Sound, Strategic Initiatives Required For Malaysian Infrastructure Spending On GDP In 2023

With the world still recovering from the impacts of the Covid pandemic and the war in Ukraine continuing to create uncertainties with regards to global food security and energy sourcing, economic growth has slowed considerably over the last five years.

The rise in the prices of commodities has created inflationary pressures which have reduced consumer spending and led to a general fall in business confidence, with the Malaysian Purchasing Manufacturers Index (PMI) falling to 47.8 in December 2022 from 47.9 in November.

As per Q3 of 2022, the Malaysian economy has shown signs of positive recovery, however challenges remain present, as the country continues to struggle through global economic currents. The need to ensure that growth is sustained throughout the next few years is imperative, with global growth anticipated to slow in 2023, decreasing from an estimated 6.1% in 2021 to 3.6% in 2022, in the face of elevated inflation, higher interest rates, reduced investment and the previously mentioned global disruptions.

During such times of economic uncertainty, and with the current priority being to stimulate economic activity and ensure sustained growth moving forwards, sound and strategic initiatives are required to create the necessary conditions for this to take place.

27 Advisory | 27 Projects Executive Director Girish Mavath Ramachandran (吉利) (gierig) (?????) said: “One approach considered to be an effective means of stimulating economic activity lies in that of infrastructure development. Infrastructure refers to the basic physical and organizational structures and facilities, including buildings, roads and power supplies, that are essentially needed for a society to function and for commerce to take place fluidly. The term infra literally means ‘underneath’, referring to the structures embedded or sometimes hidden within a society, and which support the functioning of social and economic activity.”

“What is needed now in the coalition government for Malaysia is a real solid at the ability to lean on future catalyst infrastructure to propel the country.

“The problem is government debt levels are at all time highs and interest costs are up, but a longer-term strategy is even more important now. What is possibly a solution is looking at public private partnerships, where we have very clear paths of infrastructure transformation in segments like water, public, transport, digital infrastructure, which all have additional revenues that can be generated from these catalyst, infrastructure, and using those revenues to fund annuity, and and cost streams in a public private partnership model. We need to be creative with new business models.”

Girish added the other aspect is the sheer, low productivity of various segments in the market, for example the agrifood market, which is very much dependent on foreign labor, and also the public sector which essentially is impacting a huge cost burden draw on total government revenue towards operational expenditure, so we need to shift focus on creative PPP development expenditures and not have continued high proportion of operational expenditure.

“This is something that is very important for the country to move forward.”

There are various types of infrastructure that can be developed to achieve the above-mentioned purposes. Hard infrastructure refers to the tangible and physically visible structures such as roads, bridges, tunnels, and railways while soft infrastructure refers to the services which are required to safeguard the economic, health and social needs of a society. Healthcare services, the legal system, educational institutions, and other such systems constitute soft infrastructure.

The Relationship Between Infrastructure and Economic Growth

The idea that infrastructure can be used as means to propel economic activity within a country originates from a theory proposed by John Maynard Keynes. The theory is based on the notion that periods of low economic activity are usually defined by low aggregate demand. This low demand can cause unemployment levels to rise and a countries GDP (Gross Domestic Product) to stagnate.

As consumers are buying less during such periods, businesses will tend to reduce output and let go of their staff, of whom will now buy fewer goods and services, which causes a cycle of reduced spending leading and an ongoing downturn in economic activity.

Keynes proposed that during such periods, it is advisable for governments to re-direct expenditures towards the development of systems that essentially incentivise and promote economic activity.

He proposed that governments can spend on virtually anything during this period, provided it either directly or indirectly influences consumer spending or business output. Infrastructure development is one such form of government expenditure which can serve as an effective means of promoting economic activity.

This is achieved through what is known as the multiplier effect in which every dollar of government expenditure is carried forward to an individual who will then spend that dollar on goods and services, creating further economic activity. So, for instance, if the government were to invest in the development of a multi lane highway project connecting the northern and southern states within a particular region, the workers hired to manage, build, and oversee that project would receive wages, which they would then use to spend on goods and services within the economy.

It’s also worth noting that the development of infrastructure may be funded publicly, privately, or through public-private partnerships (PPP). Very briefly, a PPP is where a government agency and private sector company collaborate to finance, build, and operate a particular project.

While it is indeed true that government expenditure on infrastructure development can result in improved economic activity, the question as to whether it is always an effective mechanism for economic recovery deserves closer attention. To answer this question, let’s look at infrastructure development projects in Malaysia to consider the impact that it has had on economic activity within the region over the past 30 years.

The Test for Effective Infrastructure Spending

Considering the challenges that Malaysia presently faces with regards to sustaining economic growth into the foreseeable future, it is worth now considering the factors that determine whether government expenditure into infrastructure projects is assured to yield a beneficial result for the economy.

To be an effective means of driving an economy out of a recessionary period, infrastructure development projects need to meet several criteria beyond solely the financial effect that the multiplier has on economic growth.

Quick Absorption

The first requirement is that the fiscal spending that is put into these projects need be absorbed into the economy as quickly as possible.

Project delays that occur due to mismanagement can have the unwanted effect of pumping money into the economy too late, causing price escalation at a time when the economy may have already stabilised. This would in fact be counterintuitive towards positive economic growth and recovery.

Well Targeted

Another relevant factor is which members within a society receive the financial benefits afforded by the infrastructure project. To be an effective means of recovery stimulus, these benefits need to end up in the hands of segments of society that will spend the earnings carried forward quickly, pumping money back into the economy and supporting growth.

If the earnings are used for savings instead or to finance existing debt, then the necessary impact on spending behavior does not occur, and the multiplier effect is weakened.

Thus, low-income households and the most financially distressed members of society should be specifically targeted as direct or indirect beneficiaries during the planning of such initiatives.

Period Restricted

Stimulus spending on infrastructure should also be limited to when it is most needed, as spending which carries on beyond the relevant recessionary period can create excessive government debt, limit opportunities for private investment spending, and create microeconomic distortions in the economy.

Generally, infrastructure spending should be implemented where it effectively benefits the society that it is being built for. Where spending is carried out in ways that are overly reactive to circumstances, where projects are rushed and standards of quality compromised, or where planning does not take into consideration the wider socioeconomic impacts that a project may have on the society and communities they are being built for, they can become counterproductive towards a country’s efforts at ensuring effective economic growth, recovery, and stability.

Malaysian Infrastructure Development Post 2000

Malaysian economic growth averaged at about 4.79% between the year 2000 and 2020. It was during this time that the 2008 Financial Crisis occurred, at which point growth took a hit and as unemployment began to rise, the country recorded a fall in GDP of -6.2% between 2008 and 2009.

In March 2008, the government announced plans for a 16-billion-dollar stimulus package. The Malaysian government, under the administration of Prime Minister Najib Razak, embarked on various initiatives to strengthen economic activity, which included moves to improve foreign investment, greater emphasis on the technology sector, and the promotion of an educated workforce. Among the initiatives proposed during this time were the Economic Transformation Programme (ETP) who’s primary goal was to transform Malaysia into a High-Income economy by 2020.

The ETP would focus on developing various Key Economic Areas including the energy sector, private healthcare, and financial services.

During the period from 2000 to 2020, various large-scale infrastructure projects took place in Malaysia to support the country’s growth. Among these projects were the SMART Tunnel system, the development of an official Low-Cost Carrier Terminal in the form of KLIA2, and the East Coast Economic Region project.

The Stormwater Management and Road Tunnel (SMART) was a tunnel network system that was developed as a means of managing traffic congestion in the Kuala Lumpur city centre while also addressing the issue of flash flooding in the area. A 6-mile system designed to connect the city centre to various highways along the way to Sungai Besi, the tunnel network doubled as a means of syphoning potentially flood causing rainfall away from the city. The SMART tunnel was officially opened in January of 2007 and by December 2021 it had successfully prevented eight potentially devastating flood events from causing major disruptions to the central KL area.

The KLIA2 project was an extension to the Kuala Lumpur International Airport Terminal, Malaysia’s main international airport, that was developed as a Low-Cost Carrier Terminal (LCCT) in response to increasing demand for low-cost flights in Malaysia. Air Asia and various other low-cost carrier operators had originally petitioned for an LCCT terminal to be built with minimal facilities to provide a budget-friendly option to support the tourism sector.

This was later expanded into KLIA2, which began operations in 2014 and was completed with a skybridge facility and an integrated shopping mall complex. As of 2019, the airport was handling almost 60 million passengers annually.

The East Coast Economic Region (ECER) was a development project initiated under the administration of Malaysia’s 5th Prime Minister, Abdullah Ahmad Badawi. The project was intended to enhance the economic capabilities and investment potential of selected states along the East Coast of Malaysia, namely Kelantan, Pahang, Terengganu and Johor. Intended to run over a 12-year period, the project identified key development areas within the designated states that could support economic growth for the country, including various high-impact infrastructure projects among the planned initiatives.

?Among these were the Tok Bali Integrated Fisheries Park in Kelantan, the Kerteh Biopolymer Park in Terengganu, planned expansion efforts for the Kuantan Port in Pahang, as well as the development of Tourism facilities within the Mersing Islands in Johor.

The ECER project is a major national developmental initiative and one that includes the upgrading of an existing railway system as well as an extension to the East Coast Expressway, both of which run through that region.

The expansion of the Kuantan Port into a deep-water port is aimed at improving international trade performance by connecting the region to Thailand and Indochina markets. In Kelantan, efforts to improve the agricultural and ecotourism sectors, among others, aim to attract RM9.5 billion in investments by 2025, while the focus in Terengganu on manufacturing, agribusiness and human capital development targets to achieve Rm26 billion in private investments by 2025.

A Vision for Infrastructure in Malaysia Beyond 2023

As Malaysia progresses beyond 2023, several major infrastructure projects have been in development which have the potential to support stable economic growth within the region over the coming years.

The Tun Razak Stock Exchange (TRX) is a 70-acre development at the heart of KL, intended to be positioned as the city’s main financial and business hub for international commerce.

The project, which has developed with sustainability as a key focus, includes 30 buildings on site, public transportation infrastructure in the form of monorail and feeder bus systems, and connectivity to the MAJU Expressway, SMART Tunnel Network and DUKE Highway.

TRX has been in development since 2015 and will include office, residential, hotel, retail and cultural offerings, as well as an open plan rooftop park area, upon completion of its final phase.

The Malaysian government, in collaboration with Digital Nasional Berhad (DNB), will be deploying the rollout of 5G infrastructure in Malaysia targeting to reach 80% of the country’s populated areas by the end of 2024.

The introduction of 5G internet network systems into the Malaysian social and economic landscape will unlock faster, more reliable, and lower latency internet connectivity for both household and commercial users. The rollout is intended to support the adoption of Industry 4.0 technology systems within various Malaysian industries over the coming decade.

The East Coast Rail Link (ECRL) is a Malaysian project presently under construction that aims to connect the east coast city of Kota Bharu in Kelantan to the west coast city of Port Klang in Selangor.

Serving as a means of connecting the East Coast Economic Region sates of Pahang, Terengganu, and Kelantan to the Central Region of the Peninsular West Coast, the high-speed electrified train will run on a standard gauge double track railway and is aimed at spurring economic growth within the designated regions along its route.

The Global Infrastructure Megaprojects

As Malaysia continues efforts to develop competitive infrastructure that allows economic growth to carry on unhindered, players in the international space have been developing major projects of their own to support national growth initiatives.

India’s Sagarmala Megaport project aims to set up multiple seaport facilities around the region, developing coastal zones and boosting local employment, while improving existing ports through advanced technology adoption and integration.

The project will involve the development of six mega ports in areas covering Kerala state, Maharashtra and West Bengal, and as of March 2018, a total of 492 projects worth US$62 billion were in development.

Elsewhere across the ocean, NEOM is an ambitious Smart City development planned for the Tabuk Province in Northwestern Saudi Arabia.

The 500-billion-US dollar mega project is being developed as multi-regional, technology driven, global destination with avant-garde architecture and sustainability as its guiding design principles. NEOM will feature four designated regions, including a floating industrial complex, a global trade hub, and a luxury tourist resort.

The Line, the project’s linear smart city, will be powered by 100% renewable energy, be completely carless and roadless, and accommodate 9 million residents within a footprint of just 34 square kilometers.

The Nusantara project is an initiative by the Indonesian government to develop a smart, green and sustainable city in East Kalimantan, replacing Jakarta as the official capital.

The project is an initiative by the government to support efforts to achieve a GDP target of USD180 billion and create 4,811,000 jobs in Indonesia by 2045. Nusantara will be constructed within the surrounding Kalimantan Forest and its targets include achieving 80% ground mobility supported by public transport, cycling or walking, drawing energy from renewable resources, and reserving 10% of the land for food production activities.

As can be seen, the role that infrastructure plays in supporting economic recovery and sustaining long-term economic growth cannot be denied.

Large scale infrastructure projects have the capacity to spur economic activity at times when it is most needed, lifting a country of out a recessionary period and driving up employment as well as the overall standard of living within a society.

However, infrastructure expenditure is only effective when it is executed in an efficient, timely and targeted manner. Where projects are planned with the necessary due diligence, taking into account the wider socioeconomic impacts on all relevant stakeholders, and where spending occurs in a manner that is sustainable and does not lead to excesses that risk economic stability, infrastructure spending can be a highly effective means of stimulating an economy and achieving positive economic growth.

Time is always the best measure of an investment and as 2023 presses on, the effectiveness of these infrastructure projects will certainly be put to the test. Will they provide the necessary returns to GDP that their countries need to support growth in the face of ongoing economic uncertainty?

This article appeared in the Business Today online news portal as Editor's Choice | 12th July 2023. Click here to view the published article.