IMPACT OF AFTA ON ACF MEMBER COUNTRIES

Prepared for The ASEAN Constructors Federation (ACF)

Shamsul Majid, CFA, MBA(Finance), BSc (Imperial College) Project Leader Raida Abu Bakar, MBA (UM), BSc (Purdue) Louie Sieh, MA (Cantab), AA Dipl, ARB

Prof Sieh Lee Mei Ling, PhD (Sheffield) Project Advisor

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Report Outline
0. 1. 1.0 1.1 1.2 1.3 1.4 2. 2.1 2.2 2.3 2.4 2.5 2.6 2.6.1 2.6.2 2.6.3 3. 3.1 3.2 3.3 3.4 3.5 3.6 4. 4.1 4.2 4.3 4.4 4.5 4.6 Executive Summary Preliminaries Introduction Objectives Approach Limitations Organization of Report AFTA Creation and Objectives of AFTA Framework of CEPT CEPT and Member Countries Trade Facilitation Measures Progress Thus Far AFTA within the Context of AEC AEC AFAS AIA Analysis of the Construction Industry Regional Overview Country Overview Segmental Analysis Supply & Supply Conditions on Labour Cross-Border Investment Policies and Regulations of Member Countries Liberalization of the Construction Industry AFTA and the Construction Industry Views and Concerns Raised by Construction Players on AFTA Degree of Readiness towards AFTA AFAS and the Construction Industry Views and Concerns Raised by Construction Players on AFAS Degree of Readiness towards AFAS

5. Impact of AFTA and AFAS on Construction Industry 5.1 Overview of Competition in the Construction Industry 5.2 Issues and Challenges in Cross-Border Movement of Construction Players 5.3 Current Strengths and Weaknesses of ACF Members 5.4 Possible Impact of Trade Liberalization to Individual Members 5.4.1 Market and Demand Growth Effects 5.4.2.1 Investment Capital 5.4.2.2 Labour 5.4.2.3 Professionals 5.4.2.4 Materials 5.4.3 Trade Effects 37

6. 6.1 6.1.1 6.2.1 6.2.3 6.2. 6.2.1 6.2.2 6.2.3 6.2.4

Conclusions and Recommendations Imperatives for Readiness Member Firms Associations Governments Framework for Cooperation Cooperation at Firm Level Cooperation at National Level Cooperation at Government Level Cooperation at Global Level

Appendices A. Value of Gross Domestic Product by Country B. Export and Import of Construction Materials C. AFAS: Schedule of Commitments Made by Members D. Presentation Materials to ACF on 11 June 2004

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Executive Summary
This report investigates the impact of trade and economic liberalization in ASEAN within the context of the construction industry, and how they will affect ACF members. As the construction industry involves the usage of both materials and services and is dependent on the financial capability of firms, the study focuses on the impact of three initiatives that have been signed and committed by the ASEAN governments, namely ASEAN Free Trade Area (AFTA), ASEAN Framework Agreement on Services (AFAS) and ASEAN Investment Area (AIA). These three initiatives form the pillars for the eventual creation of ASEAN Economic Community, a goal that is specified in ASEAN Vision 2020. A major feature of ACF member countries is that they are currently at different stages of development, both in terms of economic prosperity and readiness for trade liberalization. At one end, Singapore is a free economy with first-world social demographics and physical infrastructure, while at the other end of the spectrum, Vietnam is in the transition phase of moving from a state-dominated centralized economy to a socialist-oriented free-market system. At the same time, while Indonesia is recuperating sluggishly from the Asian financial crisis, Thailand is experiencing high growth from its expansionary fiscal and monetary policies. All these features require careful consideration on the factors that influence the construction industry in each member country. In general, this study finds that ACF members have the potential of benefiting from AFTA as trade liberalization initiatives will continue to take place in the medium to long term irrespective of any political impediments that may slow the process in the short term. There is a need for members to understand the likely impact of AFTA on their businesses and to prepare themselves for competition with foreign firms. Although numerous issues have been identified at the country level as contributing factors to the slow pace of cross-border movement of construction materials and services, three common issues are relevant at the regional level. The first issue is capital inadequacy and difficulties in getting the necessary financial assistance and services when bidding for foreign projects; the second is the lack of understanding of what and how the trade and economic liberalization will affect specific local players in construction and construction-related industries, and thirdly there seems to be a reluctance among construction players within the region to work together as it is perceived that they all share similar knowledge and expertise, hence little opportunity to complement each other through alliance or joint-venture. The study lays down several recommendations for ACF representative associations. At the regional level, ACF representatives should promote more dialogues with their governments as an input mechanism prior to the development of national and regional policies. This requires the setting up of a coordination unit that will not only participate in the working groups in various national and regional institutions related to the construction industry, but also to identify potential member firms that can work together in competing for regional and international projects. Others include the development of procedures for trade facilitation for bulky construction materials and mechanisms for mutual recognition of workers and professional qualifications. At the global level, ACF should lead the efforts in creating ASEAN-wide construction

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companies that can compete with other established construction companies in international projects. At the same time, the members of the federation must work together in identifying critical construction sub-sectors that require temporary protection or special incentives prior to the signing of regional trade agreements, either in the form of bilateral trade agreement with other major trading partners or multilateral trade agreement like WTO. Hence, it is necessary that ACF initiates the following activities firstly, develop a comprehensive database of its members for the purpose of facilitating alliances and joint-venture in bidding for both regional and international projects. Secondly, the federation should develop a database of information that describes the procedures of doing business in each member country, as well as news on business opportunities in ASEAN countries. Lastly, it should set up focused teams that are able to handle communications with governments and ASEAN Secretariat in assisting, lobbying and providing feedbacks in the development of policies that are related to the construction industry.

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Chapter 3: Analysis of the Construction Industry

3.1

Regional Overview

The construction industry in the ACF member countries was valued about US$28.85 billion in 2002 (Refer Appendix A). Construction demand generally recovered following the Asian financial crisis and has since been a great source of the countries economic growth. Indonesia has become the largest construction industry in comparison to other ACF member countries in 2002 with US$9.92 billion of value. The restructuring of Indonesias housing market is one of the few examples of the positive result of economic development. The next largest construction industry from the ACF members is Singapore at US$4.68 billion. The rapid growth of infrastructure in these countries is due to the development of buildings and other infrastructure projects. Vietnam is the smallest contributor with only US$2.07 billion. Trends The pace of the industrys development varies across economies in the region. This is due to the changes in public support in terms of finances and the stage of economic development of each country. Percentage shares of each of the construction industrys GDP have decreased for Singapore, Thailand and Indonesia from 1998 to 2002. However, in Malaysia, Philippines and Vietnam, GDP construction share had decreased from 1998 to 1999. Improvement of the construction GDP shares was seen in the year 2000 for Philippines, and after the year 2000 for Malaysia. Vietnam, on the other hand, had only picked up in 2001. The construction industry in ASEAN has developed over the years due to continued investment in infrastructure construction. The adoption of AFTA has benefits the region in terms of better procurement of construction materials, allowing trade of construction materials to move more freely than before. Indonesia, Malaysia, Philippine, and Thailand were some of the countries that were badly affected by the financial crisis. However, they began their recovery in 1999 with the resumption of growth. This growth was partly driven by the construction industry, which helped to speed up Asias recovery of the financial crisis. Export Export and import of construction materials have recovered (However unavailability of data for Vietnam does not allow us to make an accurate explanation of all ACF countries). The buoyant external market continues to be a positive engine of growth. Export for Indonesia, Malaysia, Philippines, and Singapore almost tripled in the year 2002 in comparison to 1998 (Refer Appendix B). For example, Indonesias export had increased more than 300 percent in 2002, an increase of construction materials for global market at a value of US$4.993 billion in 1998 to US$17.193 billion in 2002. Malaysia had an increment from US$9.419 billion (1998) to US$26.672 billion (2002), Philippines of US$2.879 (1998) to US$7.288 (2002), Singapore of US$9.22 billion to US$26.094 billion, while Thailand increased from US$4.912 billion to US$7.095 billion (2001). This indicates that the producers of construction materials 41

in ACF countries, whether for semi-finished materials or finished materials, are becoming larger and also increasing in number, and thus an important supplier for the construction industry. The two largest exporters of construction materials from the ACF member countries are Malaysia and Singapore, having a value of US$26.672 billion and US$26.094 billion respectively. The main reason for this is because Singapore and Malaysia re-exports the construction materials by adding value to the products (finished and semi-finished goods). The fact that Malaysia and Singapore act as transportation hub help them to import and re-export construction materials. Import Import of construction materials among ACF countries has also increased by a large amount. The major ACF countries importers of construction materials from the world are Singapore, followed by Malaysia. As explained above, Singapores import of construction materials in 2002 was US$37.845 billion, mostly from Malaysia, Japan and U.S.A., whereas Malaysias import of construction materials in the same year was US$18.149 billion which was mainly from Singapore, Japan and U.S.A. (Key Indicators of Developing Asian and Pacific Countries, 2004). The booming of the U.S. construction market makes the country a huge source of imported products. In addition, the lower price of materials is the key factor why most countries choose to import their materials from particular countries, even if transport costs are considered. In contrast, abundance in local supply is also a factor why certain countries choose to use their own materials instead of importing from other countries. The specific details on the amount of materials imported and exported for each country will be discussed later in this chapter. Private Sector The investments of construction projects from the private sector are likely to be the main driving force for the overall construction industry. Private sector markets in ASEAN are important means for productivity growth for their construction industries, creating not only productive jobs but also higher incomes. Table 1 shows many projects are spent on the telecommunications and energy sectors that are increasingly being privatized. Investment in these sectors envisions a transition to a more modern energy and telecommunication sector that is more efficient and reliable. Table 1: Private Sector Development
Investment in infrastucture projects with private participation (US$ mil) Telecommunications Energy Transport Water and sanitation 90-95 96-01 90-95 96-01 90-95 96-01 90-95 96-01 Indonesia 3,549 7,780 3,202 7,347 1,204 1,728 3.8 882.8 Malaysia 2,630 2,603 6,906.5 2,121.1 4,657.6 7,603.2 3,986.7 1,105.5 Philippines 1,279 5,528.6 6,831.3 6,943.1 300.0 1,996.8 .. 5,846.15 Singapore n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. Thailand 4,814 3,679.1 2,059.6 6,445.5 2,395.9 499.4 153 347.5 Vietnam n.a. n.a. n.a. 435.5 10.0 85.0 n.a. 212.8
Source: World Bank, 2003. n.a. not available

Table 1 also shows that investment of telecommunications in Indonesia increased from US$3.549 billion dollars between 1990-1995 to US$7.780 billion in 1996-2001,

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while Philippines spent about US$1.279 in 1990-1995 to US$5.528 billion in 19962000. In terms of the energy sector, large investments were made by Indonesia (US$ 7.347 billion), Philippines (US$6.943 billion), and Thailand (US$ 6.445 billion) between the year 1996 to 2001. Malaysia, followed by the Philippines invested a large amount in the transportation sector. However, for the water and sanitation sector, large amount of the investments were made by the Philippines. Public Sector Government also plays a complementary role with the construction industry players, particularly in terms of regulation and investment. Today, more of these countries have assistance from their governments who had made substantial investment in infrastructure, recognizing that inadequate and inefficient infrastructure constitutes a major barrier to growth, FDI inflow and poverty reduction. The Malaysian government for instance, in its mid-term review of Eighth Malaysian Plan (20012005), increased the development allocation to US$42.1 billion. Thailands government on the other hand invested most in infrastructure projects such as telecommunication and energy. A representative of the Thailand Contractors Association indicated that Thailand is expected to spend US$25 billion on infrastructure in the next 5 years. More details on other ACF countries are discuss later. Labour and Professional Services In terms of employment, labour mobility within ACF member countries is currently driven by economic reasons such as seeking employment, better income and working conditions. Malaysia and Singapore are the main destination for workers from countries like Indonesia, Philippines, Thailand, and Vietnam. As expected, the greatest pressures of labour mobility naturally comes from Indonesia due to their large population. The National Centre for Economic Research - Indonesian Institute of Sciences found that movement of highly skilled professional to Malaysia and Singapore appears to be associated with their inflow of foreign investment, while the movement of the large number of semi-skilled and unskilled migrant workers is mostly associated with labor shortage in the destination countries. Also, socioeconomic and political pressures in the sending countries account for some of the people movement. This will be elaborated later in the chapter. 3.2
3.2.1

Country Overview
Indonesia

Construction investment in Indonesia is strongly linked to economic growth (Refer Table 2). Thus, the recovery of Indonesias construction sector will depend on the recovery of the Indonesian economy. In 1999, the growth in the construction sector was -1.91 percent but in the year 2000, the growth in the construction sector recovered to 5.64 percent due to stable economic growth rate (Asian Development Bank, 2003). Total value of the construction in 2000 was US$9.09 billion. However, between 2000 to 2002, the growth of Indonesian construction has not changed much. Total value of the construction in 2002 was US$9.92 billion dollars.

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Table 2: Indonesia Growth of Construction sector

Year Real growth of output, annual changes (%) GDP Construction
Source : Asian Development Bank, 2003

1999 0.79 -1.91

2000 4.92 5.64

2001 3.44 4.21

2002 3.66 4.11

Indonesia :Construction and GDP, 1999-2002

7.00 6.00 5.00 4.00 3.00 2.00 1.00 0.00 -1.00 -2.00 -3.00

Percentage

% Growth in GDP % Growth in Construction GDP 1999 2000 2001 2002

Year

The abundance of land outside Java that are still undeveloped makes Indonesia an attractive place for foreigners to venture into. Further, the need for infrastructure development and cheaper land offer foreigners a greater opportunity in Indonesian construction industry. Expansion of infrastructure particularly the construction of highways also provide opportunities to contractors from ACF member countries, as founded out during interviews with ACF members. In addition, the Indonesian government has been trying to open up its market to foreign firms to form a joint ventures with local construction firms for such projects. These foreign firms are issued three-year construction license. However, their foreign capital must not exceed 55 percent in equity in firms that supply construction services (Ministry of International Trade and Industry, 2004). Although the Central government, Provincial and District governments are in charge of infrastructure development in Indonesia, but the private sector has been providing a growing share of the funding. In 1996, private sectors contribution was 44% and it is projected that the private firm will be providing 77% of the finance for infrastructure development by 2018 (ASIA Construct Conference, 1998).
3.2.2 Malaysia

In Malaysia, the construction industry has had positive real growth of output since the year 2000 through 2002, while at the same time maintaining a steady amount of construction GDP share (Asian Development Bank, 2003). Nevertheless, when comparing the industrys share of GDP from 1998, the value fell to 4.07 percent in 2002 from 5.12 percent in 1998. Several factors have a negative effect on the construction industry which has caused its share of GDP to be depressed. This includes a number of unsold properties, high vacancy rates for offices and shops, and

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perhaps a slower economic growth before this year. Furthermore, the Malaysian construction industry is in the process of recovering from price escalation of major building materials such as steel bars. In Malaysia, the price control of steel bars by the government aggravate the situation because it has caused a shortage of supply, which in turn caused the delay of certain projects. In recent years, the growth of construction GDP has increased positively, from 1.01 percent in 2000, 2.33 percent in 2001, and 2.32 in 2002. The industry remains competitive with other ACF member countries and this growth was supported by the rapid expansion in the construction sector, with the development of highways, upgrading ports and airports, Putrajaya, and other infrastructure projects by main players in the construction industry such as Sunway Construction Bhd, Roadbuilder, Perspec Prime (M) Sdn. Bhd., and many others. Many of the companies interviewed and feedback from the Form For Views discussed about Malaysias good track record of infrastructure construction particularly highways, and this make the contractors more attractive in getting job overseas. Spending on expansion can also be seen under the Eighth Malaysian Plan (20012005), where the government budget about US$3.68 billion on building new infrastructure and expansion of the old ones. In the Eighth Malaysian Plan (2001 2005), the Government planned a budget of about US$263 million for airports infrastructure alone (UK Trade and Investment, 2003). The development of airports remains a priority area for the Malaysian Government to turn it into a regional hub. The construction industry in Malaysia has slight linkages with the rest of the economy. Table 3 below shows the growth of construction sector from 1998 to 2002 in comparison with the growth of GDP of the country. Table 3: Malaysia Growth of the Construction sector
Year Real growth of output, annual changes (%) GDP Construction
Source : Asian Development Bank, 2003

1999 6.14 -4.35

2000 8.33 1.01

2001 0.45 2.33

2002 4.21 2.32

Malaysia : Construction and GDP, 1999-2002

10.00 8.00 6.00 Percentage 4.00 2.00 0.00 -2.00 -4.00 -6.00 Year 1999 2000 2001 2002 % Growth in Construction GDP % Growth in GDP

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In Malaysia, the government shapes the direction of the nation towards an industrialized status. Public sector projects in health and education area steer the development in construction. In addition, privatization has fostered the private sector to supplement the government in the provision of infrastructure in Malaysia. Several companies that were interviewed did mentioned that the construction industry in Malaysia will always have new opportunities to venture into, there will always be new schools to build, new highways, new buildings, etc. And once all of these projects have been undertaken, or at least many, most companies would venture outside of country particularly Indonesia and India to develop the countries infrastructure.
3.2.3 Philippines

In Philippines, construction demand sagged in 1998-1999 due to the postponement of investment and projects implementation and the rise of interest rates. The growth of construction GDP in 1999 was -1.54 percent (Refer Table 4). The downturn of Philippines construction industry was short-lived and return to a solid economic growth in 2000 where the construction sector peaked to a GDP growth of 26.27 percent. Nonetheless, construction GDP contracted significantly in the following year with a growth of only -4.97 percent. Growth would have been stronger but the slowdown was due to political turbulence that weakened consumer and business confidence. Due to this, the government formulated the Medium-Term Philippine Development Plan covering the period of 2001 to 2004, to help raise the living standards of the Philippine people with the construction of roads, irrigation, basic drinking water supply, building of schools and many others. Although the government would like to achieve the Medium-Term Philippines Development Plan goal, the lack of funds available inside the country causes them to obtain financial support from various international institutions. Thus, infrastructure projects in Philippines are mostly funded through general revenues, loans form various international financial institutions which are the World Bank, Asian Development Bank, OECF, and various grants. Further, it must be noted that private investment is much higher in comparison to the public sector in the year 2001 to 2003. For instance, the proportion of the two sectors was about 63 percent on private and 37 percent on public in 2001 (National Statistical Coordination Board (NSCB), National Statistic Office (NSO), 2001). Table 4: Philippines Growth of Construction sector
Year Real growth of output, annual changes (%) GDP Construction
Source : Asian Development Bank, 2003

1999 3.40 -1.54

2000 5.97 26.27

2001 2.95 -4.97

2002 4.43 -3.27

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Philippines : Construction and GDP, 1999-2002

30.00 25.00 20.00 Percentage 15.00 10.00 5.00 0.00 -5.00 -10.00 Year 1999 2000 2001 2002 % Growth In Construction GDP % Growth in GDP

Total value of construction share of GDP remained fairly the same throughout 1998 to the year 2000, being 5.91 percent and 5.85 percent respectively (Refer Appendix B). Exports of construction materials from Philippines are led by furniture and wardrobe, glass, and sanitary wares (Refer Appendix B). The average CEPT tariff rates for Philippines had declined from 7.43 in 1998 to 3.62 in 20031. This signifies that there will still be opportunities for changes in the number of export and import materials from the Philippines. Feedback of Form For Views received indicated that the key opportunities in the Philippines building and construction industry that should be looked upon include high-quality, low-cost materials, new mass-housing technology, local manufacturing insulation products, steel products, construction equipment, contracting and consulting, especially for infrastructure projects. With the coming of AFTA, local contractors need to be more specialized, take part in design-build and turnkey projects, and prove more training for the technical personnel. In the interviews, it was also mentioned that 87 percent of the contractors are actually small players. Thus, there is a need for these small players to unite together and form a larger entity to protect themselves against foreign competition. On the other hand, opening up the market will also give an opportunity to other countries to venture into Philippines infrastructure sector. Some of which includes the road maintenance, toll-road construction (eg. sub-contracting), building development, and engineering services.
3.2.4 Singapore

The size of Singapore constructions industry has been falling from the year 1998 where the construction share of GDP was at high 9.36 percent and fell to 5.38 percent in the year 2002. The growth of the construction sector has also not been encouraging. In 1999, the growth of construction GDP fell to -8.99 percent. In the following year, the reduction of construction GDP growth has not been large but nevertheless, a negative one. The Singaporean construction industry actually shrank
1

ASEAN Secretariat (www.moc.og.th/thai/dbe/afta_net.html)

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in the year 2002, having construction share of GDP of 5.38 percent in comparison with 9.36 percent in 1998. According to the Building and Construction Authority, at least 11 firms have dropped out of its registry in the first half of 2002, compared to 15 for the whole of 2001. Further, a September survey by Singapore Confederation of Industry shows manufacturers have become pessimistic about business conditions. Most expect falling sales, rising costs, poor profits and weak investment commitments in the future (Singapore Economic Outlook 2002). Table 5: Singapore Growth of Construction sector
Year Real growth of output, annual changes (%) GDP Construction
Source : Asian Development Bank, 2003

1999 6.42 -8.99

2000 9.41 -1.85

2001 -2.37 -3.20

2002 2.25 -10.83

Singapore : Construction and GDP, 1999-2002

15.00 10.00 Percebtage 5.00 0.00 1999 -5.00 -10.00 -15.00 Year 2000 2001 2002 % Growth in Construction GDP % Growth in GDP

Although the industry has not been improving, Singapore government seeks to ensure that the trading system is open to increase their trade with other countries and thus help in recovering their construction industry. The reduction of CEPT tariff rates for Singapore has long been reduced to 0%. Thus, the elimination of restriction to enter Singapore market has attracted many international companies to do business in and with Singapore. One of the main reasons would be for regional expansion. Singapores position in the construction industry had been well respected for in terms of its quality. Thus, the vital reason why many foreigners are interested in coming into Singapores market is due to the superior quality of their projects. This is because all projects built in Singapore are subject to review under the countrys Construction Quality Assessment System (CONQUAS). Its objective is to examine contractors work in three areas, which are structural, architectural and external works. It measures the extent to which a building conforms to the contract specifications. Further, most sizeable construction organizations aim to attain ISO 9000 and ISO 14000 certification. As discussed in the interviews, this qualifications are imposed on every practitioners in the industry, not only foreigners, but also local 48

players. Thus, the Singaporean government is actually creating the same level playing field for all players, be it local or foreigners. With AFTA coming, one of the main concern for them is having lack of track records especially in terms of experience in building extensive highways and airports. Can they actually venture into other foreign countries and compete with other players who have extensive track records?
3.2.5 Thailand

Thailand has been a major investor in the construction industry. For example, in the year 2002, US$3.75 billion was spent on construction alone (Refer Appendix A). The growth of the construction industry has also turn positive in 2002 with 5.96 percent, a recovery of constant negative growth since 1999 (Refer Table 6).

Table 6: Thailand Growth of Construction sector

Year Real growth of output, annual changes (%) GDP Construction
Source : Asian Development Bank, 2003

1999 4.45 -6.84

2000 4.65 -9.54

2001 1.94 -0.95

2002 5.22 5.96

Thailand : Construction and GDP, 1999-2002

8.00 6.00 4.00 2.00 0.00 -2.00 -4.00 -6.00 -8.00 -10.00 -12.00

Percentage

% Growth in GDP 1999 2000 2001 2002 % Growth in Construction GDP

Year

The average CEPT tariff rates for Thailand had also declined from 10.56 percent in 1998 to 4.64 percent in 2003 (ASEAN Secretariat, 2004). In 2001, a value of US$8.396 billion was spent on importing construction materials from all over the world (Refer Appendix B). Further, liberalization of the construction industry has helped many local players to form strategic alliances with overseas firms. Under the new law, overseas companies will be allowed to hold majority stakes in local firms, as opposed to a limit of 49 percent in the past (Ministry of International Trade and Industry, 2001). In Thailand, there is a National Information Technology 2000 policy to ensure there is development of the telecommunication sector. The first pillar of IT is for better

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telecommunication infrastructure. Thus, this would be one area of opportunity that foreigners might want to venture into in the future.
3.2.6 Vietnam

Vietnams GDP growth rate was about 8.2% per annum from 1991 to 1995 and was over 9.5% in 1995 (Vietnam Embassy in USA, 1998). As a result of many positive factors, exports grew an average of 20% annually from 1990 to 1994. In 1995, export earnings reached US$5.3 billion, more than five times higher than export earnings in 1988 and 38% higher than in 1994. Vietnam construction industry has had a positive growth throughout 1998 to 2002. In 1999, the growth of GDP on construction was 2.4 percent (Table 7). A much higher increment was seen in 2001 where the growth had come about to 12.78 percent. Although the value of the construction industry remains small, (total value of US$1.9 billion in 2001) in comparison with other ACF member countries, the country has certainly been developing and expanding their construction market in a short period of time. Table 7: Vietnam Growth of Construction sector
Year Real growth of output, annual changes (%) GDP Construction
Source : Asian Development Bank, 2003

1999 4.77 2.40

2000 6.79 7.51

2001 6.89 12.78

2002 7.04 10.57

Vietnam : Construction and GDP, 1999-2002

14.00 12.00 Percentage 10.00 8.00 6.00 4.00 2.00 0.00 1999 2000 Year 2001 2002 % Growth in Construction GDP % Growth in GDP

Vietnamese government has engaged in a number of measures to establish a good environment for the construction industry. Some of them would be the liberalization of construction investment, the extension of permits issued to foreign-invested firms, and tariff reductions for the import of construction materials. However, in order to invest in huge infrastructure projects, the Vietnamese government has limited financial resources and therefore need various funding from home and abroad. For example, monetary assistance from the Japans Overseas Development Assistance (ODA) is used.

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As for products from the South-East Asian countries, tariff rates on imported items are reduced from an average of 3.92 percent in 1998 to 1.78 percent in 2003 (ASEAN Secretariat, 2004). The dropping of the import duty for construction materials as part of Vietnams participation in the AFTA agreement is troubling domestic investors. Many now have oversupply of construction materials such as ceramics and tiles. Competition comes from ACF member countries particularly Thailand, Indonesia and Malaysia. This is much to be worried about in 2015 when import duty will be reduced to 0 percent. The Vietnamese Government uses quotas for imported items as a manner of balancing market demand and supply which is due to the instability of local production and the demand for some construction materials. For example, the demand for cement often increases unpredictably at the end of every year when the construction season starts. In this case, the government will allow the import of a certain amount of cement products under quota. During other times of the year, cement import is forbidden to protect local cement producers. Other countries have large opportunities in terms of supplying what the Vietnamese manufacturers cannot produce, or where local production cannot meet market demands. Import has increased to US$454.97 million in the year 2003 (Refer Table 8). Production of major materials in Vietnam are tiles and ceramics at US$410.25 million, followed by bricks at US 241.13 million. In addition, value of Vietnamese export in the construction industry has also increased throughout 1998 to 2002, from a value of US$22.54 million in 1998 to US$64.70 million in 2003. Table 8 : Import and export of construction materials Vietnam
Value in US$ mil Year 1998 Export value 22.54 Import value 142.29 1999 19.29 130.46 2000 28.82 155.41 2001 35.25 250.35 2002 46.21 324.98 2003 64.70 454.97

Source : Vietnam Association of Construction Contractors, 2004

Table 9 : Production of Construction materials

Value in US$ mil Year Industry sector Cement Bricks Tiles and ceramics Glass 1997 443.8 114.116 56.8 15.56 1998 500.066 124.916 94 14.26 1999 590.533 123.500 129.6 47.2 2000 684.000 136.200 215.1 90.1 2001 809.266 141.183 296.8 100.9 2002 1034.733 183.3 341.4 104.2 2003 117.4 241.133 410.25 75.565

Source : Vietnam Association of Construction Contractors, 2004

It was found out that one of the reasons for the decrease in demand in the construction industry is that common people do not have enough money to spend since they are unemployed, especially workers in heavy industries (coal, steel, miner, cement). In these industries, the supply exceeds the demand so significantly that the stocks increase very high. It was also mentioned that corruption has been practised for a long time in Vietnam. Now, they have become "traditions" and hinder the development of the national economy. This practice becomes a well-known feature as "business culture" in

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Vietnam. Thus, although the government has made special effort to restructure the economy, the policies have not been implemented as tentative. The foundation is not strong enough to carry big changes. There is also the lack of competition and not having any sense of the "Kiasu" ("want to be the best") system which help Singapore achieve amazing results, which makes Vietnam economy recover more slowly than other countries. Although Vietnam has shown effort to integrate to the global market, Vietnam economy does not have enough competitive strength. The "sandwich" situation of new member in the economic integration should be addressed here. On one hand, Vietnam has to join ASEAN to gain favourable tariff and other conditions. On the other hand, Vietnam has to open the door for foreign investors. Domestic producers who lack of capital, expertise and competition cannot cope up with the sudden changes. Nevertheless, becoming a member of ASEAN is a progress step for Vietnam to integrate into global market and this of course help them to gain information of the regional market. With the coming of AFTA, reciprocal trade could actually help the country in enhancing their construction industry. 3.3 Analysis of Construction Materials

Past shortages of construction materials have resulted in the accelerated liberalization of the construction materials industry. Since the implementation of AFTA, the increasingly competitive and dynamic construction industry has been affecting the export and import of construction materials among the ACF members. Moreover, infrastructure development programs and policies of industrial and regional expansion support the increased production of construction materials. The production and demand of major construction materials such as steel, cement, timber and hardware materials are discussed below.
3.3.1 Steel

The steel industry comprised of raw materials (scrap steel), semi-finished materials (bars and wire rods), and finished goods. The steel industry is mainly divided into two sub-sectors, namely the manufacturing of long steel products and the manufacturing of flat steel products that are used as construction materials. The volume of imports of all steel products of the ACF member countries have consistently far outweighed exports (Refer Appendix B). For example, import of steel from the ACF countries (with the exception of Vietnam) in the year 2001 is US$6.102 billion as compared to export value of US$1.412 billion. Reductions in import duties on steel that will take effect with AFTA will likely put downward pressure on the prices of some locally available steel products. The outlook for the industrial steel industry may face intense pressure from countries with higher comparative advantage in steel production, and from inexpensive materials suitable for manufacturers needs. Current demand for steel products has been strong owing to the continuing strong growth of the economy. Thailand is the largest exporter of steel among ACF members from 1998 to 2001. The value of Thailands export of steel is about US$677 million

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for 2000 and US$428 million for 2001 (Appendix B). Malaysia is one of the main destinations importing US$58 million in 2002. Thailands main players in the iron and steel industry are Siam Yamamoto Steel Co., Ltd, The Siam Industrial Wire Co., Ltd, and The Siam Iron and Steel Co., Ltd. In Malaysia, one of the main concerns for local contractors is the issuance of Approved Permit (AP) on steel products. This study finds that some contractors would like to see a waiver of AP requirement for products such as seamless pipes and hot rolled plate (above 30mm) which are not manufactured locally, and there are no substitutes for these products. In the case of Indonesia, the steel industry has grown from 2000. The countrys largest steel producer PT Krakatau Steel reported considerable profit due to export earnings. Nevertheless, the success was short lived because in 2001, the United States, the largest market for Indonesian steel products and a number of other countries including Thailand imposed anti dumping import duty on Indonesian steel products. The import barriers abroad forced the countrys steel producers to turn to domestic market. With AFTA, the reduction in import duty is seen to facilitate expansion of the steel market at the regional level. The Vietnamese on the other hand are having an imbalance in product mix and production process. Vietnam produces long products but not flat steel products. As a result, there is an excess in long products while imports of flat steel are rising. This imbalance of capacity in the long product sector was caused by inconsistency between the trade policy (heavy protection) and the competition policy (free entry). In 1996, the imports of long steel products have been banned and the tariff of 30 to 40% was charged when importing them for special purposes. In 2001, the Vietnamese government has limited the entry of long product to restore balance between demand and supply. Vietnamese steel producers should make full use of the relatively high tax on steel imports at present to sharpen their competitiveness against regional rivals before the countrys full admission to AFTA in 2006. With reduction of tariff, the local producers may have to consider exporting their long steel products to other ACF member countries to avoid local surplus and achieve a more balance mix of production process. In recent years, the steel markets in the world have faced escalation of price, from 2002 till early 2004. The price of steel has gone up due to increase in raw materials price, such as scrap steel, for its production. The scrap prices have almost tripled since 2002. In early 2002, the price for scrap steel was US 110 dollars per tonne and it hit a record high in February 2004 to about US 300 dollars per tonne. This has caused the shortages of steel bar influencing the pace of some construction projects to slowdown. The reduction of tariff duty in AFTA could help to lower the price of steel products and enhance the pace of construction projects. Other issues that will have to be overcome before the sector sees a significant improvement include the availability and quality of imported steel materials, and the demands associated with the increased competition that could result from the implementation of AFTA.

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3.3.2

Cement

The cement industry is controlled by top producers in the world such as La Farge, Cemex and Holcim which indirectly halt other exporters to export into ASEAN countries, as mentioned during interviews with the Philippines Contractors Association. Due to this, ACF countries cement producers, particularly the small players, would most likely concentrate on local demand instead of exporting their materials overseas, with the exception of Thailand. Thailands cement industry is reputedly one of the largest in Southeast Asia, and until today, the country is a net exporter. Cement exports for Thailand in 2001 was US 360 million dollars but import was only about US 5 million dollars (Refer Appendix A). In 1998, there was a surplus of 35 million metric tonnes of cement in ASEAN countries (ASEAN Secretariat, 2003). Total production capacity of the ACF countries in 1998 were 163 million metric tonnes (Asian Development Bank, 2001). Asias combination of cheap labour and high infrastructure demand has persuaded international cement companies to chase bargain assets in the region, especially since the onset of the financial crisis. Due to this, the six ASEAN countries agreed to buy cement from each other as a solution to excess production capacity (ASEAN Secretariat, 2003). With the implementation of AFTA, the co-operation among companies from ACF should further assist in trading cement materials regionally. Nevertheless, China is a potential supplier of cement for the ACF countries. China accounted for about 17 percent of the total world cement trade. But due to the economic crisis, the number had decreased by nearly 30 percent as the prices of cement dropped. As the industry stabilized throughout the year 2000 till recently, China will likely continue in increasing its cement production capacity and improve its quality along the way. Bulk cement is expected to become a large proportion of Chinese cement output, estimating about 182 million tonnes or 29.5 percent of total production by 2005 (World Business Council for Sustainable Development, 2003). Thus, Chinas market could offer the ACF member countries cheaper price for cement and lower the constructions cost.
3.3.3 Timber / Wood

With the implementation of AFTA, the tariff for timber and wood materials will further be reduced. Besides focusing on the local market, countries that have abundance of timber materials should focus on expanding the market regionally. The main exporter of timber materials from the ACF countries are Malaysia and Indonesia. In the year 2002, Malaysia has an export value of US$1.55 billion while Indonesia with US$1.17 billion. Apart from having the benefit of abundance of timber materials, AFTA allow member countries to enjoy national treatment for any cross-border investments. Given its well-diversified wood- based industry and a high level of productivity, Malaysia and Indonesia could emerge as a manufacturing hub for timber products in ASEAN. These ACF countries producers and exporters must take proactive steps to overcome issues such as increasing price competition due to the emergence of lower-cost producers such as China. To be able to compete more effectively, the ACF timber 54

industry should take advantage of its strength in advanced wood manufacturing facilities to produce high quality value-added timber products for the markets. In Philippines, there is an increasing substitution of tropical timber by non-wood products due to the scarce supply of wood as a result of logging bans in virgin forests. Among the non-wood products now being utilized for housing construction are coconut lumber, bamboo, and steel. This is also the reason why the value of exported timber materials of Philippines has decreased from a value of US 142 million dollars in 1998 to US 122 million dollars in the year 2002. The advantage of having the tariff lowered with the implementation of AFTA is that the Philippines could benefit from importing timber materials from other ACF member countries at a reasonable cost. Current global trade of timber or wood products is much different from the past years. In the past, suppliers can actually compete on volume and prices. The trade today however, is market-driven where it focused more on product value. Manufactured timber products must be able to satisfy consumer demands and preferences, which amongst others include product quality and the issues of sustainability. Hence, the timber industry must pay more attention to such issues and take proactive action to ensure that their products gain market acceptance.
3.3.4 Hardware Industry

Besides the major materials stated above, there are also many other materials used in the construction industry which are considered as hardware. Amongst them are sanitary wares, paints and coatings, electrical components, floor and wall tiles, pipes and plumbing, furniture and wardrobe, as well as nails/screws/nuts and bolts. These hardware materials are mostly secondary products, meaning that they are produced from materials such as steel, cement or timber. For example, pipes and plumbing as well as nails/screws/nuts and bolts are produced from steel plates and steel bars. Sanitary wares, furniture and wardrobe are produced from timber, steel and other materials. In general, Malaysia and Singapore are the largest exporters as well as importers of these hardware building materials (Refer to Appendix B). As mentioned early in this chapter, the main reason for this is because Singapore and Malaysia re-exports the construction materials by adding value to the products The fact that Malaysia and Singapore act as transportation hub help them to import and re-export construction materials. Basically Singapore is a net importer of many products from Malaysia namely, sanitary wares (US$ 35 million), paints and coatings (US$41 million), electrical component (US$1228 million), pipes and plumbing (US 37 million), furniture and wardrobes (US 123 million), heavy and light machinery (US$64 million), nails/screws/nuts/bolts (US$37 million) and prefabricated building (US$1.9 million) (Department of Statistics, Malaysia, 2004). The ceramic tile and sanitary ware industry has developed to an advanced level, bringing it acclaim in domestic and overseas markets. It was found that Thailand possesses a number of competitive advantages over other ceramic exporting nations, including abundant reserves of high quality ceramic clay and low mining costs.

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With the improvement of Asias economy, the paint and coatings market looks promising as well. The potential for increased usage in decorative and quality paint for construction are becoming significant. Singapore and Malaysia are viewed as most favourable destination for growth. 3.4 Supply & Supply Conditions on Labour

Some of the ACF member countries can be classified as labour sending countries, labour receiving or both. The pattern of movement of migrants in the ACF countries is characterized by skill type, gender, and industry (Sieh & Ong, 2003). In terms of skill type, most foreign workers are in the lower-skilled categories. For example, in Singapore, of the 600,000 foreign workers, it was estimated that only 110,000 workers belonged to the higher skilled category (Firdausy, 2003). In terms of gender, almost all workers in the construction industry are male. The number of countries from which people are drawn from as migrants appears to have widened due to easier mode of transportation and also because more economies are emerging onto the global economic scene. Conventional routes of cross border flows for foreign workers are also changing and this has resulted in migrant workers appearing from far flung countries or areas (Sieh & Ong, 2003). For this section, various data from different sources are used. A major feature of labour in the construction industry is the role of contractors and subcontractors which causes fragmentation in supply and demand of labour. 3.4.1 Labour Labour migration in Asia has accelerated and many of such migrants are unskilled. The willingness of migrant workers to undertake the so-called 3-D jobs (difficult, dirty, and dangerous) which is mostly in the construction industry, has helped destination countries in employment of construction workers and thus contribute to the well being of their economy. The pattern could be seen in Table 10 where the number of migrant workers has increased. Consistent with this trend, remittances from foreign workers, both permanent and temporary, are the second largest source of external funding for developing countries, after foreign direct investment (FDI). In 2001, workers remittances to developing countries stood at US 72.3 billion (Worldbank, 2003). Table 10: Outflow of Migrant Workers, 1976 1998 (No. of migrants 000) Year India Indonesia Philippines Thailand Pakistan Bangladesh 1976 1980 1985 1990 1995 1998 4.2 236.2 163.0 143.6 415.3 355.2 1.9 16.2 54.3 86.3 120.9 411.6 47.8 214.6 389.2 598.8 488.6 562.4 1.3 21.5 69.7 63.2 202.3 175.4 41.7 129.8 88.5 115.5 122.6 104.0 6.1 30.1 77.7 103.8 187.5 267.7 Sri Lanka 0.5 7.6 12.4 42.7 172.5 158.3

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Sources: Adapted from Wickramasekara, 1996; Indonesia: Hugo, 1999; South Asia ILO/ACRAV studies on Bangladesh, Pakistan and Sri Lanka; Statistical Handbook, Sri Lanka Bureau of Foreign Employment, 1997 and 1998, p. 15

Another factor is the attractive wage and opportunity gaps between the rich and the poor countries. For instance, Indonesian workers can earn US$2 or more per day in neighboring Malaysia compared to 28 cents per day at home country (World Bank 2001). This aspect alone had caused many to migrate to a destination country who could offer a higher income. In the case of Malaysia for instance, most foreign workers came from Indonesia (Refer Table 11) and a large number (60,197) of foreign workers in Malaysia were construction workers. The relative share of young adults in the populations of sending and receiving countries, and the reductions in the cost and inconvenience of travel has also assist in the acceleration of migration (Worldbank, 2003). Table 11: Foreign workers in Malaysia (2002) Number (persons) Indonesia Bangladesh Nepali Philippines Myanmar Thailand Pakistan Others Construction Workers Plantation Workers Manufacturing Workers Services Workers Domestic Maids Others Total
Indonesia

Share (%) 73.7 13.7 6.3 2.2 0.8 0.3 0.3 2.6 7.8 27.9 36.8 7.2 20.3 0.0 100.0

566,983 105,744 48,257 17,287 6,539 2,440 2,218 20,098 60,197 214,595 283,401 55,309 155,883 181 769,566

Source: Malaysia, Department of Migration (January 2002)

Indonesia is an important source of labour supply due to the over surplus of their unemployed worker. The official unemployment rate in 2002 for Indonesia is 10.3 percent which is about 8,005 people (ILO Labour Statistics 2003). It is also one of the worlds major sources of unskilled international migrant workers. Although only 4.2 percent of workers are actually in the construction industry in the country, most seek to migrate outside of Indonesia in search for better job and pay. Major companies in Indonesia such as Total Bangun Persada, Jaya Konstruksi, and Pt. Wijaya Karya felt that due to this reason, Indonesia has also become a major global source of contract migrant workers (Refer Table 12). The table only shows the number of Indonesian overseas contract workers and due to unavailability of data, the number of illegal workers are not specified. Table 12: Estimated stocks of Indonesian overseas contract workers in 2000

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Country Malaysia Saudi Arabia USA Taiwan Singapore Hong Kong U.A. Emirates Philippines South Korea Japan Brunei

Number of workers 1,376 425 100 90 70 40 35 26 12 3 2

Source : ILO Labour Statistics, 2001

Countries that promote labour emigration have good reasons to do so, namely, to reduce domestic unemployment while at the same time earning foreign exchange through remittances. For example, Indonesia in its Five Year Plans has generally included targets for sending workers overseas (Wickramasekera, 2002).
Malaysia

Construction industry in Malaysia is also vital for generating employment. In the year 2000, the industrys contribution to employment is about 9.3% of total employment in the country. Table 13 shows the percentage of employment by industry in 1990, 1995 and the year 2000. The percentage of construction labour has increased from 6.3 percent in 1990 to 9.3 percent in 2000. Malaysia has long been recognized as the most important source of foreign workers for the Singapore economy at least during the early days of Singapores development (Sieh, 1988). Migrants in Singapore contributed to sustain high real economic growth rates by 8 percent to per capita real GDP of US$18,757 in 1999 (Firdausy, 2003). Table 13 : Employment by Industry, 1990-2000 Percent (%) Sector 1990 1995 2000 Agriculture 26 18.7 15.5 Mining & Quarrying 0.6 0.5 0.5 Manufacturing 19.9 25.3 27.5 Construction 6.3 9 9.3 Services 47.2 46.5 47.3 Total 100 100 100
Source: Construction Industry Development Board (CIDB), 2003

As a result of rapid development of projects, the construction industry in Malaysia faced a shortage of unskilled and semi-skilled workers. Construction companies have become increasingly dependent on foreign labours. In 2000, majority of construction workers in Malaysia is actually from Indonesia (110,764 workers), followed by Bangladesh (29,275 workers) (Refer Table 14). The main reason that Malaysia accepts many Indonesian workers in the industry is actually due to little barriers in terms of communication since workers speak similar language. Thailand, Myanmar, 58

India, and Pakistan also contribute a fair amount of construction workers in this country. However, firms in Malaysia such as Satujaya and Sunway construction expressed their concern with the fact that most of these construction workers are foreigners and sometimes contributes to the social problems in the country. It is also important to acknowledge that most Malaysians who are unemployed would still prefer to pursue other areas instead of the construction industry, thus, this contributes to the unavailability of local workers to work in this areas. Table 14: Issuance of Temporary Work Permits to Foreign Workers in Peninsular (2000)

Indonesians Thais Filipinos Cambodians Myanmarese Bangladeshi Indians Pakistanis Sri Lankans Nepalese Total

Construction Workers 110,764 1,121 49 1,369 29,275 3,305 3,115 148,998

Source: Kassim (2001) in Hayase (2002).

Mobility of the Indonesian migrant workers to Malaysia has been an on-going process. In contrast, few percentage of construction workers comes from Thailand and Philippines.
Philippines

The growth rate for construction workers in Philippines has increased in 2003 by about 5.7 percent (Refer Table 15). According to the Philippine Construction Association, the major advantage that the workers have over other ACF member countries is their understanding over the English language, and thus make it easier to interact with people from different countries. Table 15: Employment in Philippines Philippines Growth Rate 2001- 200202 03 3.1 1.7

Indicators Total Domestic Employment (in million workers)

2001 29.2

2002 30.1

2003 30.5

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Average Construction Employment (in million workers) % Share of Construction to total Employment
Source : Philippines Construction Association, 2004

1.6 5.4

1.6 5.3

1.7 5.6

0.7 (2.3)

6.3 5.7

In terms of training, not much has been done compared to countries like Singapore and Malaysia. According to the Philippine Construction Association, the main reason why companies do not want to invest a great amount of money in training is because these people leave once they learned certain skills and move to another company and provide that company with greater advantage. Meanwhile the previous company probably spent more on training new workers. The fact that many employees leave after training, and the fact that there is no protection for this practice, many companies do not want to invest much in this area.
Singapore

Singapore obtains foreign workforce from two different categories of countries. One being the traditional countries which are those countries whose culture and work ethos are compatible with those of Singapore. These countries include Malaysia, Republic of Korea, Hong Kong, Japan, and Macau (CIDB, 2004). Most of these labours are actually from Malaysia. The other so called non-traditional sources are from Bangladesh, India, Indonesia, Philippines, Sri Lanka and Thailand. Singapore's economic progress has been based on systematically upgrading the level of technology in all sectors, and adopting high value-added activities, while phasing out labour-intensive ones. Whereas the employment of foreign workers is permitted in some sectors, continued reliance on such workers is not considered desirable, as it is thought that social and economic problems may result. From Table 16, we can see that the number of construction workers in Singapore is decreasing from 131,300 in 1999 to 114,474 in the year 2003. This is due to the fact that skilled workers are retained and dependency on less (in numbers) but quality worker are much sought for in their country. Table 16: Number of Construction workers in Singapore 1999 1998 2001 2002 Employment 131,330 130,730 124,925 119,068
Source :Department of Statistics, Singapore, 2004

2003 114,474

Thailand

The number of construction workers in Thailand has also increased throughout 1999 to the year 2003, from about 5,607 workers in 1999 to 7,522 workers in 2003 (Refer Table 17). It was also recorded that a large number worked in Malaysia (1121 workers) in the year 2000 (Sieh & Ong, 2003). Table 17: Number of workers (thousand persons) in Thailand (1999, 2001-2003) 1999 2001 2002 2003 5,607.1 6,580.7 7,146.3 7,522.8 Construction 117,914.5 121,836.3 125,097.1 127,841.4 Other Industry 123,521.6 128,417 132,243.4 135,364.2 Total
Source : National Statistical Office, Office of the Prime Minister, 2004

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In the year 1990 to 1997, the number of Thai workers working outside of Thailand has also increased as shown in Table 18. A large number had migrated to Singapore between these years, while the number of workers going into Malaysia had decreased by the year 1997. Table 18: Number of Thai Workers Going Abroad by Country of Destination Countries 1990 1991 1992 1993 1994 1995 1996
Middle East 27,392 & Africa 12,229 E-Asia 17,263 ASEAN Singapore 6,464 Malaysia 2,087 Brunei 8,009 Others 703 6,140 Western 63,024 Total % Shares by Region Middle East 43.5 E-Asia 19.4 ASEAN 27.4 Western 9.7 21,482 16,931 21,546 9,488 2,473 8,840 745 3,890 63,849 33.7 26.5 33.7 6.1 23,029 24,984 31,181 11,337 6,608 12,729 507 2,524 81,718 28.2 30.6 38.2 3.0 17,019 77,661 40,939 14,171 11,358 14,750 660 2,331 137,950 12.3 56.3 29.7 1.7 17,614 105,861 44,626 15,100 12,232 16,553 741 1,663 169,764 10.4 62.3 26.3 1.0 19,987 134,524 46,257 15,624 11,830 17,292 1,511 1,528 202,296 9.9 66.5 22.9 0.8 22,607 110,516 50,425 17,601 9,363 20,714 2,747 1,888 185,436 12.2 59.6 27.2 1.0

1997*
16,367 106,830 42,829 16,601 5,820 16,024 4,384 2,112 168,138 9.7 63.5 25.5 1.3

Note: * January to November 1997. Source: Department of Employment, Ministry of Labour and Social Welfare, from http://www.thaieconwatch.com/articles/m98_2/m98_2t7.htm.

Vietnam Vietnam's unemployment rate dropped from 7.4 percent in 1999 to 6.3 percent in 2001 (Asian Development Bank, 2003)). Nevertheless, the percentage rate of unemployment is still high. In order to overcome unemployment at home, the Vietnamese government put an effort to fight it by encouraging its people to work in neighboring countries. In the past few years, Malaysia and other ASEAN countries have become a growing market for Vietnamese labours. Most are employed in the manufacturing and construction industry. And unlike its Southeast Asian neighbours such as the Philippines and Indonesia, Vietnam is a relative latecomer to the idea of exporting its workers overseas. In 2002, about 2,763 Vietnamese workers were working in Malaysia, 110 in Laos, and 2,801 in the rest of the world (Refer Table 19). The number employed in other countries has increased and progress has been made in poverty reduction and job creation for the unemployed. Nevertheless, Vietnam is seriously lacking of human resources locally. Local talents have not been employed and promoted properly. Consequently, many students study overseas and later do not want to go back since they cannot find relevant jobs. Table 19: Export of Labour Services in Vietnam Construction Industry Number of people Year 2001 2002 2003 Countries To Malaysia 2673 3606

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To Laos To the rest of the world Total

4120 4120

110 2801 5584

3348 7054

Source : Vietnam Association of Construction Contractors, 2004

Illegal Workers The growth of illegal immigration has given rise to tightening of immigration rules and regulations in ACF countries particularly with regards to semi-skilled and unskilled workers in most countries facing massive numbers of illegal people movement (Sieh & Ong, 2003). Further, immigration rules are now moving towards incorporating political and cultural rationale as compared to before where economic justifications were emphasized. The case of preference for cultural affinity in selecting source migrant countries in Singapore and Malaysia has already been discussed by their governments and firms as a strategy to avert potential social and cultural conflicts. Many factors contributed to the failure of the governments efforts to curb the illegal inflow of foreign workers (Kassim 1991, 1993; Zanifan Md. Zain 1991). Legal importation of alien labour was and still is time consuming and costly and, therefore, unpopular with prospective employers who prefer illegals as they are also easy to control and mobilize, and such labour could easily be found. 3.4.2 Professional Services The construction industry is generally referred to as a service industry. The skilled workforce comprised of engineering works, project management and many others. With AFAS, governments can promote on harmonization of qualifications and equalization of standards for skilled labour and professionals. Border entry point details for such movement of people to conduct trade in services cannot be ignored. AFAS promises to benefit both the developed and the developing countries, with perhaps the former as the main beneficiaries of this mode (Sieh & Ong, 2003). The flow of natural persons providing services among developed countries is very significant, as it is among developing countries, as well as between developed and developing countries. Countries would have to pay immediate attention to their respective visa and work permit systems in order to identify areas to facilitate movements of people if they earnestly wish to promote flows of skilled workers. To illustrate further, Malaysia accepts foreign workers from countries such as the Philippines, China, Indonesia, Thailand, Bangladesh and elsewhere. But the Malaysian government has some formal arrangements with these economies, but not with all of them. There are agreements between Malaysia and the Philippines and between Malaysia and Indonesia on terms and agreements for certain jobs (Sieh & Ong, 2003). The agreements are altered from time to time after talks between the host and home governments in order that satisfaction is met on both sides. Similar agreements are also enforced between Singapore and some home governments of foreign workers that are employed in Singapore.

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The progressive liberalization of services under AFAS will help to address the issue on the needs of a similar ASEAN visa for professionals, which could be one means to promote greater cooperation. A good data base, which is currently lacking, will help to facilitate the formulation and implementation of an ASEAN visa. Perhaps such data issues may be taken up under certain agency or association that has expertise on record keeping across countries. In the case of Singapore, some policy measures are in place to encourage immigration of a permanent nature usually for higher level skills. Skilled workers holding work permits are eligible for entry/reentry permits. Professional personnel on work passes (as distinguished from work permits) are granted permanent resident status. Social Integration Management Service is established by the government of Singapore to encourage permanent integration of workers with desirable skills into the labour force (Ruppert, 1999). A further step is taken by the Singapore government to encourage skilled personnel to settle in Singapore by providing them with subsidized health care, education and housing. Malaysian services sector is considered relatively open and therefore, fairly significant foreign participation is already allowed. However, future negotiations as planned under AFAS provision will see further liberalization and bindings of services activities. Other ACF countries such as Philippines, Thailand, and Indonesia are generally prepared to co-operate with foreign professional workers as discussed in the interviews. The opportunity to work with other countries professionals should be seen as beneficial to develop ones own country. Despite the reality that different countries have different needs and priorities with respect to migrant or foreign workers, there is a need to look at the issues relating to foreign workers, either to reduce the incidence of unlawful people movement usually from the unskilled category, or to regulate the flow of highly skilled and knowledgeable professional people across borders. Table 20: Summary of Suppliers Strengths
Suppliers Strengths Country Indonesia Malaysia Philipppines Singapore Thailand Vietnam Steel ++ + 0 0 +++ 0 Cement + + + + ++ 0 Timber +++ +++ 0 0 0 Machinery + + + ++ + 0 Hardware 0 0 0 0 0 0

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Chapter 4: The Liberalisation of the Construction Industry

4.1

AFTA and the Construction Industry

AFTA, which is implemented through CEPT scheme, is expected to facilitate reduction in the cost of importing construction-related goods and materials within the ASEAN region. Goods with a minimum 40% content originating from ASEAN countries are qualified to be categorized as local goods that will be accorded with CEPT privileges. In general, the official target of AFTA for ASEAN-6 was to have tariff for all items in the Inclusion List fall within 0-5% by January 2003. In the case of Vietnam, the target deadline was set at January 2006. As of 2003, the tariff for all construction-related goods and materials have fallen within the 0-5% tariff band, with the exception of Vietnam. To illustrate the range of import tariffs applicable to ACF member countries, Table 4.1 summarizes the tariff rates applicable to selected construction materials. Four groups of countries emerged from their tariff patterns Vietnam with its high import barrier, Malaysia and Thailand with 5% flat tariff, Indonesia and Philippines with tariff in between 0 to 5%, and Singapore with no import tariff at all. To some extent, this tends to suggest how each country intends to protect their domestic industries from foreign competitors within the short term. With the coming of 0% import tariff by 2010 (for ASEAN-6 members), this will mean lower cost of importing materials from within the region. In turn, buyers will have a wider choice to source their materials, both in terms of price and quality. Table 4.2 indicates the average tariff rates applicable to HS code sections that are relevant to the construction industry.
Table 4.1: CEPT Tariff for Common Construction Materials for ACF Member Countries (2003)
HS Code 2516.12.000 2715.00.000 2523.21.000 3917.23.000 4418.20.000 4418.30.000 6904.10.000 6905.10.000 6912.00.000 Item Granite Slabs Bitumen or asphalt Portland Cement (Type I) PVC pipes Doors and wood frames Parquet panels Building bricks Roof tiles Ceramic tableware, kitchenware, & toiletware Multiple-walled insulating glass Reinforcing steel bars and coils Indon 5% 2.5% 0% 0% 0% 0% 5% 5% 5% Msia 5% 5% 5% 5% 5% 5% 5% 5% 5% Phil 3% 3% 3% 3% 5% 5% 5% 5% 5% Spore 0% 0% 0% 0% 0% 0% 0% 0% 0% Thai 5% 5% 5% 5% 5% 5% 5% 5% 5% Viet 5% 1% 40%(E) 5% 5% 5% 20% 20% 50%(E)

7008.00.000 7213.10.000

5% 5%

5% 5%

5% 3%

0% 0%

5% 5%

20% 20%

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(E) indicates the material is temporarily excluded from CEPT scheme. However, the tariff must reach between 0-5% by 2006, and 0% by 2015.

4.2

Views and Concerns Raised by Construction Firms on AFTA

In general, the contractors in the construction industry feel that there is a minimal impact of trade liberalization in goods and materials, primarily due to the fact that the bulky nature of construction materials, logistics constraints at both inland and sea, and suitability to local condition requirements will continue to demand the use of locallysourced materials. However, several concerns have been raised by construction firms regarding AFTA:
4.2.1 Too Fast Implementation of Time Table

There is a concern among construction firms that the implementation or enforcement schedule of AFTA is too fast. Although the general feeling is that the impact will be neutral (due to the bulky nature of the construction materials), the concern is primarily rooted in the lack of dialogue or communication between firms from countries in the region and their governments prior to the development of regional policies. Furthermore, the industry players also felt that their governments are not doing enough to educate relevant businesses about the potential impact of AFTA on their business.
4.2.3 Wide Discrepancy in the Strength and Competitiveness Levels among ASEAN Countries

Some of the firms from the less developed ACF member countries raised the issue of uneven playing field that will be created upon full implementation of AFTA. These firms felt that the big and financially strong construction companies, typically from the more developed ASEAN countries, will be able to muster their strength and dominate large scale projects in neighbouring countries, using their ability to mobilize cheaper funds and efficiency in supply chain management through greater negotiating power with small material suppliers.
4.2.3 Oversupply of Materials from Foreign Countries

Some of the firms from the less developed ACF member countries are concerned with the possibility of having an oversupply of construction materials in their country as a result of the dismantling of trade barriers. Some countries with unsophisticated production facilities will find that their costs are far higher than those of foreign producers who employ more advanced technology in their production process. In the case of steel, countries like Vietnam and Malaysia use a combination of import tariff and import licenses to control the level of supply of the material, with the main objective of protecting the local producers. With the lowering and eventual removal of import tariff and other non-tariff barriers, there is a risk that a glut in the supply of materials will lead to the demise of local firms, which in turn will increase the countrys reliance on foreign materials.

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4.2.4

Higher Cost for Quality / Standards Compliance

Another concern lies with the opening up of the market as producers will be forced to increase the quality of their materials simply because foreign products of higher quality will threaten local suppliers. This will result in the need to invest in new equipment or production facilities, and will increase the cost of production of construction materials, hence a negative cost effect.
4.2.5 Market Access Not Equal Despite Implementation of AFTA

Many construction firms, notably from the less developed ASEAN countries, felt that trade liberalization in the form of tariff reduction is not free-lunch. There was a strong suspicion that other forms of barriers will be put in place in order to protect local companies, for example, license and permit application, quality accreditation and professional qualification requirements, financial and technical requirements, and composition of local staff. 4.3 Degree of Readiness towards AFTA

Despite the concerns raised by the construction firms, there are many among those interviewed indicated that they are already prepared for AFTA, except for Vietnam. Singaporean companies said that they have been trained to compete in an open market due to the nature of its open economy. Malaysian and Thai companies claimed to be ready as they have had several years of domestic experience to build up their technical and financial strengths. Indonesian and Filipino companies reported that they have been exposed to open competition through international-funded projects at home. 4.4 AFAS and the Construction Industry

AFAS will affect trade in professional services in the construction industry. The commitments made by each ACF member country after the completion of the 2nd round of negotiation is somewhat diverse although in general they are moving towards further dismantling of trade barriers within the services sector. It is important to note that AFAS, which is modeled after GATS, have to be read within the context of both horizontal and vertical commitments. Under AFAS, a member country must offer a better deal to its regional neighbours than what it has offered under GATS. This is the cornerstone of the initial aim of preparing ASEAN countries for global liberalization of the services sector under GATS. Commitments made by a country under AFAS are presented in a list of schedules. These commitments are split into two sections. Horizontal commitments specify limitations that apply to all of the sectors included in the schedule; these often refer to a particular mode of supply (discussed below), especially with regard to commercial presence and the movement of natural persons. Any reference to the sector-specific commitments must therefore consider the horizontal entries. The second section of the schedule lists the commitments which apply to trade in services in a particular sector or subsector.

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As an example, the commitments made by the Philippines in AFAS will mean a foreigner can only have a maximum of 40% equity in a company that wishes to provide construction service in a locally-funded project (sector-specific limitation) and at the same time a foreign civil engineer can only be employed by this company after it has been determined that no suitable Filipino has the competency to carry out the same tasks (horizontal limitation). The schedule of commitments offered by each ACF member country is provided in Appendix C. These are the sector-specific schedules that are relevant to the construction industry. Some of the terminologies that are used in the schedules are clarified below.
4.4.1 Market Access

Unlike goods and materials which have to be physically moved to the point consumption, the supply of services can be achieved in more ways as it need not require the presence of the supplier, either in the form of person or company, at the time when the service is delivered. In other words, there are more ways to gain market access in the supply of services. AFAS has adopted GATS modes of trade in services and defines four ways of accessing a market under the four modes of supply:
4.4.2 The Four Modes of Supply

Cross-border supply the possibility for non-resident service suppliers to supply services cross-border into the member's territory without the need to have physical presence. An example would be a developer from Malaysia hiring a Filipino civil engineer to draft a technical drawing for the formers project at home. The entire exercise can be done electronically via the internet: the developer could communicate his requirement and output expectations through email, the engineer could then send electronic files containing his drawings, and the transaction is finally concluded via telegraphic transfer of currency to a Filipino bank. Note here that no service supplier need to move across national borders. Consumption abroad the freedom for the member's residents to purchase services in the territory of another member. An example would be a Singaporean company wishing to set up a plant in Malaysia engages a Malaysian construction firm to build the factory. In this case, the Singaporean manufacturing firm is importing construction services for its consumption (ie. building the plant) abroad. Commercial presence the opportunities for foreign service suppliers to establish, operate or expand a commercial presence in the Member's territory, such as a branch, agency, or wholly-owned subsidiary. An example is when a Thai contractor set up a 55:45 joint-venture company in Indonesia to undertake a construction project in the island of Java. The ratio 55:45 foreign and local ownership is to comply the sectorspecific limitation specified in Indonesian schedule in AFAS. Presence of natural persons the possibilities offered for the entry and temporary stay in the Member's territory of foreign individuals in order to supply a service. An example would be a civil engineer specializing in metal stress and fatigue from

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Singapore provides an inspection service to a company that is building a bridge in Vietnam.

4.4.3 Most-Favoured Nation (MFN) Status & National Treatment

Like GATS, AFAS must also be read within the context of what are offered by a government with regard to the difference in treatments that it will accord to foreigners when compared against its own citizens and its other preferred trading partners. Both MFN and National Treatment are also types of market access. The first is MFN Treatment, which stipulates that any privilege granted by a country to another (frequently through bilateral agreement) must be extended to other members. The second is the National Treatment clause, which refers to the obligation of extending the same treatment enjoyed by domestic companies to those from another AFAS member country. In other words, there must be non-discriminatory treatment to foreigners from AFAS countries when doing business in the country. 4.5
4.5.1

Views and Concerns Raised by Construction Firms on AFAS

Lack of Understanding of what AFAS is All About

Many of the construction firms interviewed are aware of the liberalization of the services sector although the understanding is typically in the form of investment and employment constraints imposed on foreign companies. There is also a general feeling that the movement of construction labour is covered under AFAS although the agreement (as at the completion of 2nd round of negotiation) limits its coverage to professional service persons.
4.5.2 Supply of Services will be Dominated by Companies from More Developed ASEAN countries

There was a general feeling that professional service companies from the more developed countries will dominate the industry upon full implementation of AFAS. This is due to their ability to recruit locals as they have a better education system, as well as their ability to attract foreign employees to work in their companies and reside in the host country. A typical example quoted is Singapore, which has a combination of excellent education system and attractiveness for foreigners to reside in the country. Either way, this provides the opportunity for Singaporean companies to hire better qualified people to provide professional services in the region.
4.5.3 Market Access Not Equal Under AFAS

Just like AFTA, there was a strong suspicion that other forms of barriers will be put in place in order to protect local companies, for example, license and permit application, quality accreditation and professional qualification requirements, financial and technical requirements, and composition of local staff. These requirements will deter or discourage foreign companies from competing in the local market. 4.6 Degree of Readiness towards AFAS

There was a strong consensus among construction firms in the region that they are ready for AFAS. In the case of Vietnam, the lack of guidelines and standards has 68

enabled foreign companies to employ whatever standards that is acceptable to the authority in their construction projects in Vietnam. In a way, this is a form of liberalization, where foreign companies are allowed to do business without constraints in the form of compliance to local standards and guidelines. Thus, Vietnamese firms assert that the impact of AFAS will be neutral to them. The Singaporean, Malaysian and Thai companies are confident that they will be able to compete on a strong footing with the liberalization of the service industry. They are very confident of their project management skills and are well equipped with technical competencies to compete within ASEAN and Asia. Indonesian and Filipino companies, to a lesser extent, are confident that they will also be able to compete with foreigners upon liberalization of the service industry, especially in local projects. This is based on the belief that their technical skills are at par with foreign service providers. Coupled with stronger network ties with local material suppliers, the construction firms in these two countries believe that it will not be easy for foreigners to compete with the locals in their own country. However, the threats from foreign service providers will be significant for large-scale projects, where foreign companies are able to mobilize bigger and cheaper funds to compete with the locals, who are constrained by the high cost of borrowing.

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Table 4.2: Tariff Rates for HS Sections that are Relevant to Construction Industry
HS Section 25 Description SALT, SULPHUR, EARTH & STONE, LIME & CEMENT PLASTICS & ARTICLES THEREOF WOOD & ARTICLES OF WOOD, WOOD CHARCOAL CERAMIC PRODUCTS GLASS & GLASSWARE IRON & STEEL ARTICLES OF IRON OR STEEL COPPER & ARTICLES THEREOF ALUMINUM & ARTICLES THEREOF LEAD & ARTICLES THEREOF Total Items / Avg Rate for All Indon 56 No of Items in the Inclusion List Msia Phil Spore Thai 55 58 56 70 Viet 49 Indon 1.7% Average Tariff Rates in 2003 Msia Phil Spore Thai 1.1%

Viet 3.6% 13.5% 4.4% 8.0% 5.0% 4.3% 7.3% 2.9% 5.2% 0% 5.4%

3.0% 4.4% 4.5% 4.8% 4.3% 3.0% 4.7% 3.5% 3.9% 3.4% 4.0%

0% 0% 0% 0% 0% 0% 0% 0% 0% 0% 0.0%

4.9% 4.9% 5.0% 5.0% 5.0% 4.3% 4.7% 4.6% 4.7% 4.9% 4.8%

39 44

31 67

100 69

33 25

38 28

102 37

29 14

3.4% 0%

4.1% 4.7%

69 70 72 73 74 76 78

25 55 295 133 72 72 15 821

33 60 442 154 66 46 13 1038

26 49 179 118 58 47 10 603

28 42 190 99 70 38 10 599

34 64 403 164 75 52 19 1020

15 36 223 149 64 44 10 633

4.1% 4.5% 2.0% 2.7% 0.2% 1.3% 0% 2.0%

3.9% 3.5% 2.7% 3.8% 0.8% 4.3% 0.8% 3.0%

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Chapter 5: Impact of AFTA and AFAS on the Construction Industry

5.1

Overview of the Cross-Border Competition in the Construction Industry

The demand for construction works in the region will be driven by the need to build infrastructure and basic facilities such as houses, schools, roads and hospitals. With exception of infrastructure and hospitals, these buildings do not require sophisticated structural design and finishing. A local contractor with access to local resources would be able to undertake a project with better control of costs and compliance to deadlines. Furthermore, a contractor working in a foreign country will need to source most of the materials and labour from local source due to the bulk nature of construction materials. A foreign contractor will only have an edge over the local contractors if he has the following: local knowledge lower cost of funds ability to import specialized material (not available locally) at a lower price knowledge, technology and experience in a specialized project

As mentioned earlier, construction projects in ASEAN countries will be dominated by basic buildings and infrastructures that do not require sophisticated design and finishing. Local general contractors would therefore be in a stronger position to take up the tasks of completing those projects. However, ASEAN countries will also be investing in other infrastructure projects that require higher technology input, for example airports, marine ports and power plants. In the past, many of these projects were undertaken by a consortium of construction companies comprising of locals and foreigners. Frequently, the foreign partners will be responsible for the more sophisticated portion of the construction works, with little or no opportunity for technology transfer to the local partners. Unless the situation is rectified, ASEAN construction firms will not be able to improve their technical capability to compete with non-ASEAN firms in sophisticated construction projects. 5.2 Issues and Challenges in Cross-Border Movement of Construction Players

Despite claims of strong foothold in domestic market, there is a consensus among ACF members on the challenges that need to be overcome if cross-border movement of construction services within the region were to be encouraged.

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5.2.1 Finance-Related Issues

5.2.1.1 Financial Restrictions and Lack of Access to Peripheral Services

A common complaint raised by contractors in this region is the lack of and/or access to funds. This is due to the weak financial strength of local banks as demonstrated by their low ratings, especially for banks originated from Indonesia, Philippines, Vietnam and to a lesser extent, Thailand. As a result, contractors will have to pay higher cost of funds for loans, as observed in the Philippines and Indonesia (see Table 5.1). In other parts of the region, for example Malaysia, banks are no longer keen to finance construction projects due to high non-performing loans from commercial and retail space loans (construction and properties sectors account for 43.8% of total NPL in December 2003). For regional projects, contractors from countries with smaller or weaker banking sector raised the issue of difficulty in raising performance bonds that are acceptable to the project owner in the host country. For example, due to the junk rating of many Indonesian banks (see Table 5.2), a performance bond raised on behalf of an Indonesian contractor will not be accepted by another bank acting on behalf of the project owner in Singapore. There are also other impediments in discouraging cross-border investment in construction projects. These include prohibition from opening up foreign currency account, restricted repatriation of profits and existence of gaps between official and market exchange rates.
Table 5.1: Sovereign Rating and Indicative Interest Rates for ACF Member Countries Country Malaysia Singapore Thailand Philippines Indonesia Vietnam Foreign Currency Sovereign Rating A- / stable AAA / stable BBB / positive BB / stable B / positive BB- / stable Local Lending Rates per annum (May 03) 6-8% 5-6% 6-8% 10-12% 12-16% 10-14%

Sources: Bank Negara Malaysia, Bank of Thailand, Singapore Department of Statistics, Banko Sentral ng Pilipinas, HSBC Vietnam, Bank Indonesia, Standards & Poor

5.2.1.2 Restrictions in Projects Financed by Bilateral and Multilateral Financial Institutions

Contractors in this region feel that they are at a disadvantage when competing for local projects that are financed by international institutions like the World Bank and Asian Development Bank, in the forms of: Time-frame clause, for example, a bidding company must have the experience of building an infrastructure of similar size and quality in the last 5 years. This will discriminate against a local company who might have the experience completing the same kind of project 8 years ago.

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Scale clause, for example, a competing company must have the experience of constructing a 300 km elevated expressway. A company who has the experience of constructing similar expressway of a smaller scale will be at a disadvantaged position as it will not meet the requirement stipulated in the tender. Price clause: A company with cheaper borrowing cost (frequently those from developed nations) will have an advantage of lower overall cost. For example, a Filipino construction company will have a higher cost due to higher interest rates in the Philippines than a company of Singapore origin.

Similar restrictions are also prevalent in projects that are financed through bilateral agreement, eg. Japanese Government Loan. For this kind of project, priority will be given to Japanese construction products and services. Local contractors will only be able to participate as subcontractors, thus limiting themselves to lower margin segment of the business.
Table 5.2: Ratings on Selected Banks in ACF Member Countries Country Indonesia Bank Bank Mandiri Lippo Bank Bank Danamon Bank Negara Indonesia Bumiputra Commerce Bank Malayan Banking RHB Bank CIMB Banco de Oro Universal Bank Rizal Commercial Banking Corp Metropolitan Bank & Trust Equitable PCI Bank Inc Development Bank of Singapore Overseas Chinese Banking Corp United Overseas Bank Krung Thai Bank Bank of Asia Bangkok Bank Bank of Ayudhya Siam Commercial Bank Bank of Foreign Trade of Vietnam Bank of Investment and Development of Vietnam Industrial and Commercial Bank of Vietnam Vietnam Bank for Agriculture and Rural Development Local Currency Rating B+ / positive CCC / stable B+ / positive B / stable BBB / stable BBB+ / stable BB+ / positive BBB / stable B / stable B / stable B+ / stable B / stable A+ / stable A / stable A+ / stable BB / positive BB+ / positive BB / positive B+ / positive BB / positive B (pi) B (pi) B (pi) B (pi) Foreign Currency Rating B / positive n.a. B / positive B / stable BBB / stable BBB+ / stable BB+ / positive BBB / stable B / stable B / stable B+ / stable B / stable A+ / stable A / stable A+ stable BB / positive BB / positive BB / positive B+ / positive BB / positive n.a. n.a. n.a. n.a.

Malaysia

Philippines

Singapore

Thailand

Vietnam

Source: Standard & Poor Rating Agency

5.2.1.3 Inefficiency in Progress Payment by Project Owners

Theoretically, construction service providers require minimal capital. An initial startup of 10% is sufficient to see a project through to its completion. However, there are

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many instances of inefficiency or slowness in payment by the project owners, especially projects that are not fully taken up by buyers or financed by municipals or governments with weak financial standing. For example, a local Filipino newspaper reported that the Philippine government has an outstanding owings of P6 billion (USD110 million) to both local and foreign contractors as at November 2003, with payment due of 8 months regarded as common by the local contractors. This resulted in the need for higher working capital on the part of contractors, and is a discouragement for foreign contractors to participate in local projects funded by the authorities. 5.2.2 Government-Related Issues
5.2.2.1 Limited Spending Capability of the Governments

Philippines and Indonesia face high budget deficits due to sluggish economic recovery (see Table 5.3). Coupled with high foreign debts, these two governments have limited power stimulate the construction industry. This leads to lower spending in infrastructure projects, which in turn will limit business opportunities for construction players in those countries. An implication of this is that the local construction players will not have sufficient number of projects to help them build their profiles when competing for foreign projects.
Table 5.3: Financial Strength Indicators of ACF Member Countries (Year 2003) Item Fiscal Balance (%) Public Savings to GDP ratio (%) Foreign Debt to GDP ratio (%) Debt Service Ratio (%) Indonesia -2.1 21.1 76.3 26.5 Malaysia -5.3 41.8 26.9 6.1 Philippines -4.6 19.5 68.7 16.1 Singapore +6.4 44.7 0 2.1 Thailand +0.6 32.0 46.1 15.0 Vietnam* -4.8 28.8 37.9 8.3

* Figures for Vietnam are for 2002. Sources: Economist Intelligence Unit, IMF and ADB

5.2.2.2 Lack of Support from the Governments

There is a general consensus among member countries that their respective governments are not doing enough to help the local construction players to go abroad. The Japanese way should be emulated the government assisted in the form of information gathering, coordination of material and service provider and financing of a project in a foreign country. Some forms of training facilities should be provided by the government in building the capabilities in construction industry. Progressive increase in quality standards should also be spearheaded by the government in helping the industry to grow and be competitive to the outside market. Effort should be made by governments to enable mutual recognition of qualifications and mutual recognition of banks.

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Governments could also work together to set up a pilot program where players in the construction industry from the respective countries could work together to develop a project in a common growth area like BIMP-EAGA (Brunei-Indonesia-MalaysiaPhilippines-East-ASEAN-Growth-Area).
5.2.2.3 The Need to Balance Social Aspirations and Free Trade

Although partnership and joint-venture with foreign firms could benefit a local company through cost reduction, some construction companies, especially those that are majority-owned by the government, will give local service and materials provider priority over foreigners. This is especially true in Vietnam, a country which practices socialist-oriented market economy system. Job creation and job security are regarded as crucial in maintaining social stability of the country. In the case of Philippines, many of the professional services are still protected, due to high employment among the graduates. This could be a reason for the lack of foreign investment in the construction sector.
5.2.2.4 Counter-trade Requirement

Some countries like Indonesia and Malaysia require counter-trade arrangement. Foreign suppliers tendering for government procurement are subject to counter-trade obligations, requiring them to purchase, or export, selected local goods of an equivalent value (minus local charges incurred in executing the contract). Countertrade obligations may also be attached to some large government-funded contracts, such as construction projects. 5.2.3 Knowledge and Cultural-Related Issues
5.2.3.1 Lack of Training & Qualifications

The lack of trained workers in the industry is an issue to many contractors in this region. An unskilled worker raises the cost of construction through higher material wastage and longer time required to complete a task. Many contracting companies require the intake of highly skilled worker as they themselves are not profitable enough to train their own workers. On the professional side, there is a need to mutually recognize qualifications issued by member countries to enable mobility of services in the region. Alternatively, the relevant professional bodies should begin discussion on the streamlining of syllabus that must be covered by anyone who wishes to pursue the qualification.
5.2.3.2 Language & Cultural Barrier

Some countries, notably Indonesia, Vietnam and Thailand, mentioned the lack of ability to speak English fluently as a major detriment to their ability in exporting their services beyond the domestic border.

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5.2.3.3 Lack of Information on Other Countries

The existing lack of cooperation among members or interest in expanding beyond the domestic border can be attributed to the lack of information on other countries. Most members rely on occasional meeting or gathering via conference or exhibitions to learn about potential partners and opportunities in other countries. Lack of understanding of laws and procedures in doing business in other countries is also another reason why there has been lack of cross-border investment and trade of services in this region. 5.3.3 Standards-Related Issues
5.3.3.1 Adoption of Different Material Standards

Due to historical reasons, countries in the ASEAN region adopt different standards. For example, Philippines adopt American standards, whereas Malaysia and Singapore adopt British standards. In the case of Vietnam, the country has thus far allowed adoption of whatever standard that is deemed safe while deciding on which standard to follow.
5.3.3.2 Compliance to Different Levels of Quality Standards

Many of our interviewees claimed that countries which proclaim to practice open market system install barriers to entry by requiring foreign competitors to comply to the requirements of the host country, for example ISO certification and compliance to safety and environmental standards. Contractors from the less developed countries feel that although getting the quality accreditations will help to raise the quality standards of the industry as a whole, the different level of economic development in ACF countries poses a question of whether the customers do differentiate between those that have quality accreditation versus those who do not. It is suspected that most contracts are given based on price rather than quality accreditation of a company. 5.3.4 Other Issues
5.3.4.1 Oligopolistic Dominance in the Production of Construction Materials

It has been alleged that some segments in the construction industry are controlled by oligopolists. For example, in the case of cement, companies like Cemex, Holcim, Lafarge and Taiheiyo are controlling more than 70% of trade in cement in the region, thus indirectly influence the cost of construction in the region. Steel is another sector that is controlled by oligopolists, albeit at national level. For example, PT Krakatau Steel and Siam Construction Steel Company dominate the production of steel products in Indonesia and Thailand respectively. In Malaysia, Lion Industries, Southern Steel and Malayawata together control 65% of Malaysias steel rods and bars production capacity.

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5.3.4.1 Price & Licence Control

Malaysia categorised steel products as controlled items. The government set the prices for steel billets, bars and coils with an aim to control price fluctuations for all other industries that consume steel. Recent increase in the price of steel products in the world market was not accompanied by increase in the local price, thus causing shortages in the domestic market. The governments first attempt was to issue new licences for the import of steel into the country and imposing temporary ban on steel exports. However, the low price of steel in Malaysia made it impossible for anyone to supply any kind of steel products at the stipulated prices, unless if the government raised the official prices of all steel products. Vietnam, despite importing most of its steel requirement, only allow companies under the umbrella of Vietnam Steel Corporation to import steel into the country. In addition, tariff will be applied to imported steel, whose quantum is decided on the basis of controlling the amount of steel into the country in order to protect local producers. During shortfall of steel, import tariff is removed, while tariff between 10 to 20% is common during other times. 5.3 Current Strengths and Weaknesses of ACF Member Countries

There was a consensus in the perception of strengths among the players in the region. Almost all of the players that we interviewed claimed to have an advantage over foreign competitor in terms of technology requirement for local projects. Ignoring the financial constraints faced by some of the ACF member countries, all players were also confident of being able to compete on price due to their knowledge of where to source construction materials locally. 5.3.1 Indonesia The most pronounced advantage of this country is the ample supply of labour. Despite low educational background, Indonesian workers are capable of completing basic tasks in construction works, which are sufficient to cater for the need of construction projects in Indonesia, where the building of schools, houses and roads does not require high technology. The lower standard of living in Indonesia also makes Indonesia workers an attractive source of labour for neighbouring countries, especially Malaysia. Indonesia is still recuperating sluggishly from the financial crisis. The government is in a weak position to kick-start the economy through new construction projects as it is constrained by three factors: (1) IMF requirement of a balanced budget, (2) high foreign debt to GDP ratio, at 76.3%, and (3) high debt service-ratio, at 20.5%. At the same time, the market interest rate in Indonesia is also very high (12-16%) when compared to its more prosperous neighbours. These contribute to the lack of government funded projects and high cost of funds in the country.

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5.3.2 Philippines A key issue in the Philippines is the lack of financial strengths for many of its small contractors. The Philippine Contractors Accreditation Board is now cleaning up its list of contractors by requiring all members to prove their financial standing, technical capability and all previous works undertaken through resubmission of company profile to the Board. It is suspected that many small contractors are technically bankrupt or act as middlemen in allowing other people to make use of their licences. Philippine is also facing the issue of lack of capital for new construction projects. The high budget deficit and high debt-service ration put a constraint to how much the government is able to stimulate the construction industry via expansionary fiscal policy. International projects financed by Asian Development Bank and World Bank do provide opportunities for local contractors, although these projects are opened to international competitors. On the other hand, Philippines have an ample supply of workers that are literate and fluent in English. This explains why Filipino workers are popular in the Middle-East and command higher wages than say, Indonesian workers. 5.3.3 Singapore Due to the nature of the open economy of the island state, Singapore construction companies have long been exposed to open competition. As a result, Singapore companies are well equipped with quality accreditations both for their products and services. Singapore companies have attracted many non-ASEAN companies for tieups and joint-ventures, especially for projects in China. However, Singapore has a higher cost due to its higher standard of living. A typical concern raised by Singaporean contractors is that customers in other parts of the region do not appreciate the quality standing of their companies, hence unwilling to pay a premium for higher standards. There was a view that Singaporean companies face disadvantages due to the small size of the island. It is difficult for a Singapore company with an experience of constructing a 10 km highway to compete for an ADB-financed project in India that requires a bidder to have some experience in building a 50 km highway. Another difficulty is that since Singapore government has been able to finance major public infrastructure projects by itself, no Singapore company has the experience of undertaking a BOT project. This scheme, which is becoming popular in India and China, is putting Singaporean companies at a disadvantage. 5.3.4 Malaysia In general, Malaysian construction firms recognize the need to seek business opportunities outside the country. The country has completed most of its mega infrastructure projects in the 1990s, with only very few infrastructure projects left to pursued over the next couple of years. Several Malaysian construction companies

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have secured jobs in India and Middle East, either through open competition or G-toG arrangements. Due to its small population, Malaysian companies have long relied on foreign labour. Shortage of labour is a common problem in Malaysia, where constant training need to be given to new workers as they arrive in Malaysia to replace the ones that are required to return due to stringent immigration rules. 5.3.5 Thailand Our interview with key players from Thailand construction industry revealed optimistic view on the outlook of the construction industry in the country. The Thai government is expected to spend around 1 trillion Baht over the next 3 to 5 years, allowing the construction players to have enough jobs at hand without any worry for the need to seek business elsewhere. 5.3.6 Vietnam Vietnam needs to restructure many of its state-owned companies before it can truly compete with foreign companies. Here, the state-owned companies employ huge number of workers, typically in tens of thousand at all levels including unskilled labours. In addition, Vietnamese factories employ old technology which is a cause for higher production costs. On the human side, Vietnam faces the challenge to improve their education, as there is a shortage of skilled workers, especially for professional services. Lack of capital is also a major problem in Vietnam. This is partly due to its junk status (sovereign rating of BB-) which prohibits many institutional investors from investing in the country, as well as its high foreign debt (US$13 billion debt as compared to its GDP of US$35 billion).

5.4

Possible Impact of Trade Liberalization to ACF Member Countries

5.4.1 Market and Demand Growth Effects Easier market entry will be accompanied by increased supply and demand for all players in the construction industry within the region. For example, easier market entry into Indonesia will encourage some Malaysian developers to seek opportunities to construct mass units of low-cost houses which they are experienced at, either in the domestic market or in international projects promoted by Malaysian government (eg. in Bosnia and South Africa). However, the extent to which the barrier to entry is lowered will not just be dependent upon commitments made by the member states within the CEPT or AFAS agreements, but also on the hidden procedural barriers that comes in the form of licence applications, regulations and by-laws and adherence to guidelines stipulated by the local authorities.

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Trade liberalisation will encourage investment flows into the country that has the potential for the highest return. Investment flows will create job opportunities and encourage greater spending within an economy. In turn, this will create bigger demand for goods and services, which include demand for houses and commercial buildings. Greater production of goods and services leads to higher income for the country and will improve the government financial position. A government with healthier financial position will then be able to spend more money in developing infrastructure for its people, and this will lead to higher demand for construction works, both from the public and private sectors. 5.4.2 Supply and Suppliers Effect Heavier competition will be experienced by all players as freer market access encourages inward and outward movement of construction firms. The liberalisation of trade will encourage greater mobility of suppliers and workers, which in turn will encourage alliances and joint-ventures among companies who share similar views on business opportunities and who can complement each others skills in pursuing a construction project.
5.4.2.1 Investment Capital

The effect on investment flows within the region is dependent on the extent of liberalisation of capital movement within the region. At the moment, the AIA is still in its infancy stage, with many details have yet to be sorted out. Currently, various forms of barriers are in place in most ASEAN countries, for example, limitations on foreign equities, limitations on loans that can be sourced from local banks and limitations on land ownerships. Although the target for AIA is far away from now, there is a need for construction players to learn the investment procedures of other member countries.
5.4.2.2 Labour

AFAS strictly covers professional services. The construction labours, either skilled or unskilled, are not covered within the tenet of AFAS or GATS. Instead, they are covered under the immigration laws of member states. Unless the 3rd round of AFAS negotiations extends to construction and household labours, the impact of AFAS on construction workers will be minimal.
5.4.2.3 Professional Services

To facilitate free-flow of professional services in the ASEAN region, the member states agreed to commence negotiations on Mutual Recognition Arrangements (MRA) for professional services for all service sectors. The Coordinating Committee on Services (CCS) will adopt a sectoral approach to develop MRAs for each professional service, and will work together with professional bodies in ASEAN member countries to come up with appropriate scope and standards that are agreeable to all members. This will increase mobility of professional service providers in the region.

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5.4.2.4 Materials

Free movement of goods will enable suppliers of materials to seek opportunities beyond domestic borders. At the very least, the buyers of materials, will be encourage to consider buying from foreign suppliers to seek cheaper, higher quality materials.

5.4.2 Trade Effects There will be greater stimulus for trade to take place between member countries upon liberalisation of goods and services, as well as investment flows. Removal of tariff will enable buyers to have greater choice of suppliers, both within and outside the country. Greater market size created from trade liberalisation will enable suppliers to expand their business horizon beyond the domestic border, in search for customers who are willing to pay higher premium for their products. 5.4.3 Effects on Government Policies Apart from progressive liberalisation, AFAS also requires member countries to be transparent in the guidelines of doing business, including incentives and application for licences, to other member states. An implication of this requirement is that a foreign investor will be able to compare the relative difficulties of doing business in each of the country in the region. This will help him decide which country will provide the best environment for him to seek business opportunities in the region, hence the destination of his investment. From the perspective of national governments, the need to attract foreign investment into a country will require them to adopt more stable, predictable and attractive national policies. This is important as it will create an environment with greater certainty of doing business and mitigating losses related to procedural complexities, uneven playing field or regulatory loopholes. Governments will also be encouraged to develop policies that will promote a more efficient resource allocation based on the strengths of their industries, and this should lead to greater competitiveness and more efficient output.

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Chapter 6: Conclusions and Recommendation

6.1

The Need for Action

The progressive movement towards the creation of ASEAN Economic Community, as envisaged in the ASEAN Vision 2020, in the form of three-pronged approach via CEPT, AFAS and AIA, leaves very little choice for ACF members. At the very least, construction firms must be prepared for the arrival of foreigners in the domestic market. However, the opening up market will not just present a threat to domestic players, but also opportunities for expansion beyond the domestic border. 6.1.1 Imperatives for Member Firms ACF members must start looking at ways to tackle four areas in their business in order to enhance their competitiveness: Reduction in the overall cost of production Enhancement in skills and competencies Employment of new technology for production efficiency and consistency in service delivery Development of business network in expanding job opportunities through alliance and joint-venture

ACF representative associations could facilitate in the above efforts by providing education, training and forum for discussion among its members, as this will allow cross learning and awareness of best practices within their associations. 6.1.2 Imperatives for Associations Associations are created for the purpose of protecting the interests of members. Associations under the umbrella of ACF need to work together in identifying the common needs of their members, and to establish a database where members can refer to prior to exploring opportunities to work together in securing or completing a job. Associations must also seek to develop relationship with government agencies and ministries. Only through continuous contacts, dialogues and feedback will the government be aware of the issues and problems surrounding the domestic construction industry. 6.1.3 Imperatives for Governments While the pursuit of trade and economic liberalization will bring in higher investment flows and increase in the production of goods and services, there is a need for governments to understand the level of development and readiness of local firms to compete in an open market.

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It has been alleged that governments often devise policies without proper consultation with the domestic industry players. Thus, it is important for government to set up a mechanism for seeking opinions and feedback before committing to liberalize an industry at regional and international level. 6.2 Further Work

This report will conclude by recommending some form of cooperation between members of ACF in preparing themselves for the gradual liberalization of construction industry. The study team will discuss key issues that need to be addressed at firm, national, regional and global levels. From there, areas that need to be prioritized will be identified, followed by the kind of cooperation that can best address those problems. 6.2.1 Cooperation at Firm Level Generally, ASEAN contractors share similar set of expertise in construction. It is difficult therefore to promote cooperation unless if the one party can offer skills or opportunities that the other is unable to do. Having said this, firms must continue to improve their cost structure, enhance knowledge and skills and develop network with suppliers and potential customers as part of their preparation for the opening up of the market. 6.2.2 Cooperation at National Level A general concern raised by contractors in all member countries is that there had been very little consultation or opinion sought by the governments from the industry players prior to developing policies with regard to liberalization of trade and services. Furthermore, little effort has been done by the national governments to inform or to educate the impact of those liberalizations to the affected industries. This gap could be reduced if representatives from the constructor associations are included in the ASEAN working group in developing policies that could ensure fairness and equitable benefits to member states. The first initiative required is to conduct broad education on the impact of trade liberalization to the construction firms. Understanding of how the agreements work and what they mean is the first step towards preparing for the change in competitive dynamics of the industry. There is a need for firms, through their associations, to participate and influence the leadership role played by the authority. Only through continuous engagement will the government understand the issues and problems faced by the construction industry. A very important step that must be undertaken is to identify and prioritize construction sub-sectors that require help from the government to compete in an open market. This will then help the government to develop policies that help to protect the interest of the local firms in competing with foreign players.

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6.2.3 Cooperation at Regional Level Associations must continue to engage their governments in all matters pertaining to the construction industry. Several initiatives could be initiated at the regional level to help the region build its competitiveness in light of the trade liberalization at the global level. The governments, through ASEAN Secretariat, could set up a coordination unit to help identify potential companies that can work together to develop a project in a country within ASEAN region. This can be tied to a financial arrangement packaged by one of the banks in the region and guaranteed by the host government. This kind of initiative could help stimulate construction industry in the region. A key area that needs to be addressed is the harmonization of standards within the region. A common standard is important in facilitating movement of goods from one member country to another. By complying to one standard that is applicable to the region, suppliers are able to explore new markets beyond their border. Similarly for professional services, there need to be a streamlining of standards with regards to professional qualifications. This is where the association of construction firms, professional bodies and the governments must work together to develop a common professional qualifications that can be accepted by all member countries. There is also a suggestion that governments should assist their construction companies by becoming guarantor for a private company-led project. Apart from stimulating private investment in the construction sector, this would promote crossborder movement of services within the region. It is also suggested that ACF takes the initiative to develop a database that contain information on members as well as the relevant industry information on each member countries. Availability of information will facilitate alliance and joint-venture among members in competing jobs both within and outside the region. 6.2.4 Cooperation at Global Level With the signing of FTAs with China, India and ANZ, construction players in this region will be exposed to stronger competitors, both in terms of material and labour costs (India & China), and technology (ANZ). Unless there is any serious attempt by the construction players to work together, ASEAN construction industry will face serious downhill battle to compete with low-cost producers and technologically superior service providers from outside the region. There is a need for both industry players and the governments in this region to identify business opportunities outside the region. Apart from that, the ASEAN governments, through ASEAN Secretariat, must work together to identify critical subsectors within construction industry that must be helped in elevating their competitiveness at global level. Perhaps there should also be an initiative to create several ASEAN-wide construction companies through cross-ownership, alliances

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through sharing of business and operational facilities, or joint-venture in bidding for projects in selected markets, eg. Middle East, China or India.

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SWOT Analysis of COUNTRIES (Before AFTA & Current Situation)

Indonesia Strengths Abundance of land areas Young & growing population Availability of labour Weaknesses Lack of good infrastructure Weak financial capability Technology not as advanced as other countries Lack of research & information Opportunities Undeveloped land Expansion of infrastructure Cheaper industrial land & housing development land Industrial sites for small-scale & specialized materials Need for skill training Government recognition of the sector as an important engine for growth Now, major players look at construction opportunities in India, infrastructure Facilitating recruitment of local labour Higher chances of getting local project due to who you know culture Opportunities Threats Restrictive government rulings & regulations Slow economic growth

Malaysia

Technology Professionals & skilled workers Good track record & experience in large project i.e. highways, highrise buidings,etc

Lack of research & information Dependency on foreign workforce

Strengths Philippines

Weaknesses Lack of research & information Not many big players Professionals & skilled workers Finance Lack of research & information Lack of track record & experience in large infrastructure projects i.e. highways, airports,etc

Threats Too many small players (87%)

Singapore

Venture into other countries because have the financial capabilities

High costs of land

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Thailand

Finance

Lack of research & information

Local infrastructure projects

Vietnam

Availability of labour

Resistance to change Lack of research & information Lack of technology Lack of finance Patronage-client relationship

common people do not have enough money to spend since they are unemployed

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