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CHAPTER 5LIBERALISATION OF CONSTRUCTION SERVICES

Services Trade Liberalisation in MalaysiaConstruction Sector LiberalisationConstruction Services in Free Trade Agreements under NegotiationsImpacts of Liberalisation on Malaysia Construction Market

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CHAPTER 5 LIBERALISATION OF CONSTRUCTION SERVICES CHAPTER 5 LIBERALISATION OF CONSTRUCTION SERVICES

CONSTRUCTION INDUSTRY REVIEW AND PROSPECT 2015/2016

Introduction104 105

Services Trade Liberalisation in Malaysia

LIBERALISATION OF CONSTRUCTION SERVICESINTRODUCTIONTrade liberalisation is achieved through reduction or elimination of market restrictions for the freer exchange of goods or services between nations. This includes the reduction or elimination of both tariffs and non-tariff barriers. Trade in services covers the flow of services and investment, as well as the movement of individuals across nations. It is affected by variety of domestic regulations, among others the requirements of licensing and certifications, which differs according to the services industry in the economy. Hence, liberalisation of trade in services normally takes more probing, in order to ensure that these domestic regulations support rather than impede the developments of services sectors. While the trade in goods have a more direct approach, and covers the imports and exports of goods.

The process of liberalisation usually went through these 3 main channels:

a) Autonomous or unilateral measures undertaken by individual nation such as reduction of import tariffs and liberalisation of certain services subsectors through the Government Annual Budget. This is done voluntarily without reciprocal commitments from trading partners;

b) Multilateral liberalisation is normally done through World Trade Organization (WTO) commitments such as General Agreement on Tariffs and Trade (GATT) for trades in goods, and General Agreement on Trade in Services (GATS) for trade in services. All WTO members are given an equal treatment based on “non-discriminatory principle”; or

c) Preferential market access between 2 or more countries through bilateral or regional Free Trade Agreements (FTAs). Parties to the FTAs reduce their border measures such as tariffs and other domestic restrictions such as licensing requirements. An example of bilateral FTA is the Malaysia-Australia FTA and while regional FTA is the ASEAN Framework Agreement on Trade in Services (AFAS).

The WTO which was established in 1995, is the inter-governmental organisation that managed the GATT and GATS trade agreement between countries. By the end of 2015, WTO consists of 162 member countries that accounts for about 97% of total world trade. The underlying principle of WTO is the non-discriminatory principle of Most Favoured Nation (MFN) treatment and national treatment. MFN treatment requires the foreign goods (or imports) or service supplies of all nations be treated equally, while national treatment requires the domestic goods or domestic service supplies be treated equally when they entered into commerce in a country. In the case of domestic regulations for services, national treatment requires certain domestic regulations be applied the same ways between both domestic and foreign services.

GATS provides rules governing trade in services, which establishes a mechanism for members to liberalise their services sectors and provides a mechanism for resolving disputes between countries. There are two main objectives in GATS, which are to ensure all members are provided with equal treatment when entering foreign markets, and to promote progressive liberalisation of services trade. GATS bind the commitments of the WTO country members towards market liberalisation in various services sectors and subsectors, as stipulated in the countries’ schedules of commitments.

The GATS are based on the same principle in ensuring a fair and equitable treatment and promoting trade and development through progressive liberalisation of services trade. Services negotiations started on 1 January 2000, as mandated under Article XIX of GATS. The GATS mandates WTO member economies to progressively liberalise their services trade through successive rounds of trade negotiations. At the launching of Doha Round on November 2001, trade in services has become an integral part with four main areas of negotiations which includes:

a) Market access by removing or easing market conditions for trade in services through “request-offer” process. The requests and offers are made on improvement-related treatments for services, and service suppliers of those WTO members involved;

b) Domestic regulations to ensure that measures relating to qualification requirements and procedures, technical standards and licensing requirements do not constitute unnecessary barriers to services trade;

c) GATS rules on Emergency Safeguard Measures (ESM) in the event that service suppliers faced with unexpected adverse developments arising from members’ obligations under the GATS. Other areas of rules include government procurement and subsidies; and

d) Participation of developing countries in which WTO members in 2011 have adopted a waiver to allow preferential treatment for services, and service suppliers from least-developed countries.

The Doha Round negotiations that includes trade in services are still on going. Since the launch of Doha Round in 2001, 71 initial and 31 revised market access offers have been submitted by WTO members. To increase participation of developing countries in the negotiations, 17 WTO member countries have committed to provide preferential treatment to least-developed countries’ services and service suppliers.

Realising the limited progress of Doha Round negotiations since it was launched 15 years ago, most member countries have been focusing on FTA negotiations through regionally or bilaterally since the results are more tangible and faster. This is evidenced by the proliferation of FTAs around the world. By the end of 2015, about 284 FTAs has been established, of which 139 of these FTAs covers trade in services agreements.

Autonomous Liberalisation of Services SectorsUnilateral or autonomous liberalisation has become one of the important channels in liberalising services sector. Through autonomous liberalisation, Malaysia has gradually opened several services subsectors with the main objectives of improving quality, standards, and competitiveness. The government has identified 27 services subsectors since April 2009 to be autonomously liberalised and subsequently attract foreign investments, acquire more professionals, and enhance the transfer of technology. In 2012, the government has begun to implement partial or complete lifting of foreign equity restrictions in 6 services sectors, namely professional services; communications services; distribution services, educational services, environmental services; and health-related and social services.

In 2015, Government has developed a “Services Sector Blueprint” to accelerate the developments in the services sector. The blueprint facilitates structural adjustment across the services sector by internationalisation of service providers, effective investment incentives, enhancing human capital development and promoting integrated sectoral governance reform. This blueprint also serves as a guide for the development of services sector under 11MP from 2016-2020, mainly on the subsectors of halal, tourism, private higher education, private healthcare, financial services, wholesale and retail, professional services, and construction.

Multilateral Liberalisation of GATSGATS is the first multilateral agreement covering trade in services and were first negotiated during Uruguay Round. It came into force in 1995 together with the establishment of the WTO.

Malaysia has been a WTO member since 1 January 1995 and prior, a member of GATT since 24 October 1957. Malaysia has participated actively in the regular work of the WTO as well as in the Doha Round negotiations. Malaysia is a signatory to the GATS protocols on telecommunications (Fourth Protocol) and Financial Services (Fifth Protocol). Under the Uruguay Round negotiations, Malaysia has committed

SERVICES TRADE LIBERALISATION IN MALAYSIA



106 107Services Trade Liberalisation in MalaysiaServices Trade Liberalisation in Malaysia

to liberalise 7 services sectors, which comprise of business services, communication, construction and related-engineering, financial, health, tourism and travel, and transport.

Under the Doha Round services negotiations, Malaysia submitted its initial offer on services in 2005 and a revised offer in 2006. Trade liberalisation in services as presented in GATS has been followed by many other regional and bilateral FTAs. The supply of services is normally delivered through 4 modes of supply, namely:

Mode 1: Cross-Border SupplyCross-border supply refers to the supply of services from territory of one member into the territory of any other member. It involves cross-border movement of services without movement of service provider to the other country. Services such as consultancy or market research reports, telemedical advice, and long-distance learning delivered to consumers abroad through telecommunications or communication technologies falls under this category.

Mode 2: Consumption AbroadConsumption abroad refers to supply of services in the territory of one member country to the service consumer of any other member countries. This mode of supply requires the movement of consumer from one country to the other country in order to acquire the services. Examples include when a Malaysian travel abroad as a student to receive education services or as a tourist to consume tourism or recreational services.

Mode 3: Commercial PresenceCommercial presence refers to supply of services by supplier of one member country through commercial presence in the territory of another member country. An example of this mode is the service provided within Malaysia by a locally established affiliate through joint venture, subsidiary or representative office of a foreign-owned and/or controlled company. Foreign Direct Investment (FDI) also normally correspondent to Mode 3.

Mode 4: Movement of Natural PersonsMovement of natural persons refers to supply of services by individual present temporarily in the territory of another member country to supply services. For examples, a foreign national provides a service within Malaysia as an independent supplier such as a consultant or a nurse, or as an employee of a foreign company.

According to Article IV of AFAS, ASEAN member countries are required to enter into negotiations on measures affecting trade in specific service sectors, and the results are to be set out in schedules of commitments. The results of negotiations are formalised as Packages of Schedules of Commitments under the AFAS, which provide for details of liberalisation of the services subsectors where commitments

Regional Free Trade AgreementsMalaysia has also pursues other regional and bilateral FTAs. The focus of regional FTAs has largely been under the framework of ASEAN such as ASEAN Framework Agreement on Services (AFAS) and ASEAN with dialogue partners of China, Republic of Korea (South Korea), Japan, India, Australia and New Zealand. Malaysia has also signed its first non-ASEAN regional FTA through Trans-Pacific Partnership Agreement (TPPA) on 4 February 2016. For ASEAN-Japan Comprehensive Economic Partnership (AJCEP) Agreement, the trade in services for liberalisation has not explicitly been covered.

ASEAN Framework Agreement on Services (AFAS)ASEAN member countries developed and implemented the AFAS after recognising the growing importance of trade in services in the world economy. AFAS was initiated and signed by ASEAN Economic Ministers (AEM) on 15 December 1995 in Bangkok, Thailand with the aims to eliminate restrictions to services trade and enhance cooperation in order to improve the competitiveness, diversify production capacity, and supply and distribution of services of service suppliers within and outside ASEAN. This initiative came 2 years after the signing of Agreement on Common Effective Preferential Tariff Scheme (CEPT) of ASEAN Free Trade Area (AFTA) in 1993.

AFAS is also stated under the ASEAN Economic Community (AEC) Blueprint 2025, which was developed upon the AEC Blueprint 2007 and 2015, to build the dynamic process of economic integration and fast changing external environments within ASEAN. This was also in line to establish the economic integration by 2020 as inscribed in the AEC Blueprint in 2007. Nevertheless, the overall vision articulated in the AEC Blueprint 2015 remains relevant and continues to be pursued in advancing the services trade liberalisation agenda.

ASEAN member countries strived to substantially remove services trade restrictions to service suppliers in providing services and establishing companies across national borders within the region, subject to the respective countries’ domestic regulations. To facilitate the free flows of services, ASEAN is working towards removing all services sectors restrictions on 5 priorities of air transport, e-ASEAN, healthcare, tourism, and logistic services.

are made. The AFAS packages are implemented via protocols signed by the ASEAN Economic Ministers (AEM). ASEAN has so far concluded 9 packages, in which each succeeding package contributes to progressively deeper level and wider coverage of services sectors for substantial elimination of services trade restrictions. The 9 packages of commitments in the services sectors are listed on Table 5.1.

Table 5.1 Sector Covered under AFAS Negotiations

Year Date and Place Signed Services Sector Covered

1st package2nd package3rd package4th package5th package

6th package

7th package

• financial • maritime transport• telecommunications• air transport• tourism• construction• business

• business and professional • telecommunications• construction • distribution • education• environmental• healthcare• tourism • recreational, cultural and sporting• maritime transport• other (skills training)• computer and related services• financial

• business and professional • computer and related • research and development • rental/ leasing services without operator• advertising• telecommunications • construction• distribution • education• environmental• healthcare• tourism• recreational, cultural and sporting• maritime transport• other (skills training)

15 December 1997, Kuala Lumpur, Malaysia16 December 1998, Hanoi, Vietnam31 December 2001 (ad-referendum signing)3 September 2004, Jakarta, Indonesia8 December 2006, Cebu, Philippines

19 November 2007, Singapore

26 February 2009, Cha-am, Thailand



108 109Construction Sector LiberalisationServices Trade Liberalisation in Malaysia

Year Date and Place Signed

FTAs Signed

Services Sector

GATS

AFAS

Japa

n

ASEA

N-AU

S/NZ

New

Zea

land

TPPA

Paki

stan

ASEA

N-Ko

rea

Indi

a

ASEA

N-Ch

ina

Aust

ralia

Services Sector Covered

Year Signed

Regional FTAsWTO

Year Enter Into Force

Bilateral FTAs

8th package9th package

• computer and related services• tourism• hospital • construction• professional • research and development • rental and leasing• telecommunications• distribution • education• environment• transport

28 October 2010, Hanoi, Vietnam27 November 2015, Makati City, Philippines

Multilateral Trade AgreementGeneral Agreement on Trade in Services (GATS)

Regional FTAASEAN Framework Agreement on Services (AFAS)ASEAN-China Trade in Services Agreement (ACTISA)ASEAN-Korea Trade in Services Agreement ASEAN-Australia-New Zealand Free Trade Agreement (AANZFTA)ASEAN-India Trade in Services AgreementTrans-Pacific Partnership Agreement (TPPA)

Bilateral FTAMalaysia-Japan Economic Partnership Agreement (MJEPA)Malaysia-Pakistan Closer Economic Partnership Agreement (MPCEPA)Malaysia-New Zealand Free Trade Agreement (MNZFTA)Malaysia-India Comprehensive Economic Cooperation Agreement (MICECA)Malaysia-Australia Free Trade Agreement (MAFTA)

Business Communication Construction and related engineeringDistribution Education Environmental Financial Heath related and social Tourism and travel related Recreational, cultural and sportingTransport Other services

•••

••••••

••••••••••••

••••••••••••

••••••••••••

••••••••••••

••••••••••••

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•

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1994

199520072007200920142016

20052007200920102012

1995

199520072009201020142018

20062008201020112013

Source : ASEAN Secretariat, 2015

Source : Ministry of International Trade and Industry (MITI)

Source : World Trade Organization (WTO) Ministry of International Trade and Industry (MITI)

Bilateral Free Trade Agreement (FTA)Malaysia has also signed 7 bilateral FTAs with Japan, Pakistan, New Zealand, India, Chile, Australia, and Turkey. The liberalisation of services in trade has not

Malaysia has undertaken services commitments in majority of its FTAs. As of 2016, 5 FTAs incorporating services commitments have entered into force (Malaysia-Japan, Malaysia-Pakistan, Malaysia-New Zealand, Malaysia-India, and Malaysia-Australia). At the regional level, the 8th Package of Commitments of AFAS was completed and entered into force in 2010,

been covered under the Malaysia-Chile and Malaysia-Turkey FTA. Table 5.2 shows the bilateral and regional trade in services agreements signed by Malaysia until 2016.

while the 9th package has already been signed in 2015. Additionally, a protocol to implement the Second Package of Specific Commitments under the ASEAN-China Trade in Services Agreement was adopted in 2011. Beyond GATS, the coverage of services sectors under the FTAs signed by Malaysia is listed on Table 5.3.

Table 5.2 Trade in Services’ Agreement Signed by Malaysia

Table 5.3 Services Commitments in Malaysia’s Free Trade Agreements

The scope of liberalisation for construction services is classified in the “Services Sectoral Classification List” of WTO as “Construction and Related Engineering Services”. This classification is in accordance with the United Nations Central Product Classification (CPC) of services with CPC codes of 511-518. This classification excludes architectural and engineering services under CPC codes 8671, 8672, 8673, and 8675 as these services are within the scope of professional services. Under GATS, construction and related engineering services cover the physical work listed as follows:

a) CPC 511 – pre-erection work at construction siteb) CPC 512 – construction work for buildingc) CPC 513 – construction work for civil engineering d) CPC 514 – assembly and erection of prefabricated constructione) CPC 515 – special trade construction workf) CPC 516 – installation work g) CPC 517 – building completion and finishing workh) CPC 518 – renting services related to equipment for construction on demolition of or civil engineering work, with operator.

The GATS and majority of Malaysia FTAs explicitly define trade in services in terms of the 4 modes of supply: cross-border supply (mode 1), consumption abroad (mode 2), commercial presence (mode 3), and

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movement of natural persons (mode 4). GATS use these modes of supply for scheduling purposes, which also called the “Schedules of Specific Commitments” that becomes an annex to GATS and FTAs. It covers 2 types of commitments:

a) Horizontal Commitments: Commitments that apply to all sectors. For Malaysia, horizontal commitments normally cover mode 3 (e.g. acquisition, merger, and take-over) and mode 4 (e.g. intra-corporate transferees), which also to mean that they also cover construction and related engineering services.

b) Specific Commitments: Commitments that apply to specific sectors such as construction and related engineering services. For example, mode 3 commitments related to entry of foreign contractor through representative offices, regional offices, or joint venture companies incorporated in Malaysia, subject to foreign equity not exceeding 30%.

Malaysia’s commitments under the construction services agreement cover only supply under modes 3 and 4 because supply of construction services cannot take place under modes 1 and 2. Out of the total agreement on trade in services, all agreements offers commitments under the construction and related engineering services (Table 5.3).

Commitments under General Agreement on Trade in Services (GATS)Under mode 3 for the construction sector, Malaysia is committed with the supply of services through commercial presence. Malaysia allows the entry

The schedule of Malaysia’s Horizontal Commitment section is applicable to all services sector which have commitment under GATS, including the construction sector (Appendix 5.1a). Under mode 4, the Horizontal Commitment outlines the entry of foreign individuals, which is allowed through intra-corporate transfer or individual entry are as follows.

a) Intra-Corporate Transfer (i) Company’s Senior Managers

Individuals involved in the company senior management and decision-making are allowed to work in Malaysia for a period not exceeding 5 years.

(ii) Company’s Foreign ExpertsA total of 2 experts conversant with the company management and products are allowed to work in Malaysia. An additional number of experts to Malaysia will only be allowed provided that there is a transfer of expertise to the local workers in the construction sector. In addition, these individuals must have served the organisation abroad for not less than 1 year. They are allowed to stay in Malaysia for a period not exceeding 5 years.

b) Individual Entry (i) Construction Experts

Construction experts who are highly knowledgeable in specific construction products and services are allowed to operate in Malaysia provided that they appoint or train local worker in specific expertise. These individuals are permitted to work in Malaysia for a period not exceeding 5 years.

(ii) Construction Professionals’Professionals in construction sector such as engineers, architects, quantity surveyors and others are allowed to work in Malaysia provided that their expertise is recognised by Malaysia professional bodies. These individuals are permitted to operate in Malaysia for a period not exceeding 5 years.

(iii) Business Visitors Business visitors who do not receive payment from the financial resources in Malaysia are allowed for business negotiation purposes. These individuals are allowed to stay temporarily in Malaysia for a period not exceeding 90 days.

of foreign contractors through representative offices, regional offices, or joint venture companies incorporated in Malaysia, subject to foreign equity not exceeding 30% (Table 5.4). This means that companies with foreign equity not exceeding 30% will be treated as local contractors. In contrast, companies with foreign equity ownership exceeding 30% will be treated as foreign contractors. Contractors which are incorporated abroad are also being treated as foreign contractor.

GATS commitments which took effect in 1995 are not applicable to foreign contractors who have been in Malaysia prior to GATS. These foreign contractors have been treated as local contractors and continue to be permitted to operate with local status as long as there are no changes in their equity ownership. In the event of changes in equity ownership, the status of these contractors will be reviewed based on the commitments under GATS.

Local contractors are allowed to undertake construction projects in Malaysia with valid CIDB registration. On the other hand, foreign contractors who wish to bid for construction tenders are required to apply in advance to CIDB for temporary registration. Foreign contractors incorporated abroad must be registered with Companies Commission of Malaysia (CCM) before applying for registration with CIDB. Registration is granted on a project-by-project basis and is valid only for the period required to build and complete the project. This provides the opportunity for foreign contractors to execute construction projects in the domestic market.

Commitments under ASEAN Framework Agreement on Services (AFAS) From 2008 to 2015, ASEAN members undertook their services liberalisation commitments based on the targets outlined in the ASEAN Economic Community (AEC) Blueprint. The 9th Package of AFAS schedules of commitments ASEAN members were signed on 27 November 2015 in Makati City, the Philippines.

Under the 9th Package, Malaysia maintained its commitment as in 8th package for construction services in which foreign equity in a joint venture will not exceed 51% for ASEAN countries. This means any joint venture company incorporated in Malaysia with ASEAN equity stake of not exceeding 51% is granted with local contractor status provided there is no other foreign equity. The involvement of any foreign equities other than ASEAN in a joint venture will automatically be subjected to the GATS agreement. Entry of individuals from ASEAN countries to Malaysia is subject to the Horizontal Commitment under GATS.

Brunei maintained its market opening commitment for construction sector under the 9th package for the establishment of joint venture construction companies where capital contribution from other ASEAN countries are allowed up to the maximum equity of 55%. Individuals such as managers, executives, and experts through intra-corporate transfer are allowed to stay in Brunei for a maximum period of between 3 and 5 years.

Cambodia’s construction sector is relatively new and there is no limit on market entry for ASEAN countries to establish the construction companies in Cambodia. The requirements for entry of individuals from ASEAN countries into Cambodia are as follows:

a) Individuals involved in the establishment of business are not subject to the maximum stay limit in Cambodia; and

b) Executive, managers and experts through the intra-corporate transfer are allowed to stay up to 2 years and may be given extension of up to a maximum of 5 years.

Compared to the schedule of commitments under the 8th package, Indonesia has made improvements under the 9th package. Key improvements include 15 new subsectors. These improvements however, have not included construction services. The existing

Services Limitation on Market Access Limitation on National Treatment

Construction and related engineering services

(CPC 511, 512, 513, 514, 515, 516, 517)

Unbound due to lack of technical feasibility

None

None

Unbound except for categories of natural person referred to under market access.

Unbound due to lack of technical feasibility

None

Only through a representative office, regional office or locally incorporated joint-venture corporation with Malaysian individuals or Malaysian-Controlled corporation or both and aggregate foreign shareholding in the joint-venture corporation shall not exceed 30%

Unbound except as indicated in the horizontal section

Table 5.4 Malaysia’s Commitments under GATS for Construction Sector

Source : World Trade Organization (WTO)




commitment stipulates that the establishment of a representative company in the country is valid for 3 years with provision for extension of the period. Joint venture construction companies with capital contribution from other ASEAN countries must not exceed 55%. Entry of individuals such as directors, managers, technical experts or advisors from ASEAN countries into Indonesia is allowed for 2 years, and may be given two extensions for 2 years each. Entry of managers and technical experts through intra-corporate transfer is allowed subject to the current needs of the Indonesia economy. Business visitors from ASEAN countries are allowed for a temporary stay up to 60 days which may be extended to another 120 days.

Meanwhile, Lao PDR has made a key improvement under the 9th package by relaxing the minimum 30% of equity investment by ASEAN countries in a joint venture construction companies. The entry of individuals from ASEAN countries into Lao PDR is fully subject to the approval by its government.

Myanmar has an open construction market to ASEAN countries through 100% foreign capital on business permitted by the commission; and joint venture between ASEAN countries and Myanmar citizens through agreement by both parties. Individuals from ASEAN countries comprising of professional managers and technical experts are allowed to stay in Myanmar for a period of 1 year which can be extended.

The Philippines requires 40% of equity ownership from ASEAN countries for implementation of private sector projects financed by local funds. The equity ownership of ASEAN countries is allowed for 100% for projects financed by foreign funds or through international bidding.

Singapore provides a free market access under mode 3 which is in line with its open economic policy. Managers, executive and experts from ASEAN countries entering through intra-corporate transfer are allowed for a stay period of not less than 1 year and maximum of 2 years. An extension may be granted for an additional 3 years with a total period not exceeding 8 years.

Thailand maintains its AFAS commitment by allowing the entry of foreign contractors from companies

improvements to the existing commitments by allowing the entry of China contractors through representative offices, regional offices or joint venture companies incorporated in Malaysia with equities of not exceeding 30%. The improvements include allowing China construction companies to carry out projects jointly with local contractors on project-by-project basis with the condition that the construction projects must be wholly financed by foreign investment, and/or financed by loans from international tenders.

For China construction services, Malaysia’s contractors to China are permitted to undertake 4 types of projects under mode 3:

a) Construction projects wholly financed by Malaysia’s investment or grants;b) Construction projects financed by loans of

international financial institutions and awarded through international tendering process;

c) Joint China-Malaysia construction projects with Malaysia’s equity of 50% or more; ord) Malaysia’s equity of less than 50% is allowed if the

projects that are difficult to be implemented by China’s construction companies, but is subject to approval by the provincial government.

The entry of Malaysian individuals into China under mode 4 is subject to the following commitments:

a) Entry via intra-corporate transfer is allowed for managers, executives, and construction experts with a maximum of 3 years;

b) Managers, executives, and construction experts that are engaged in the Malaysian construction companies in China are allowed for a long-stay permit as stipulated in the terms of contracts or an initial stay of 3 years whichever is shorter;

c) Entry of Malaysian individuals to perform a service contract of employers to Chinese consumers provided that employers have no commercial presence in China. Their duration of stay depends on duration of contract but not exceeding 1 year; and

d) Entry of Malaysian individual to perform installation or maintenance work subject to duration of stay of the contract but not exceeding 3 months.

Horizontal and Specific Commitments by Malaysia and China are shown in Appendix 5.3a and Appendix 5.3b respectively.

of ASEAN countries with foreign equity ownership not exceeding 49%. It is committed to the entry of individuals from ASEAN countries under the category of business visitor only. These individuals are allowed to stay temporarily for 90 days with an extension of not more than 1 year.

Vietnam began to allow the establishment of branches of construction companies from ASEAN countries from 2010, but requires the head of the branches to be a resident in Vietnam. The entry of managers and technical professional is allowed only if such individuals are unavailable in Vietnam. The entry of foreign individuals from ASEAN countries under the category of managers, executive and experts through intra-corporate transfer is allowed with an initial stay period of 3 years. Extension may be granted but is subjected to the company operations in Vietnam. In addition, 20% of the managers, executive and specialists in the joint venture companies must be Vietnamese citizens. Vietnam also allows a minimum of 3 individuals to be brought in for each company as manager, executives and foreign experts.

Horizontal and Specific Commitments of ASEAN countries on AFAS are shown in Appendix 5.2.

Commitments under ASEAN-China Trade in Services Agreement (ACTISA)The negotiations between ASEAN member countries and China were initially started with the Framework Agreement for Comprehensive Economic Co-Operation on November 2002 during the 6th ASEAN-China Summit. This subsequently led towards the ASEAN-China Trade in Services Agreement (ACTISA), which was signed by the Economic Ministers from ASEAN member countries and China on January 2007. The market access commitments of ACTISA are contained in the First Package of Specific Commitments on the Agreement. The ACTISA provides liberalisation on substantial coverage of more than 60 additional subsectors committed by ASEAN member countries.

The Second Package of Specific Commitments of ACTISA was signed on 16 November 2011 in Bali, Indonesia. The second package further liberalises trade in services among the ten ASEAN member countries and China with substantial improvement in their level of commitments on trade in services. Under the second package of ACTISA, Malaysia has made

Commitments under ASEAN-Korea Trade in Service AgreementUnder the ASEAN-Korea FTA, the first packages of commitments ASEAN-Korea Trade in Services Agreement was signed on 21 November 2007 by 8 ASEAN countries of Malaysia, Brunei, Cambodia, Indonesia, Lao PDR, Myanmar, Singapore and Vietnam. The commitments of the ASEAN countries are based on the scope of offers under 4th package of AFAS and therefore, are actually less comprehensive than the later AFAS packages.

Under the ASEAN-Korea Trade in Services Agreement, Malaysia retains the existing commitments given under GATS, i.e. allowing the entry of Korean contractors through representative offices, regional offices or joint venture companies incorporated in Malaysia and foreign partnership equity holding in the joint venture not exceeding 30%. The entry of Korean individuals into Malaysia for supply under mode 4 is subject to Malaysia Horizontal Commitments under GATS.

There is no limit for market entry (mode 3) of Malaysian contractors to Korea. Under mode 3, the Korean Horizontal Commitments only describes the limit of foreign equity ownership in Korean domestic companies for specific areas such as energy and aviation related companies. However, the market entry could be imposed to Malaysian investors with the establishment of new companies in Korea. Korea stipulates that the land ownership for supply of services and placement of Malaysian individuals are subject to the relevant laws. The eligibility for subsidy and tax may be limited to companies incorporated in Korea, subject to the existing Korean laws. Entry of Malaysian individuals into Korean under mode 4 is subject to the following commitments:

a) Entry via intra-corporate transfer is allowed for executive, senior managers and construction experts with a maximum stay of 3 years in Korean. This period may be extended subject to the stipulated appointment conditions;

b) Malaysian business visitor and services provider salesperson are allowed to stay in Korean for 90 days; and

c) Contractual services providers without commercial presence in Korean, and which receive payment from Malaysia financial resources are allowed to stay in Korean for duration of the contract and not exceeding 1 year.




Horizontal and Specific Commitments by Malaysia and Korea are shown in Appendix 5.4a and Appendix 5.4b respectively.

Commitments under ASEAN–Australia–New Zealand FTA (AANZFTA)The AANZFTA was signed by the ministers of ASEAN member countries, New Zealand and Australia on 27 February 2009 in Thailand and entered into force on 1 January 2010. Under AANZFTA, Australia does not impose market access limit or country treatment limit on ASEAN countries and New Zealand to Australia. Ownership of partnership or joint-venture foreign companies in Australia is subject to Australia domestic regulations, the Foreign Acquisitions and Takeovers Act 1975 (FATA) which require notification and prior approval of the Australian Government for the following cases:

a) Ownership of foreign companies through acquisition of total assets of A$50 million and more;b) Establishment of new foreign companies for total investment of A$10 million and more; c) Foreign government direct investment or through its department, regardless of investment size; ord) Property ownership in urban areas that is subject to categories, value of asset and heritage list.

Australia also stipulated at least 2 company directors must be Australian citizens. Malaysia and New Zealand provide the same commitments as those of the MNZFTA to the AANZFTA with additions of mode 4 as follows:

a) Malaysia allowed company’s senior managers, decision-making executives and 2 individual experts from New Zealand and Australia to stay for a period not exceeding 5 years; and

b) New Zealand is increasing its commitments by allowing entry of executives from Malaysia through intra-corporate transfer rather than limiting it to senior managers and specialists under MNZFTA. Length of allowed stay is a maximum of 3 years.

Conversely, Australia allows entry of foreign individuals under the AANZFTA with conditions such as:

a) Foreign executive and senior managers through the intra-corporate transfer are allowed to remain in Australia for up to 4 years. This period is subject to

Entry of Malaysian individuals into India under mode 4 is subject to the following conditions:

a) Business visitors are granted temporary entry for up to 180 days;b) Entry via intra-corporate transfer is allowed for

senior managers and construction experts for a total term not exceeding 5 years; and

c) Independent professionals for temporarily short periods of stay, is allowed up to 12 months, with a possible extension of a maximum of 3 months.

Horizontal and Specific Commitments by Malaysia and India are shown in Appendix 5.6.

Commitments under Trans-Pacific Partnership Agreement (TPPA)The Trans-Pacific Partnership Agreement (TPPA) was developed from the Trans-Pacific Strategic Economic Partnership (P4), an agreement originally created by Brunei, Chile, Singapore, and New Zealand in 2005. The membership expanded as negotiations began in 2010 and concluded on 5 October 2015 with 12 countries

The services trade is covered under the Cross-Border Trade in Services, Chapter 10 of TPPA, which is substantially different than the schedules of services trade commitments typically crafted under previously signed GATS and FTAs. The Cross-Border Trade in Services covers 4 core obligations:

an extension of up to a maximum of 14 years; b) Construction experts are allowed to stay up to 2 years with provision for extension of the period;c) Independent executive are allowed to stay in Australia for a maximum of 2 years;d) Business visitors for a service provider or

salesperson are allowed to stay for a minimum of 6 months and a maximum of 12 months;

e) Business visitor for the purpose of business negotiation, investment and sales negotiation are allowed to stay up to a maximum of 3 months;

f) Independent services provider is allowed to stay up to 12 months with a provision for extension; andg) Entry and stay in Australia for the spouse is the same as for the foreign individuals.

Horizontal and Specific Commitments by Malaysia, Australia and New Zealand on AANZFTA are shown in Appendix 5.5.

Commitments under ASEAN-India Trade in Services AgreementThe ASEAN-India Trade in Services Agreement was concluded and signed by the 10 ASEAN member countries and India under the Framework Agreement for Comprehensive Economic Cooperation on September 2014. Malaysia has made improvements to the existing commitments by allowing the entry of foreign contractors through representative offices, regional offices or joint venture companies incorporated in Malaysia and foreign partnership, with not more than 30% in equity. Among the improvements was by allowing foreign construction companies to carry out projects jointly with local contractors on project-by-project basis, provided that the:

a) Projects will be wholly financed by foreign investment and/or financed by loans of international tenders; or

b) Projects with foreign investment of 50% or more and when local expertise is not available.

For India, the mode 3 offer on construction services under ASEAN-India Trade in Services Agreement is less substantial than bilateral agreement of MICECA. Under the new agreement, Malaysia’s equity is limited to 51% compared to 74% under MICECA. This limit in equity is subject to the condition that the Malaysian investors must have prior collaboration in that specific service sector in India. This also requires Foreign Investment Promotion Board’s (FIPB) approval.

on board, specifically Australia, Brunei Darussalam, Canada, Chile, Japan, Malaysia, Mexico, New Zealand, Peru, Singapore, United States, and Vietnam. TPPA was officially signed on 4 February 2016 in New Zealand. Based on the United Nations statistics, these countries represent about 28.6% (USD5.2 trillion) and 24.5% (USD4.4 trillion) of the world total imports (USD18.2 trillion) and exports (USD17.9 trillion) in 2014.

TPPA aims to promote a comprehensive market access commitment through eliminations or reductions of tariff and non-tariff barriers across substantially all trade in goods and services and covers the full spectrum of trade, including goods and services trade and investment. The TPPA includes 30 chapters covering traditional trade and trade-related issues such as trade in goods; sanitary and phytosanitary measures; technical barriers to trade; trade remedies; investment; services; and electronic commerce as well as new issues like government procurement; competition policy; intellectual property; labour; and environment (Table 5.5).

a) National treatment, providing that no country can discriminate in favour of its own service suppliers;b) Most favoured nation treatment that provides all

TPPA countries must be treated equally in terms of the obligations;

Traditional Issue New Issue Cross-Cutting Obligation

1. Initial provisions and general definition22. Competition and business facilitation23. Development24. Small and medium enterprises25. Regulatory coherence26. Transparency27. Administration and institutional provisions28. Dispute settlement29. Exemptions30. Final provisions

15. Government procurement16. Competition policy17. State-Owned Enterprises18. Intellectual properties19. Labour20. Environment

2. Trade in goods3. Textiles and apparel4. Rules of origin5. Customs administration and trade facilitation6 Sanitary and phytosanitary (SPS)7. Technical barriers to trade (TBT)8. Trade remedies9. Investment10. Cross-border trade in services11. Financial services12. Temporary entry for business persons13. Telecommunications14. Electronic commerce21. Cooperation and Capacity Building

Table 5.5 Chapters of the Trans-Pacific Partnership Agreement (TPPA)




116 117Construction Sector Liberalisation Construction Sector Liberalisation

c) Market access, which provides that no country can impose restrictions on the service suppliers or specific type of legal entity or joint venture; and

d) Local presence that provides no country may require a foreign supplier to establish an office or affiliate, or to be resident, in its territory in order to supply the service.

The market access commitments in TPPA are presented on a “negative-list” basis, which means that

TPPA substantially covers all services sectors except for reservations of measures and sectors that are presented in two annexes to the TPPA text:

a) Annex I consists of a list of current measures that violate 1 or more of the core obligations which are put as “reservations” (or exemptions). Under these reservations, a country can maintain these policies but must “standstill” them to ensure they will not become more restrictive in the future. An example for Malaysia includes foreign equity of not more than 30% in a joint-venture between Malaysian and foreign companies; and

b) Annex II consists of a list of current measures that enable a country to have full discretion to maintain existing non-conforming measures or adopt new restrictions in the future without any legal consequences of violating the core obligations. An example includes assistance to Bumiputera for the purpose of supporting Bumiputera participation in the Malaysian market.

The aim of Cross-Border Trade in Services chapter is to ensure that TPPA countries develop and administer measures in a fair and reasonable manner, while fully recognising the flexibility and right to regulate and

sector, except measures generally applicable to all sectors. The reservations include:

a) Overseas Private Investment Corporation (OPIC) programs which are available to foreign enterprises and foreign owned or controlled domestic enterprises depends upon the extent of US ownership or participation, as well as the form of business organisation. OPIC insurance and loan guaranties are available only to eligible investors, which are:

(i) The US citizens; (ii) Corporations, partnerships, or other

associations, including non-profit associations, created under the laws of the US, any state or territory thereof, or the District of Columbia, and substantially beneficially owned by the US citizens; or

(iii) Foreign partnerships or associations 100% owned, or foreign corporations at least 95% owned, by one or more such US citizens, corporations, partnerships, or associations.

b) Requirement of in-state office for the state of Michigan.

In general, Canada maintains its commitments under GATS together with reservations in the non-confirming measures annexes. Canada reservations on construction services that include all relevant rules under investment related acquisition of control, which depends on:

a) Effect of the investment on the level and nature of economic activity in Canada, including the effect on employment, on the use of parts, components and services produced in Canada and on exports from Canada;

b) Degree and significance of participation by Canadians in the investment;c) Effect of the investment on productivity, industrial

efficiency, technological development and product innovation in Canada;

d) Effect of the investment on competition within an industry or industries in Canada;e) Compatibility of the investment with national

industrial, economic and cultural policies, taking into consideration industrial, economic and cultural policy objectives enunciated by the government or legislature of any province likely to be significantly affected by the investment; and

all countries can have full access to their market except on certain services sectors or subsectors included in country-specific list of reservations or also called “non-confirming measures”. This is practically different than the GATS and other previously signed FTAs, which is presented on a “positive-list” approach. Unlike negative-list approach, a positive-list requires a party to list its commitments by sectors or subsectors, which a party has decided to commit for liberalisation (Table 5.6).

introduce new regulations for services trade.

Under TPPA, Malaysia puts the reservations (non-conforming measures) for cross-border trade in services and investment on construction and related engineering services that:

a) Only an entity incorporated in Malaysia registered with CIDB and locally incorporated through representative office, regional office, or joint-venture corporation with Malaysian individuals or Malaysian controlled corporation may be permitted to provide construction services;

b) Any entity incorporated in Malaysia in the forms of joint-venture or consortium with Malaysian individuals or Malaysian controlled corporations is subject to registration requirements by CIDB; and

c) The senior management and board of directors of each foreign entity should be of Malaysian majority with control over its management and investment.

From 11 of Malaysia’s TPPA with partner countries, only the US, Canada, and Peru that has yet to formalise the FTAs with Malaysia. The US does not impose any non-conforming measures on cross-border trade in services and investment specifically for construction

f) Contribution of the investment to Canada’s ability to compete in world markets.

Recognising the highly importance of government procurement in a country’s business, another obligation that is included in the TPPA on services trade is related to the government procurement policy. The Organisation for Economic Cooperation and Development (OECD) estimates that the value of government procurement in OECD countries represents approximately 12% of the country’s GDP and 29% of total government expenditure.

Government Procurement (GP) for Services Trade in TPPAThe Government Procurement (GP) chapter establishes general principles and detailed procedural requirements for compliance by TPPA parties including recourse on complaints and challenges against measures adopted by parties on their GP regimes. The GP chapter includes 2 core obligations:

a) National treatment, which requires any TPP party to provide bidders the same treatment like its own firms, and

b) Most favoured nation treatment, which requires a party to treat all parties equally. These obligations will ensure that governments do not discriminate against foreign suppliers when assessing tenders and in awarding procurement contracts.

However, there are exemptions in these obligations that do not apply to loans and grants or assistance from a government. For Malaysia, GP chapter does not cover construction services that are carried out to maintain or improve the existing slope (hillside surfacing) conditions through periodic maintenance; or to reconstruct or improve existing slopes or construct new slopes due to natural disaster, flood, landslide ground subsidence and other emergency and unforeseen circumstances. The aim of GP chapter is to ensure good governance through competitive, open, fair and transparent conditions for participation of TPPA suppliers in the GP process.

The market access on GP allow TPPA suppliers to access the parties’ GP market for procurement covered under the agreement, and to enable parties to achieve best value for money through competitive pricing and wider range of goods and services.

Negative-list Approach (TPPA) Positive-list Approach (Other Malaysia’s FTAs)

• Reservations are specified in Annex I and Annex II of the agreement (non-conforming measures).

• Sectors or subsectors that are not specified and listed in the Annex I and Annex II are considered opened for liberalisation.

• Only sectors or subsectors that are specified in the Schedules of Specific Commitments are to be liberalised.

• Sectors or subsectors that are not listed in the Schedules of Specific Commitments are considered to be excluded from liberalisation.

Table 5.6 Positive-list vs. Negative-list Approach of Services Trade Liberalisation





A major feature of the GP chapter is that governments must generally use an open tendering process for contracts above a certain threshold to ensure that government procurement is open to all suppliers. The commitments in the GP chapter only apply to procurement that each country has agreed to cover. The scope of GP in TPPA includes procurement of goods, services and construction services specified by procuring entities that include:

a) Central government entities (federal ministries and agencies); andb) Sub central government entities (state government

and local authorities); and other entities (statutory bodies and government companies).

Malaysia has committed that the value of the procurement to be equal or exceed the following relevant thresholds with a longer transition period up to a maximum period of 21 years for construction services (Table 5.7). Under TPPA, Malaysia reserves the right to grant Bumiputera (indigenous) status to eligible companies, based on the Bumiputera definition by the Government Procurement Policy. Malaysia has decided to set aside procurement of construction services contracts to Bumiputera, according to the threshold and price preferences as agreed (Table 5.7).

Country

Country

Transition Period (If applicable, year)

Transition Period (If applicable, year)

Procurement Threshold

Procurement Threshold

Malaysia

Australia

Brunei Darussalam

Canada

Chile

Japan

Mexico

New Zealand

Central Government entities• SDR63,000,000• SDR50,000,000• SDR40,000,000• SDR30,000,000• SDR14,000,000

Other Government entities• SDR63,000,000• SDR50,000,000• SDR40,000,000• SDR30,000,000• SDR14,000,000

Bumiputera

For TPP Party (% of price preference)Above RM500,000 – RM1.5 million (7%)Above RM1.5 million – RM5 million (5%)Above RM5 million – RM10 million (3%)Above RM10 million – RM15 million (2.5%)Above RM15 million (0)

For Non-TPP PartyAbove RM500,000 – RM1.5 million (3.5%)Above RM1.5 million – RM5 million (2.5%)Above RM5 million – RM10 million (1.5%)Above RM10 million – RM15 million (1.25%)Above RM15 million (0)

Central Government entities• SDR5,000,000

Sub central government entities• SDR5,000,000

Other government entities• SDR5,000,000












Central Government entities• USD$10,335,931

Other government entities• USD$12,721,740



1 – 56 – 1011 – 1516 – 2021

1 – 56 – 1011 – 1516 – 2021

Table 5.7 Government Procurement Thresholds for Construction Services




Note : Thresholds are quoted in IMF Special Drawing Rights (SDR). SDR1 = USD1.41 as of 16 April 2016

Country Transition Period (If applicable, year)Procurement Threshold

Peru

Singapore

United States

Vietnam








Central Government entities• SDR65,200,000• SDR32,600,000• SDR16,300,000• SDR8,500,000

Other government entities• SDR63,000,000• SDR55,000,000• SDR40,000,000• SDR25,000,000• SDR15,000,000

1 – 56 – 1011 – 1516

1 – 56 – 1011 – 1516 – 2021

Given the highly importance of government procurement policy on economic and social development objectives, it is imperative that developing countries including Malaysia retain the right to have greater flexibility over their procurement policy. In the case of Malaysia, the longer adjustment (transition) period up to 20 years is given for certain levels of procurement thresholds. In addition, Malaysia has also been given flexibility to grant certain percentages of the procurement contracts and preference margins to meet the Bumiputera socio-economic objectives as specified in the existing Government Procurement Policy.

c) Conduct procurement by electronic means or through other new information and communication technologies; and

d) Consider the size, design and structure of the procurement, including the use of subcontracting by SMEs.

Commitments of TPPA by selected member countries are shown in Appendix 5.7.

Commitments under Malaysia-Japan Economic Partnership Agreement (MJEPA)MJEPA was signed on 13 December 2005 and became effective on 13 July 2006. Under MJEPA, Malaysia has opened up the market access, in which Japanese equity that does not exceed 30% is treated as a local contractor. Contractor incorporated abroad are also allowed to undertake joint-venture project with Malaysian local companies based on project-by-project basis. In addition, implementation of a project on a subcontract basis must be awarded to local contractors and subject to the following criteria:

a) Financed wholly by Japanese fund through investments or grants;b) Financed by international loans;c) Financed by 50% foreign investment or more where local expertise is not available; ord) Financed wholly by local fund where local expertise is not available.

There is no restriction for the entry of Malaysian contractors into the Japanese construction market. However, the period Malaysian individuals are allowed to stay in Japan for the above service categories may be extended subject to the current requirements. For entry of Malaysian individuals into Japan, the country has committed as follows:

a) Short-term Malaysian business visitors whose financial resources are not from Japan are allowed a temporary stay not exceeding 90 days;

b) Entry of Malaysian individuals through intra-corporate transfer is allowed for a stay in Japan for a period not exceeding 3 years;

c) Malaysian professionals from legal, accounting, and taxation fields recognised under Japanese law are allowed to stay for a period not exceeding 3 years; and

TPPA also gives due recognition to the important of contributions of Small and Medium Enterprises (SMEs) to economic growth and employment. The GP chapter will facilitate the participation of SMEs in government procurement by making the rules and criteria for eligibility more transparent. To facilitate participation by SMEs in covered procurement, parties have agreed to:

a) Comprehensive procurement-related information that includes a definition of SMEs in a single electronic portal;

b) Make all tender documentation available free of charge;

d) Malaysian individuals involved in the supply of services based on individuals’ contract with public or private organisation in Japan are allowed to operate for not more than 3 years.

Entry of Japanese individuals into Malaysia under mode 4 is subject to Malaysia’s Horizontal Commitment under GATS.

Horizontal and Specific Commitments by Malaysia and Japan are shown in Appendix 5.8.

Commitments under Malaysia-Pakistan Closer Economics Partnership Agreement (MPCEPA)The Malaysia-Pakistan Closer Economic Partnership Agreement (MPCEPA) was signed on 8 November 2007 and came into effect in 2008. Through the MPCEPA, the Malaysian equity with not more than 49% holdings will be treated as a local contractor. Nevertheless, contractor incorporated abroad are allowed to undertake joint venture projects with Malaysian companies as per project basis and are subject the following criteria:

a) Financed wholly by Pakistani funds through investment of grants;b) Financed by international loans;c) Financed by 50% foreign investment or more where local expertise is not available; ord) Financed wholly by local funds where local expertise is not available.

In addition, project implemented on a subcontract basis must be awarded to local contractors. The entry of Pakistani individuals into Malaysia for mode 4 is subject to Malaysia’s Horizontal Commitments under GATS.

Pakistan’s commitment under the MPCEPA allows the entry of Malaysian contractors into Pakistan through the formation of a partnership or joint venture with a Pakistani engineering company. The establishment of this company is subject to the Engineering Council’s Construction and Operation of Engineering Works By-laws 1987 with Malaysian equity ownership limit of 60%. Entry of Malaysian individuals into Pakistan is as follows:




a) Entry via intra-corporate transfer is allowed for construction office managers, executives and experts with a maximum service of 3 years;

b) Malaysian businesses visitors are allowed to stay up to 6 months for business negotiation activities which receive payment from Malaysian financial resources. On the other hand, business visitors who are involved in the activities of installation, repair, monitoring, and maintenance that require specialised knowledge are allowed to remain in Pakistan up to 1 year;

c) Contractual service suppliers and professional individual are allowed to remain in Pakistan up to 1 year; and

d) Malaysian individuals who provide training in other skills in Pakistan are allowed to stay temporarily for a period of 30 days up to 1 year, subject to market study.

Horizontal and Specific Commitments by Malaysia and Pakistan are shown in Appendix 5.9.

Commitments under Malaysia-New Zealand FTA (MNZFTA)The MNZFTA was signed on 26 October 2009 and entered into force in 2010 after both countries settled their respective domestic procedures. Malaysia’s commitments under the MNZFTA are the same as those under the MPCEPA, where the Malaysian equity that does not exceeds 49% holdings will be treated as a local contractor. Nevertheless, contractor which are incorporated abroad are allowed to undertake joint venture projects with Malaysian companies based on project basis and are subject to the following criteria:

a) Financed wholly by New Zealand funds through investments or grants;b) Financed by international loans;c) Financed by 50% foreign investment or more where local expertise is not available; ord) Financed wholly by local funds where local expertise is not available.

For entry of individuals under supply mode 4, Malaysia has increased the existing commitment under GATS with the following conditions:

Commitments under Malaysia-India Comprehensive Economic Cooperation Agreements (MICECA)The MICECA was signed on 24 September 2010 and entered into force on 2011. In general, India has committed to allow Malaysian shareholding equity from 49% to 100% in 84 services subsectors, including in professional services, healthcare, telecommunications, retail and environmental services. In return, Malaysia has made commitments to allow Indian shareholding equity in 91 services subsectors.

Under the MICECA’s trade in services, Malaysia offers better market access commitments compared to what it has offered under GATS. This is by allowing the entry of Indian contractors through representative offices, regional offices or joint venture companies incorporated in Malaysia with equity holding in the joint venture partnership of not exceeding 51%. This offer is equivalent to offer made under 9th package of AFAS. The entry of Indian Individuals into Malaysia for supply under mode 4 is subject to the following commitments:

a) Business visitors are granted temporary entry for up to 30 days, and multiple entry visas for up to 5 years. A further extension of 30 days can be granted provided that the total period of stay shall not exceed 90 days;

b) Entry via intra-corporate transfer is allowed for senior managers and construction experts for an initial period of up to 2 years. The period of stay may be extended for period of up to 2 years at a time for a total term not exceeding 10 years for senior manager and not exceeding 5 years for specialists or experts; and

c) Entry of installer and servicer for duration of 3 months or the period of contract, whichever is less. The period of stay may be extended for another period of up to 3 months. Any further extensions may be considered.

For India, the supply of construction services under mode 3 requires the limit of foreign equity ownership, with a maximum of 74% Malaysian equity holdings in Indian domestic companies. It is also subject to the condition that the Malaysian investors must have prior collaboration in that specific service sector in India. This also requires Foreign Investment Promotion Board’s (FIPB) approval.

a) Length of stay in Malaysia for New Zealand individuals under intra-corporate transfer, expert individuals under intra-corporate transfer, expert individuals and professionals is increased from not exceeding 5 years to not exceeding 10 years;

b) The number of foreign experts through intra-corporate transfer is increased from 2 to 3 people per organisation. An additional number of experts may be allowed subject to the needs of the market in Malaysia; and

c) Additional commitments covering New Zealand individuals for installation and maintenance activities who are allowed to stay in Malaysia within a period not exceeding 6 months.

No limit is imposed on the entry of Malaysian contractors to New Zealand’s construction market. In addition, New Zealand has made improvements for mode 3, subject to the Overseas Investment Regulations 1985. Establishment of partnership or joint venture companies in New Zealand by Malaysian individuals is subject to capital of more than NZ$10 million. The establishment of such companies includes equity ownership or voting power by Malaysian individuals of 25% or more. On the other hand, the issue of land purchase by Malaysian individuals is subject to approval by New Zealand’s Land Settlement Promotion and Land Acquisition Act. Entries of Malaysian individuals into New Zealand are allowed with conditions, as follows:

a) Through intra-corporate transfer, senior managers and experts are allowed to stay a maximum period of 3 years;

b) Business visitors are allowed to stay temporarily for a period not exceeding 90 days in a calendar year;c) Malaysian individuals involved in installation and

maintenance activities are allowed to stay in New Zealand for a period not exceeding 3 months within 1 year; and

d) Independent service providers offering contractual service in New Zealand without commercial presence are allowed to stay for a period not exceeding 12 months and are subject to economic needs.

Horizontal and Specific Commitments by Malaysia and New Zealand are shown in Appendix 5.10.

Entry of Malaysian individuals into India under mode 4 is subject to the following commitments:

a) Business visitors are granted temporary entry forup to 180 days, and multiple entry visas for up to 2 years;

b) Entry via intra-corporate transfer is allowed for senior managers and construction experts on year to year basis for a total term not exceeding 5 years; and

c) Entry of installer and servicer for duration of 3 months or the period of contract, whichever is less. The period of stay may be extended for another period of up to 3 months or the period of contract, whichever is less.

Horizontal and Specific Commitments by Malaysia and India are shown in Appendix 5.11.

Commitments under Malaysia-Australia FTA (MAFTA)The MAFTA was signed on 22 May 2012 and came into force on 2013 after both countries settled their respective domestic procedures. Malaysia’s commitments under the MAFTA are the same as those under the MNZFTA, where the Malaysia’s equity of not exceeding 49% holdings in Australia is treated as a local contractor. Nevertheless, contractors which are incorporated abroad are allowed to undertake joint-venture projects with Malaysian companies on project-by-project basis and are subject to the following project criteria:

a) Financed wholly by Australian funds through investments or grants;b) Financed by international loans;c) Financed by 50% foreign investment or more where local expertise is not available; ord) Financed wholly by local funds where local expertise is not available; or

For entry of individuals under mode 4, Malaysia has increased the existing commitment under GATS with the following commitments:

a) Length of stay in Malaysia for Australian individuals under intra-corporate transfer, expert individuals under intra-corporate transfer, expert individuals and professionals is increased from not exceeding 5 years to not exceeding 10 years;



124 125Construction Services in Free Trade Agreements under Negotiations Impacts of Liberalisation on Malaysia Construction Market

b) The number of foreign experts through intra-corporate transfer is increased from 2 to 3 people per organisation. An additional number of experts may be allowed subject to the needs of the market in Malaysia; and

c) Additional commitments covering Australian individuals for installation and maintenance activities who are allowed to stay in Malaysia within a period not exceeding 6 months

Under MAFTA, no limit is imposed on the entry of Malaysian contractors into Australia’s construction market. In addition, Australia has made treatment for mode 3 subject to the Australian Foreign Policy guidelines. Australia’s Foreign Investment Policy guidelines are applied to foreign-owned or controlled enterprises after establishment in Australia. The guidelines require at least 2 directors of a public company must be resident in Australia. The establishment of partnership or joint venture companies in Australia by Malaysian individuals is subject to the following conditions:

a) Through intra-corporate transfer, senior managers and executives are allowed to stay a maximum period of 3 years with a provision of a maximum stay of 14 years;

Trade liberalisation is not a new phenomenon, and has been happening since 1947 when GATT came into place. Trade liberalisation is intensified with the creation of a ruled-based organisation of WTO in 1995. It is still too early to judge whether trade liberalisation could lead to positive or negative impacts on the domestic construction market. Nevertheless, local contractors must be prepared to face the challenges of liberalisation, as it will open up opportunities for foreign contractors to tap onto the domestic construction market. The issues of liberalisation include increased competition, domination of high level job opportunities, changes in government policies and sharing of specific skills in the domestic construction market.

Increased Competition in Domestic MarketOne of the main concerns by the local contractors from the FTA liberalisation is the increased competition in the domestic market. Construction sector liberalisation allows the entry of foreign contractors into domestic construction market which will test the capability of local contractors. A study in 2015 shows that 89% of the 54,355 local contractors in the construction sector came from SMEs. It is observed that the majority of foreign contractors entering the domestic market have the advantage of expertise, technology, and financial resources.

b) Specialists and independent executives are allowed to stay a maximum period of 2 years;c) Business visitors are allowed to stay temporarily for a period of 3 months; d) Independent service providers offering contractual

service in Australia without commercial presence are allowed to stay for a period not exceeding 12 months; and

e) Contractual service suppliers (including independent professionals/ specialists) are allowed for entry for periods of stay up to 12 months, with provision for an extension

Horizontal and Specific Commitments by Malaysia and Australia are shown in Appendix 5.12.

In addition to the FTAs which has been agreed and enforced, Malaysia continues to be involved in 5 bilateral and multilateral trade negotiations. The FTA entered into by Malaysia and those still under negotiation are detailed in Table 5.8.

Data from CIDB shows that the construction sector was valued at RM91 billion in 2010 and RM172 billion in 2014. The only comparable local grade contractors to foreign contractors, the grade G6 and G7 only stands at 7,795 contractors or 10.9% from the total number of registered contractors in 2015. Therefore, the entry of foreign contractors through the liberalisation of construction sector could results in loss of market shares for the local contractors in the domestic market. Local contractors could bear the negative effects by the intense competition with the entry of foreign contractors who have the advantage in term of capacity and capability.

However, as United Nations Trade and Development Conference on Trade and Development (UNCTAD) in 2005 study shows that the increased competition between firms in the domestic market will also create incentive for innovation. Innovation can be tapped through joint-venture, which enables local companies to gain experiences and skills as well as obtain financial resources to undertake large-scale construction projects that require high capital investments.

CONSTRUCTION SERVICES IN FREE TRADE AGREEMENTS UNDER NEGOTIATIONS IMPACTS OF LIBERALISATION

ON MALAYSIA CONSTRUCTION MARKET

Free Trade Agreement

Free Trade Agreement

Tentative Scope

Tentative Scope

Date of Commencementof Negotiations

Date of Commencementof Negotiations

Malaysia-European Union Free Trade Agreement (MEUFTA)

Trade Preferential System among the Member States of the Organisation of the Islamic Conference (TPS-OIC)

(25 Islamic countries)

ASEAN-EU Free Trade Agreement (AEUFTA)

Developing Eight (D-8) Preferential Tariff Agreement (PTA)

(Bangladesh, Indonesia, Iran, Malaysia, Egypt, Nigeria, Pakistan and Turkey)

Regional Comprehensive Economic Partnership (RCEP)

(ASEAN plus six)

2010

2010

2007

2006

• Trade in goods • Trade in services

• Trade in goods

• Trade in goods• Trade in services• Government procurement• Competition policy• Intellectual property rights• Labour rights• Environmental• Cooperation on trade-related issues• Dispute settlement mechanism

• Trade in goods

• Trade in Goods• Trade in Services• Investment• Economic and Technical Cooperation• Intellectual Property• Competition• Dispute Settlement

Table 5.8 Free Trade Agreement under Negotiations




126 127Impacts of Liberalisation on Malaysia Construction Market Impacts of Liberalisation on Malaysia Construction Market

Exploring New Market OpportunitiesOne of the main benefits of FTA market liberalisation is the market access opportunities. As the trade restrictions are removed or eased for tariffs and non-tariff barriers, the costs of doing business in foreign markets are practically lower. In the construction sector, joint-venture has become one of the major organisational forms to undertake large-scale construction projects in both developed and developing countries.

Since the early 1990s, joint-ventures between local contractors and foreign contractors for construction projects in Malaysia have evolved rapidly. Malaysia is actually one of the leading countries in Southeast Asia involved in international joint-ventures for projects focusing on infrastructure developments, civil engineering works, airports and hospitals. Examples of joint-venture collaborations include Petronas Twin Towers, the Kuala Lumpur International Airport (KLIA), the Likas Specialist Hospital and Klang Valley Mass Rapid Transit. There are also joint-venture projects that Malaysian companies participating such for the construction of new Royal Adelaide Hospital (new RAH) located at North Terrace, Adelaide, which expects to be completed in 2016. The new RAH has been designed to be a world-class health facility. Other joint-venture project includes the construction of the South Road Superway project in South Australia. The project was undertaken by a joint-venture between John Holland and Leed Engineering and Construction. A joint-venture project between Fajarbaru and Beulah International, Australian developer can also be found for the construction of Gardenhill Apartment in Melbourne. The joint-venture projects will be intensified by having more transparent rules on construction service trade.

On GP for construction projects, Malaysian suppliers are able to expand and penetrate foreign markets through wider GP market access opportunities for their construction services. For example, the Buy American Act restricts products and services that come from non-TPP countries. With the TPP, this restriction will be waived for Malaysian products and services suppliers. Another benefit is when the local service suppliers are able to establish networking with the other 21 FTA partner countries with Malaysia.

Transfer of Expertise and Technology The commitments of liberalisation allow local and foreign contractors to establish a joint venture to carry out local construction projects. The benefits from joint venture may range from acquisition of new technology, access to marketing and distribution experts, access to established distribution channels and increased profit margins for new construction projects. This will provide opportunities for local contractors to work with foreign contractors that have the expertise and technology. Indirectly, such joint venture can increase the capacity and capability of local contractors through transfer of expertise and technology from foreign contractors. Based on observation, the involvement of foreign contractors in Malaysia is mainly focused on specific construction work where there is a lack of local expertise and technology. Examples of specific construction projects are the Pahang-Selangor Raw Water Transfer Project, Second Penang Bridge Project and Ulu Jelai Hydroelectric Project.

Cheaper Raw Materials for Construction ProjectsFTAs do not only cover trade in services but also liberalisation on trade in goods. For trade in goods, products will be subject to elimination or reduction in tariffs and non-tariff barriers such as removal of overly burdensome technical standards and customs administration procedures. Elimination of import tariffs for certain raw materials for construction projects such as long products of steel wire rods or deformed bars or construction machinery, will reduce the cost of construction projects.

In 2015, Malaysia Steel Institute estimated that the construction sector is by far the biggest consumer of steel products accounting for more than 60% of the apparent steel consumption in Malaysia. Other than the imports of steel, TPPA member countries account for about 34% of the total imports of machinery and transport equipment for the construction sector. The US, Japan, and Singapore alone are collectively supplying about 91% of import demand for machinery and transport equipment. Lower cost of raw materials and construction equipment will benefits the construction sector in medium and long terms.

Domination of High Level Job OpportunitiesThe impacts of liberalisation on job opportunities are two-pronged. In terms of employment, liberalisation will provide opportunities to foreign contractors entering Malaysia to gain foreign domination of the highest office and at the intermediate level. This will reduce the opportunities for locals to hold key positions in multinational companies. This however, can be addressed in the scheduling of services commitments by putting conditions to the movement of natural persons such as intra-corporate transferees. On the positive impact, liberalisation could possibly bring about transfer of foreign expertise and technology to meet the shortage of skilled manpower in the country for certain segments of construction projects.

Adjustments of Domestic RegulationsLiberalisation of the construction sector through various channels such as multilateral of GATS and FTAs allows foreign companies intending to operate in Malaysia to own foreign equity holding in a domestic construction company. Before GATS came into the market in 1995, Malaysia allowed the entry of foreign contractors into the domestic market without regard for the equity holding limit. Foreign contractors were treated as local contractors, without discrimination in terms of regulations. After the signing of GATS, foreign contractors entering Malaysia are defined according to foreign equity holding through the agreed commitments. A contractor with foreign equity not exceeding 30% will be treated as a local contractor. Conversely, a contractor with foreign equity exceeding 30% will be treated as a foreign contractor. The proliferation of FTAs brings various commitments that carry different levels of obligations and thus different level of impacts on different subsectors.

Domestic regulations concerning the registration and classification of contractors have to be adapted to enable the implementation of various liberalisation commitments entered into. Liberalisation commitments under various trade agreements will be more open and liberal in the years to come—a good example is from GATS to TPPA. This requires continuous adjustment in domestic regulations to match the current commitments that Malaysia entered into.

SMEs Development: Competition versus OpportunityThe companies in the construction sector are largely SMEs, which accounting for about 90% of total contractors. The 11MP recognises that the productivity of the construction sector is low due to limited modernisation of construction methods and practices, low technology adoption as well as the reliance on low-skilled labour. The 11MP has further identifies that approximately 34% of the construction workforce is foreign, of which 93% are low-skilled labour. In terms of exports, construction companies’ weaknesses include the lack in financial resources and multi-disciplinary expertise, and in complying with the domestic regulations of the host countries.

As trade policy around the world is moving towards streamlining various government support programmes—for examples, reducing government loans, grants, and various other subsidy programmes, SMEs can further equip themselves to face this competition and tap new market opportunities from the various FTAs that the government has agreed and enforced into. This can be done by continuing building up their capacity and expertise such as through large multidisciplinary consortia targeting international markets.

The important role of SMEs and challenges faced by them in international trade has been recognised in many Malaysia’s FTAs. In the GP chapter of TPPA, the rules will facilitate the participation of SMEs in procurement process by ensuring rules and criteria for eligibility more transparent.

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