KUCHING: Bank Negara Malaysia’s rising interest rates have caused contractors to abandon public projects, leading them to become what is billed as sick projects.
According to Sarawak Building and Civil Engineering Contractors Association (SBCECA) chairman James Ha, the rising interest rates are likely to impact contractors who obtain project loan financing to maintain their cash flow, resulting in reduced profits due to the high interest rates.
Speaking to New Sarawak Tribune on Saturday, Ha, however, revealed that the primary reason for sick projects was not the rising interest rates, but rather the inability of contractors to accurately estimate costs and the subsequent increase in material costs.
“However, that is not the main reason why sick projects happen,” said Ha.
“It is because of the incapability of the contractors to do costing, and then rising material cost which kills the project. Not the interest rates per se.”
When asked about the number of contractors relying on bank financing, he replied: “I have no idea but there are contractors relying on this bank financing to do projects.”
He also pointed out that many contractors are misguided by the government’s faulty cost estimation, resulting in projects being started on the wrong footing and without profitability.
Ha explained that while capable contractors can determine accurate costing and avoid underbidding, many others lack the necessary skills to do so and instead rely too heavily on government estimates.
As a result, they may end up taking on projects that are not financially viable, even before taking into account the impact of rising interest rates.
“That’s why we keep urging the government to pay contractors promptly,” he said.
“If the payment is fast, then we don’t have to rely so much on bank financing.”
Ha pointed out that normally, the government should honour contractors’ claims within 45 days, as stated in the contract, but this rarely happens.
He noted that many contractors complain of not getting paid for eight to nine months, adding: “If the government quickens the process, it will help the contractor a lot.”
Two economists hold a different view from Ha, as they disagreed with his assertion that interest rate hikes are not the primary cause of contractors abandoning and failing to complete projects.
Universiti Malaysia Sarawak (UNIMAS) economist Dr Jerome Kueh, for example, argued that interest rate hikes will certainly affect project delivery, especially for critically delayed projects.
As interest rates have risen, contractors’ financial flows have been severely strained, aggravating the situation.
“Abolishing the projects on the other hand will not be the option because those projects were already planned and any cancellation would result in economic losses for the people, both monetary and non-monetary.” he said.
According to Kueh, the state government is taking action to address critically delayed projects by providing incentives to contractors.
These measures include lower minimum payment, advanced payment for works contract, three payments to be made without the contract documents in the first four months of the contract period, lower rate of liquidated and ascertained damages, Extension of Time (EOT) for projects with progress of at least 60 per cent based on the works programme and Mutual Termination subject to principal conditions imposed.
EOT is a contractual provision that allows for additional time to be granted to complete a project beyond the original completion date while Mutual Termination is another contractual provision that allows for a project to be terminated by mutual agreement between the parties, subject to certain conditions imposed.
He added that these initiatives could help contractors cope with the financial strain caused by interest rate hikes and advised them to take advantage of these incentives to ensure they can complete projects on the revised timeline.
Meanwhile, economist Dr Carmelo Ferlito said interest rates are an important element in a market economy for allocating scarce resources along the supply chain, much like other types of prices.
Lowering interest rates through liquidity injection can create a ‘malinvestment’ process, leading to a worse situation than before, and causing a readjustment crisis.
“A high number of sick projects suggest they are approaching a turning point from a period of artificial growth to a contraction,” he said.
Malinvestment is misallocation of resources in an economy due to inaccurate price signals. It occurs when investors or businesses invest in projects or activities that appear to be profitable in the short term but are not sustainable in the long run.
Bank Negara’s Monetary Policy Committee (MPC) maintained the overnight policy rate (OPR) at 2.75% in a surprise move on Jan 19.
In 2022, the central bank had increased the OPR by 100 basis points (bps) to 2.75% in November in an attempt to curb inflation.
Economists anticipate rate hikes of 50 bps this year, with some forecasting a return to pre-pandemic interest rates of 3% to 3.25%.
Against this backdrop, Deputy Premier, Datuk Amar Douglas Uggah Embas, recently reported 36 projects as critically delayed among the 340 currently categorised as sick.
