This article first appeared in The Edge Malaysia Weekly on September 19, 2022 - September 25, 2022

THERE could be a couple of large road and highway construction contracts up for grabs following the tabling of Budget 2023 in parliament, people familiar with the matter tell The Edge. The budget announcement is scheduled for Oct 7.

It is understood that some of the larger contracts being looked at by the government include portions of the RM7.3 billion, 351km Central Spine Road (CSR), which is slated to connect Kuala Krai in Kelantan to Simpang Pelangai in Pahang. They could also include parcels of the RM5.2 billion, 425km Sarawak-Sabah Link Road (SSLR), which will link Long Lama to Lawas, bordering Sabah, with a spur road being constructed to Long Pasia in Sabah’s Sipitang district when completed.

“We are expecting some announcements on these two contracts (CSR and SSLR), which could impact the construction sector positively in the budget next month,” says the managing director of a publicly traded construction company.

The executive director of another listed construction company concurs, saying that he understands that the industry will get a shot in the arm, and names the above-mentioned projects as potential catalysts.

When asked via a short message whether the portions of the two projects would be announced in Budget 2023, Senior Minister (Works) Datuk Seri Fadillah Yusof merely replied, “Wait for the announcement” and declined to comment further.

The announcement of the contracts could generate interest in the long-suffering construction sector. The Bursa Malaysia Construction Index was hovering at the 155-point level last Thursday. The index has been below 200 points since end-February 2020.

A dearth of jobs, the slow economy and the ongoing pandemic, among others, have taken a toll on the construction sector. So, any news of contracts being dished out could generate much interest.

An analyst who covers the construction sector says he is maintaining his “underweight” call on the sector due to thin margins on contracts and other difficulties that the industry has been grappling with. For instance, the analyst says many of the larger construction companies did not participate in the CSR as the margins were thin and there were also a lot of variations of price (VOP) and extensions of time (EOT) issues, which tends to delay payments.

“Raw material costs — steel, cement, timber and so on — have all eaten into margins. So, some of the jobs being tendered may not even be attractive with such high costs,” he explains.

To put things in perspective, over the past two years, the cost of construction materials including aluminium, steel, cement, timber, concrete and sand have increased by 15% to 55%, eating into the margins of construction players. Earlier this year, the Real Estate and Housing Developers’ Association Malaysia (Rehda), after a study, said construction costs could increase 19% this year, with aluminium up 55%, timber 52%, steel 38%, cement 19%, sand 18% and concrete 16%.

As a means of assistance, the federal government in July added more items that can be renegotiated under a VOP, such as cement, aggregates, bricks and walls, steel and metal sections, timber, plywood, sanitary fittings, floor and wall tiles, plumbing materials, sand and paint, adding on to the bricks, glass, steel, ceiling and roofing materials that were included earlier. Nevertheless, industry players are hopeful that the jobs that may be awarded in the upcoming budget may positively impact them.

CSR, which is scheduled for completion by 2026, involves six construction packages — from Kuala Krai to the Sg Lakit bridge in Kelantan (47km); from Sg Lakit bridge to Gua Musang, Kelantan (59km); from Gua Musang to Kampung Relong in Kuala Lipis, Pahang (93.8km); from Kampung Relong to Raub, Pahang (50km); from Raub to Bentong, Pahang (54km); and from Bentong to Simpang Pelangai, Pahang.

Some portions of the CSR have already been awarded and the highway was about 58% constructed at end-2020, having been delayed by the Covid-19 pandemic.

There is also talk of the highway being extended towards Johor, but this remained conjecture at press time.

Other highways that could be considered for construction under the budget include the East Coast Expressway Phase 3, which is likely to connect Gemuroh in Terengganu to Pengkalan Kubor, Kelantan, and span almost 150km. At a conservative cost of RM20 million per kilometre, these could cost RM3 billion.

As for the SSLR, thus far only a RM780 million contract has been awarded to Kimlun Corp Bhd (in November 2021), covering 77km from Lawas to the Long Lopeng Junction, with the other portions still up for grabs. The award to Kimlun Corp came from Sarawak-based Samling Resources Sdn Bhd, which is part of the diversified Samling Group.

Reports put the original award to Samling in excess of RM1 billion. While Sarawak-based construction players are likely to be favoured for the remaining RM4.42 billion worth of contracts, there could be opportunities for joint ventures.

Some of the larger construction companies in Sarawak include Cahya Mata Sarawak Bhd, Hock Seng Lee Bhd, Zecon Bhd and KKB Engineering Bhd. It is noteworthy that while the state has a number of large construction companies, Sabah does not. This means the road construction contracts in the state may be more hotly contested, with companies from the peninsula likely to bid.

For instance, the Sarawak portion of the Pan Borneo Highway, which stretches 786km, is currently more than 86% completed but Sabah’s portion, which spans 450km is only 65% completed, having been bogged down by various issues.

While the construction of the Pan Borneo Highway is still being undertaken, plans are already underway for the second phase of the highway to be constructed, linking Limbang to Lawas. However, while politicians have said it is likely that construction will be concluded five years from now, in 2028, the distance between the two towns of less than 70km has caused some confusion.

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