My Say: Public-private partnerships with Malaysian characteristics


Private sector participation in public infrastructure and public-private partnerships (PPP) are not new to Malaysia.

PPP 1.0

The Privatization Master Plan was launched in 1991. It outlined the policies, processes, modalities and other issues relating to private sector participation in public infrastructure development. Although it was called “privatization”, many projects were based on concessions. The privatization master plan was designed to achieve the following objectives: reduce the financial burden on the state; promote business competition; stimulating private entrepreneurship and investment; reduce the size of the public sector and monopolistic tendencies; and assist the bumiputera. The plan allowed for Private Sector Initiated Projects (PSI). Several modalities have been developed, including management buyout (MBO), build-own-operate (BOO), build-lease-transfer (BLT), build-operate-transfer (BOT) and land swaps. Many of these modalities are still used for new projects.

There have been many successes but also some failures. Most of the failures have been blamed on absent or inadequate regulatory reforms and unbalanced agreements. Some of the failed projects were nationalized due to the financial difficulties of private companies. These included the urban transport system in Kuala Lumpur and the national sewerage system.

PPP 2.0

Malaysia’s ninth plan (2006-2010) introduced the Private Finance Initiative (PFI), which was meant to embody most of the principles of the British PFI programme. The PFI was designed to show a stronger working relationship between government and the private sector – in addition to providing finance for the projects, the private sector also had to bear some of the risk. Various concepts have been introduced such as KPIs, rewards and penalties system, public sector comparator and risk allocation. The PFI was to be an obvious extension of what Malaysia had done, quite successfully, under the previous privatization program.

Here is some background on the UK’s PFI. When Margaret Thatcher came to power in 1979, she promoted wider ownership and increased efficiency through the effective use of privatisation. Many government-owned entities were floated on the London Stock Exchange and shares were sold to a wider audience. These measures coincided with an increase in oil revenues from the North Sea and a reduction in taxation. Public Sector Borrowing Conditions (PSBR) were used as a policy tool. As a result, UK public investment as a percentage of gross domestic product declined from a high of around 9% to a low of 2% in the early 1990s. public sector net worth was just 0.6% of GDP (the UK had a deficit of over RM190 billion at the time), the lowest level for a decade. This has led to lower standards in hospitals and public property. There was a backlog of repairs and maintenance, which hampered the delivery of quality services to the public. The backlog of school repairs at that time was estimated at some RM50 billion, while that of health service building maintenance exceeded RM20 billion.

The UK government has used the PFI to fill public sector funding gaps. Private investors were invited to develop public infrastructure projects and the government paid the investors over several years. The UK PFI was essentially a DBFO (design, build, finance and operate) method of financing public infrastructure including hospitals, defence-related assets, schools, roads and social housing. Under the PFI, the private company had to raise funds to design, build and maintain the public facility for a long period, which usually exceeded 20 years. In return, the private enterprise received a “regular royalty” from the government.

Criticism and demise of the UK PFI

The PFI has been the subject of much criticism. The National Audit Office and the UK Parliament’s Treasury Select Committee on PFIs have published reports critical of the way the scheme has been implemented.

As a result, in 2008 the UK reclassified £60 billion of its PFI payment obligations as public sector debt. This was in line with the International Public Sector Accounting Standard, IPSAS 32. cash accounting.) Malaysia had a similar experience of reclassifying PFI payment obligations as public debt.

After 2008, the UK government tried to develop a new form of PPP (called PF2) to replace PFI, but it abandoned its PFI program entirely in 2018.

PPP 3.0

There is still no PPP 3.0 in Malaysia, although there is still a huge need for private sector participation in public infrastructure development.

Unlike PPP 1.0 and PPP 2.0, where lessons could be learned from other countries (and policies, processes and success stories emulated), PPP 3.0 must be developed locally to accommodate Malaysia’s unique business and regulatory conditions. No country has developed a successful and comprehensive program that Malaysia can easily emulate beyond PPP 1.0 and PPP 2.0. PPP 3.0 should be a “PPP with Malaysian characteristics”.

Traditionally, public infrastructure has been financed from public budgets, either through tax revenues or through public borrowing. Some may be financed by Special Purpose Vehicles (SPV), for example, DanaInfra Nasional Bhd, which was established to raise funds for several infrastructure projects. The debts of these SPVs are guaranteed by the State and may ultimately be considered as State debts. Some public infrastructure projects can be “privatized” to allow private investors to develop. These private investors would recover their investment cost by collecting tolls or fees from users. Examples of this type of infrastructure include toll roads, IPPs (independent power producers), and land swap projects. In these cases, the government assumes no responsibility for these projects unless it has given some form of guarantee of income to private investors. These are PPP 1.0 projects.

PPP 2.0 terms have many weaknesses, the main one being the need to account for them as public sector debt, in accordance with IPSAS 32. PFIs are currently not favored by many countries.

Role of National Development Finance Institutions (DFIs)

Many countries have also established DFIs to provide financial services in sectors or regions underserved by commercial banks or financial institutions. DFIs are also known by a variety of names: state investment bank (SIB), mission-oriented or challenge-oriented bank, or promotional bank (as in Italy) and political bank (as in China). They usually belong to the government and their roles can be very specific and goal-oriented. In some countries, their DFIs have evolved to serve domestic companies overseas. Among the successful ones are Germany’s KfW and the China Development Bank (CDB), which finance projects outside their home countries. Another example is Singapore’s Development Bank of Singapore (DBS), which has become a regional financial powerhouse with a market capitalization of over RM200 billion.

In the next article, we will talk about DFIs and the role they can play in PPP 3.0, namely how they can provide patient capital and attract private participation in public infrastructure through blended finance and the formation of capital, and promote growth by recycling them. We will talk about how Malaysia could use its experience with PPPs, and the use of Islamic financing, to participate in infrastructure projects in other countries.

HK Yong was the Commonwealth Secretariat’s PPP Adviser in London, where he advised the governments of the 53 member countries on PPP policies and provided capacity building to civil servants. He also worked in a national development bank.


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