KINIBIZ As the 11th Malaysia Plan (11MP) marches towards year 2020, we are now on the clock to reduce the nation’s dependency on foreign labour. In this respect, the way forward for the construction sector is clear – automation.
The benefits are clear (see previous article ) and there are baby steps towards greater automation in the sector. However, there are some mixed signals in the larger picture despite what seems to be a growing push for less labour-intensive operations.
Last October, for instance, the prime minister announced a special allocation of RM500 million in Budget 2016 to promote the use of Industrialised Building System (IBS), a form of prefabricated construction method, for G5 contractors and below. This fund would be placed under SME Bank as loans for this purpose.
G5 contractors are players allowed to bid for no more than RM3 million in tender value. The highest classification is G7, which faces no cap, while the lowest is G1, which cannot bid for tenders worth more than RM200,000.
While this was welcomed by the sector, there are also calls to extend the financing aid to all contractors above the G5 categorisation as well. In an immediate reaction to the announcement, the Master Builders Association Malaysia (MBAM) expressed disappointment that the move was not accompanied by a reduction in import duties for heavy construction machinery.
“The association had hoped to see more reduction of import duties for heavy construction machineries and more incentives to be given to industry players who adopt and implement the use of IBS, such as equipment tax reduction and tax holidays incentives, as mechanisation is a way forward for us to reduce our dependency on the use of foreign labour and to increase productivity in the industry,” said MBAM president Matthew Tee Kai Woon.
“At present the duties for construction machineries such as hydraulic truck mobile cranes amount up to 30 percent,” Tee added. “This results in high cost of construction machinery and overall cost of running a business in Malaysia.”
In any case, this followed a prior announcement by Works Minister Fadillah Yusof in mid-October last year that, effective in 2016, private construction projects costing more than RM50 million, as well as government projects exceeding RM10 million, will also require the use of IBS.
However, will these projects require full IBS adoption, for instance, or only a percentage of works to be done via prefabrication? Industry players KINIBIZ spoke to said details remain scarce at the time of writing (late last year).
Aggressive push
Shifting from cheap foreign labour to relatively steeper IBS - for the private sector especially - is a chicken-and-egg situation. Once there is sufficient adoption of the system, then economies of scale would kick in, yet players hesitate to embrace it without economies of scale present as it would hurt their cost competitiveness.
According to Rofizlan Ahmad, deputy director (technology unit) IBS Centre, technology and innovation department at the Construction Industry Development Board (CIDB), there is now a concerted effort from the government to push for more automation in the construction sector.
The increased requirement for IBS used announced by the works minister in mid-October last year, for instance, is a signal along this vein.
“However, this particular development has not been gazetted as we are in process of working out the details of its implementation.
“The requirement may also be rolled out first for major cities such as Kuala Lumpur and Shah Alam,” said Rofizlan to KINIBIZ via phone. “It may be a problematic shock if it is imposed immediately in more rural areas like Segamat.”
In turn, the RM500 million fund to be used as soft loans is likely targeted at IBS manufacturers as opposed to contractors per se, Rofizlan added.
On the other hand, the government in June last year stated some 1.5 million Bangladeshi workers will be brought in over three years to meet demand in various sectors. This raises concern as, for the construction sector specifically, the continued availability of foreign labour may undermine efforts to promote greater use of machinery.
While declining to comment on the Bangladeshi workers specifically, Rofizlan noted that CIDB is also looking into raising the cost of hiring foreign labour to further to encourage the adoption of IBS.
This is in line with its Construction Industry Transformation Programme 2016-2020 (CITP) which, among others, seeks to increase the proportion of high-skilled foreign labour entering the country.
A useful example, according to Rofizlan, is Singapore where there is a tiered visa programme with varying costs for hiring foreign labour based on their skill levels.
On the other hand, if the government increases “levy for foreign workers then give incentive for mechanisation,” said MBAM vice-president Chuan Yeong Ming to KINIBIZ . “We must have both carrot and stick.”
Machinery import duty to go?
While IBS use in government and private sector projects will boost its adoption in the sector, a long-standing hurdle is the steep cost of heavy machinery involved, said MBAM to KINIBIZ .
Import duties go as high as 30 percent for some types of machinery. According to MBAM president Tee, the association has been asking for a reduction in import duties for machinery types not manufactured in Malaysia.
“There is no industry to protect here,” said Tee in a previous interview with KINIBIZ , adding the association hopes for the duties to be more in line with some of Malaysia’s Asean peers. “Some countries don’t even have them.”
Effective June 11, 2015, the government had slashed import duties for three tariff codes under HS 8429.51.000, HS 8430.41.000 and HS 8431.43.000 from 10 percent to 5 percent, though the remaining seven tariff codes requested by MBAM for reduction remain between 20 percent and 30 percent in import duty.
Bringing down the cost barrier to heavy machinery would bring two benefits, said MBAM: improving productivity and boosting safety in construction sites, as labour-intensive operations carry a greater risk as seen in a string of fatal mishaps in 2015 alone.
This is before potential health and social issues from a large influx of foreigners staying in crowded accommodations, the latest being worries over the reported string of typhoid cases involving foreigners recently.
“When we talk about going towards IBS, they require heavy machinery, for instance tower cranes,” said Tee in a previous interview. “So the higher capacity (of the machinery) therefore can increase productivity. If you have small machinery you cannot lift heavy things, so cannot go to IBS.”
In addition, there is also a huge proportion of existing machinery in the local construction sector which is old, Tee added. This raises both risks and costs. Making it cheaper for construction players to replace them would only make sense.
“We cannot keep using old machinery; we find it very difficult to maintain them,” said Tee, adding that greater mechanisation would also improve productivity and efficiency.
According to CIDB’s Rofizlan, this matter had been brought to the International Trade and Industry Ministry, as well as the Finance Ministry recently, and is currently being negotiated.
Decoupling IBS procurement
As for the high cost of procuring pre-manufactured IBS components which require upfront fees on the contractor’s part, CIDB is proposing to decouple the cost by separating this portion from the main construction contract.
According to CIDB’s five-year plan up to 2020, this works by shifting payments for buying IBS components from suppliers from the contractor directly to the project owner. Essentially, this means the project owner will pay the supplier directly as opposed to the contractor forking out the money first before being paid.
“This decoupling of IBS procurement will thus reduce cost to the contractor and will increase demand certainty for IBS suppliers,” said CIDB. “Direct procurement of IBS will also generate competitiveness amongst IBS manufacturers and can eliminate any potential mark-up of prices via main contractors.”
It is imperative, then, that the government takes the lead in this respect as it is a substantial source of construction projects. CIDB recommends that the Public Works Department (JKR) pilots this particular change in public procurement as it undertakes a high number of construction projects.
The government should also “provide leadership in obtaining and standardising quality of design, specifications and materials of IBS components, given its advantage as a key client of the industry,” said CIDB. “It can lead this charge through design and construction of institutions such as schools, hospitals and government offices.”
Once the use of IBS is widespread, economies of scale will kick in, said CIDB senior general manager for the development sector Ahmad ‘Asri Abdul Hamid in a previous interview.
“There may be a shock to the system at first, but once everyone uses IBS, there will be volume,” said Ahmad ‘Asri. “A previous JKR study found that using IBS has reduced costs for the past several years.”
Improving labour pool
Underlying the push towards greater mechanisation is the need to build up a skilled labour force for the construction sector as, said MBAM, on the basic level, heavy machinery is handled by trained professionals.
“The use of heavy machinery comes together with having skilled workforce,” said MBAM vice-president Chuan, adding, however, that “Malaysians are shying away from this field – skilled operators”.
“That is the problem we are facing, so the government needs to look at the long term – how to get people to come and operate cranes and so on,” said Chuan further.
It is, however, an area addressed in CIDB’s five-year CITP for the sector. One of its initiatives is to promote continued investment in human capital development in the construction sector eyeing, among others, to produce more than 30,000 skilled and certified graduates for the construction sector by 2020.
This will come alongside its push to reduce the sector’s heavy reliance on cheap foreign labour by raising levies for low-skilled or unskilled labour imports, as well as to monitor manpower planning more closely.
However, one last hurdle remains: a negative perception towards the industry by locals, largely reinforced by seeing low-skilled foreign labourers on construction sites undertaking repetitive manual labour under sun and rain.
“Of course we hope Malaysians can do that (fill jobs in the sector),” said Chuan. “(But) if you have better machinery, high-technology systems in the sector, I’m sure more locals will eventually be attracted.”
Part 1: Can gov’t really reduce foreign labour in construction?
Part 2: A nation built by foreigners, brick by brick
In view of the current debate over a possible influx of Bangladeshi workers into Malaysia this year, Malaysiakini is republishing a series of articles on foreign labour and their impact on the country. The series was first produced by KINIBIZ which ceased operations on Feb 1 after a sterling three-year run.