead to new perspective
towards the concept of risk transfer that exists in the PPP/PFI projects.
Subsequently, Islamic finance, which is embedded in Islam religion being
community welfare-oriented, encourages the social and economic development
of humanity that is compatible with the idea of PPP/PFI to provide public
services.
Together with the Malaysia governance model for close cooperation between all
parties and closely monitoring the PPP/PFI projects, this could enhance the
sustainability of Malaysian infrastructure.
In conclusion, the analysis of the interviews revealed that Malaysia has its own
methods of implementing PPP/PFI procurement. The purpose, structure,
implementation, financing and even the risk transfer of PPP/PFI procurement is made
to fit for the Malaysian economic and social development agenda. Hence,
implementation of PPP/PFI procurement in its various development plans (in
particular it‟s Ninth and Tenth Malaysian plans) benefits the Malaysian citizens in
relation to their living standards and infrastructure development.
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