Foreign Participation in Malaysian Construction Projects: A Practical Introduction By Jihong Wang (Senior Partner) and Paul Kossof (Legal Consultant) 2016-11-25
Malaysian construction projects are often attractive to foreign companies as, in addition to its relatively steady and high growth, Malaysia offers a comparatively stable political and legal environment. Propelled by the One Belt, One Road Initiative, Chinese construction companies are funding and building many of the country’s most important projects.
Zhong Lun attorneys led by Senior Partner Jihong Wang assisted a Fortune 500 construction company with a potential large-scale water works project. Our team conducted legal environment due diligence, met with the local government, etc. Based on this experience, the following article seeks to provide a practical introduction to foreign participation in Malaysian project investment, EPC contracting and public-private partnerships.
Brief Overview of Malaysia’s Economy and Construction Industry
With an average annual economic growth of over six percent since the 1950s, Malaysia now possesses one of the highest GDPs in Southeast Asia (over USD 800 billion). As more than 80 percent of its GDP is derived from exports within only a few industries, Malaysia has recently implemented federal policies (Malaysia has a federal system) to diversify its economy as well as reduce both domestic need for and economic reliance upon oil and gas products.
Construction projects in Malaysia are addressing this market diversification push including office buildings for financial and services industries, power projects to expand its energy capabilities (ranging from coal to renewables) and various transportation projects to address a growing population. A new city was even built, Putrajaya, to address overcrowding in capital Kuala Lumpur by relocating almost all of the federal government (this project utilized over USD eight billion in investment).
Beginning in 2009, the Malaysian government began removing restrictions on foreign equity participation in various construction-related industries including engineering, architecture, telecommunications, schools and hospitals. Currently, foreign investors may establish several forms of local business entities as well as directly invest in local companies (contributions can include cash, equipment, technology, franchise rights, etc.) to participate in local construction projects.
Foreign entities considering investing in Malaysia should understand what the Malaysian Investment Development Authority (MIDA) offers as the government administration responsible for promoting foreign investment as well as take advantage of their online information and foreign investor services. We also recommend reviewing materials from the Economic Planning Unit (EPU; a government agency directly under the Office of the Prime Minister that influences economic and related policies, such as environmental) and Ministry of Domestic Trade, Cooperative and Consumerism (MDTCC; government ministry that advises on federal laws and regulates trade, business registration and governance, and specific industries including oil and gas). Construction companies will also work with the Construction Industry Development Board (CIDB) as it handles many of the related permits and licenses.
Malaysia offers various incentives to foreign investors including a wide spectrum of tax exemptions and benefits. However, as investors must actively apply for these benefits, it is important to be aware early on of what incentives you may qualify for so as to ensure adequate time to properly file the associated applications.
The Malaysian construction industry is relatively open to foreign contractors, and many of China’s largest construction companies are involved in EPC projects ranging from transportation infrastructure to power plants (key players include China Railway Construction, China National Machinery Import & Export Corporation (coal power plants) and China National Nuclear Industry 23 (oil and gas, renewable energy, etc.)).
For both private and government projects, a foreign company intending to perform EPC work must first incorporate a local business entity (usually an LLC) and then obtain a Registered Contractor Certificate from CIDB (CIDB License), which is required for performing any type of construction work. These licenses have seven registration grades ranging from G1 (tenders not exceeding MYR 200,000, or app. USD 48,000) to G7 (no limit).
The CIDB registration criteria make it difficult for foreign contractors to obtain higher-grade licenses (e.g., previous and ongoing Malaysian projects, local technical personnel, local financial capability), so they frequently bid with Malaysian construction companies through joint ventures or consortiums. Malaysian construction companies often contribute little capital or technology, their main contribution being the CIDB License and other local qualifications. For comparatively small projects, it is also possible for foreign contractors to obtain a project-specific license.
In addition to applying for general construction permits, the local company may need industry-specific approvals. It is also important for companies to understand foreign v. local labor requirements (and to negotiate potential exemptions, if necessary) as well as the procedures and related restrictions/fees for hiring foreign employees.
Finally, although Malaysian law does not require public tenders for performing government project EPC work, and some projects are directly awarded, federal and state projects often utilize public bidding.
Following the general common law trend, Malaysia does not have legislation dedicated to PPPs. Instead, its PPP framework is set on an administrative level (primarily by the Malaysian Public Private Partnership Unit (3PU). On the federal level, PPP participants should be mindful of industry-specific laws such as the Railways Act for railroad projects and Electricity Supply Act for energy projects. Some of the other most relevant federal laws include the Port Authorities Act, Land Acquisition Act and Telecommunications Act.
Malaysian law does not require that PPP projects be awarded through public bidding. For federal projects, 3PU will determine whether a PPP project shall be granted via public bidding or direct award. 3PU tends to require bidding to facilitate competition and fair dealing; however, 3PU has allowed direct awards depending on the typical factors such as project complexity.
Bidding is also not necessary for projects awarded on the state level. State governments will tend towards public bids (mainly to increase competition), but have directly awarded projects.
Engaging Legal Counsel and Other Due Diligence Professionals
This article provides a general introduction to foreign participation in Malaysian construction projects. Depending on the project, Malaysia presents a potentially suitable environment for foreigners to invest in and build projects. However, successful implementation requires a comprehensive understanding of the legal environment including federal and state incentives and restrictions on foreign involvement, potential transactional structures, approvals, tax and currency exchange (just to name a few).
Given the scale and complexity of cross-border construction projects, it is always advisable to carefully identify qualified consultants including attorneys (from both the outbound and target country) and financial advisors as well as to conduct complete and proper due diligence before determining whether to participate in a project.
Zhong Lun is a leading full-service Chinese law firm with overseas offices in New York, Los Angeles, San Francisco, Hong Kong and Japan. Our thriving outbound practice represents some of China’s largest construction companies throughout the world within the infrastructure, real estate, energy and natural resources sectors, navigating diverse legal environments and providing comprehensive legal services that both address the numerous risks facing cross-border investment and construction while tailoring our services to the internal requirements and cultures of Chinese central, state-owned and private enterprises. Please contact firstname.lastname@example.org or email@example.com to learn more.
This article originally appears in the November 2016 issue of the Illinois State Bar Association newsletter THE GLOBE, and is for informational purposes only and does not constitute legal advice or advertising.